A Beer Giant Loses Fizz But Still Has Buzz

(Bloomberg Opinion) -- Investors were in no mood to raise a glass to Constellation Brands Inc. on Wednesday after the beverage giant behind brands such as Robert Mondavi wine and Corona beer reported third-quarter earnings that missed estimates on certain metrics and slashed its full-year earnings guidance. Shares were down nearly 10 percent by mid-afternoon, which would make for its worst one-day decline in six years.

But after picking apart the factors shaping the reduced outlook, I don’t see reason for this level of alarm.

One major change was in the expectations for its wine-and-spirits division. Constellation’s previous guidance was for sales and operating income in this segment to grow 2 percent to 4 percent for the full year. Now, executives are expecting a “low-single digit” decline on those measures.

Indeed, that’s a sharp change in momentum. But the trouble spots are ones that Constellation was already well aware of and has been working to counter. The company said its premium wines such as The Prisoner and Kim Crawford continue to perform well. It was its sub-$11-per-bottle wines that were a drag. But Constellation has for years been shifting focus toward the upscale end of its wine portfolio, as foodie culture has pushed many consumers to trade up for products that seem more premium and niche.

In other words, this is simply a change in magnitude of a problem that was already well-known. And the weakness could have a silver lining: It may end up pushing Constellation to move with more urgency to sell off some of the low-price lines in its stable.

Another reason for the lower guidance was interest expense associated with its major investment in Canopy Growth Corp., an emerging power player in the nascent medical and recreational cannabis industry. As my colleague Tara Lachapelle has noted, a wine, beer and spirits giant like Constellation is right to try to get on the ground floor of a potential boom associated with another “sin” segment, legalized pot. Such products could be a powerful complement to the ones they already own – or they could be a hedge against the possibility that legal marijuana becomes am alcohol replacement for some consumers.

Constellation’s long-time CEO, Rob Sands, is soon to hand over the top job to one of his lieutenants, Bill Newlands. The newcomer shouldn’t pay too much attention to Wall Street’s bout of queasiness. These latest results suggest a need to be nimble, but they hardly suggest a need for a major course correction. 

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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