Download - Constellation Brands Inc in Alcoholic Drinks (World)

5/28/2018 Constellation Brands Inc in Alcoholic Drinks (World)

1/38

CONSTELLATION BRANDS INC IN ALCOHOLICDRINKS (WORLD)

September 2013


2/38

Euromonitor International PASSPORT 2ALCOHOLIC DRINKS: CONSTELLATION BRANDS INC

Disclaimer

Much of the information in thisbriefing is of a statistical nature and,while every attempt has been madeto ensure accuracy and reliability,Euromonitor International cannot beheld responsible for omissions orerrors.

Figures in tables and analyses arecalculated from unrounded data andmay not sum. Analyses found in thebriefings may not totally reflect thecompanies opinions, reader

discretion is advised.

The worlds second largest

wine produc er, Constel lat ion

Brands transformed its alcoholic

dr inks operat ions with the

acquis it ion of ModelosUS beer

business in 2013. This prof i le

considers strategies for the

development of Constellations

wine operat ions and its new

beer business, as well aslook ing at how the acquis i tion

can be integrated to enhance the

companys strength in both

markets.

ScopeSCOPE OF THE REPORT

Alcoholic Drinks 2012251 billion litres

Wine29 billion litres

Beer195 billion litres

Spirits21 billion litres

RTDs/High-

Strength Premixes4 billion litres

Cider/Perry2 billion litres
http://www.euromonitor.com/http://www.euromonitor.com/http://www.euromonitor.com/http://www.euromonitor.com/


3/38

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

MARKET ASSESSMENT

CATEGORY AND GEOGRAPHICOPPORTUNITIESBRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


4/38


Major move into beer

US company Constellation Brands is the worldssecond largest wine producer, behind E&J GalloWinery, and a globally significant player incider/perry, spirits and RTDs/high-strengthpremixes.

In addition, in 2013, the company acquiredMexican brewer ModelosUS beer business from

Anheuser-Busch InBev, in a deal that brought

Constellation the exclusive perpetual licence toimport, market and sell Modelo brands, includingCorona, in the US, and the freedom to developbrand extensions and innovations for the USmarket.

North American focus

Following the acquisition, Constellation operates a

beer division and a wine and spirits division.However, the deal maintained the companysstrong focus on North America. The regionaccounted for 94% of Constellations wine volumesin 2012, as well as more than 98% of both itsspirits and RTD/high-strength premixes volumes.0

200

400

600

800

1,000

1,200

2008 2009 2010 2011 2012

Million

litres

Constellation Brands: Global AlcoholicDrinks Volume 2008-2012

Constellation Brands Inc

Headquarters: Victor, New York, USA

Regional involvementAll regions except theMiddle East and Africa

Category involvementWine, spirits, cider/perry,RTD/high-strengthpremixes

Global wine volumeshare 2012 2.0%

Global wine volumegrowth 2012

6.4%

Key company factsSTRATEGIC EVALUATION


5/38


Constellation Brands saw net sales grow by 5% to US$2,796 million in the year ended 28 February 2013.

Growth was driven by rising branded wine and spirits volumes in the US, sales of branded wine gainedthrough the acquisitions of Mark West and Ruffino, and a favourable shift in the companys wine and spiritsproduct mix, mainly in the US.

Operating income rose by 7%, to US$523 million, driven by the same factors, as well as lower restructuringcharges and unusual items, partially offset by increased promotional expenditure, as the company workedto support and develop its branded portfolio.

Meanwhile, net income fell by 13% from US$445 million to US$388 million, as positive growth factors wereoffset by increases in interest expenses and provision for income taxes.

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2009 2010 2011 2012 2013

US$m

illion

Constellation Brands: Financial Performance 2009-2013 (Year End February)

Net sales Operating income Net income

Emphasis on premium brands spurs growthSTRATEGIC EVALUATION


6/38


In the first quarter of financial 2014 (three months to the end of May 2013), Constellation Brands saw wine

and spirits net sales increase by 4% on an organic constant currency basis compared with the same periodof the previous year, driven by rising volumes. The acquisition of Mark West also contributed to total netsales growth, which stood at 6%.

The companys wine and spirits growth was driven by its Focus Brands, with Rex Goliath, Kim Crawford,Nobilo, SIMI and Black Box performing particularly well, as Constellation worked to develop a morecoherent, premium-orientated strategy. New brands, including Simply Naked, Thorny Rose and DreamingTree, also made progress.

On a comparable basis, Constellation saw operating income fall by 5% in the first quarter of financial 2014,

reflecting the impact of higher grape, selling, general and administrative costs, partially offset by net salesgrowth.

Crown Imports, which was still a 50/50 joint venture with Modelo during the quarter, saw net sales grow by5%, to US$762 million, while operating income rose by 9%, to US$134 million. Crowns positive resultswere driven by volume growth and increased product pricing in selected US markets in autumn 2012.Constellations equity earnings from the venture were US$66 million, compared with US$61 million for thesame period in the previous year.

Profits hit by higher costs in Q1 2014STRATEGIC EVALUATION

Constellation Brands: Financial Performance Q1 2014Comparable (US$ million) % growth Reported (US$ million) % growth

Net sales 673 6 673 6

Operating income 104 -5 71 -34

Net income 74 -3 53 -27


7/38


STRENGTHS

OPPORTUNITIES

WEAKNESSES

THREATS

The company hasdeveloped a strongdistribution network inthe US and Canada,and its domesticdistribution should be

further enhanced bygaining Modelos USbeer business.

Strong distribution

Constellation Brands isthe second largest wineproducer in North

America and, with theacquisition of ModelosUS business in 2013,

the second largestplayer in US premiumlager.

North American strength

Constellation is heavilyreliant on North

America, making itsensitive to changingconditions in the regionand preventing it from

benefiting from theexpansion of key growthmarkets.

Narrow geographic focus

Constellations alreadyhigh debt load wasincreased by theacquisition of ModelosUS beer business in2013. As a result, its

profitability and financialflexibility are likely tosuffer.

High debt level

Younger US consumersare proving to be more

receptive to wine thanprevious generations,creating potential for thedevelopment of newbrands and products.

Younger wine consumers

Constellationsacquisition of Modelos

US beer businessplaces it in a strongposition to benefit fromthe growing demand forpremium imported lagerin its domestic market.

Premiumisation of USbeer

Constellations relianceon its domestic market,

which generated 65% ofits wine volumes in2012, makes it verysensitive to downturnsin the economic fortunesof the US.

Domestic economicdifficulties

While the Modelo dealoffers considerable

potential benefits, it alsorisks the undermining ofthe companys focusand reducing itscapacity to compete inwine and spirits.

Persistent sluggishnessin developed markets

SWOT: Constellation Brands IncSTRATEGIC EVALUATION


8/38


Constellations geographic coverage wassignificantly reduced by the divestment of its UKand Australian operations in 2011, making it evenmore reliant on North America. The company hasnot shown major ambitions to extend its

international reach, but is making moves todevelop a presence in certain markets withsignificant growth potential through agreementswith local companies. The 2013 agreement withInterfood Importao to develop sales in Brazil wasparticularly notable.

The deal to acquire Modelos US beer businessstands to transform the companys operations. Itprovides a significant new source of revenue,opportunities for value-generating innovation, andconsiderable growth potential. Constellation is

committed to increasing production at its newlyacquired Mexican brewery in order to exploit theavailable opportunities. The company also sees thedeal as enhancing its power in negotiations withretailers relating to shelf space and distributionpoints across its alcoholic drinks offer.

Constellation is working to develop a morepremium-orientated portfolio, as it looks to reduceits exposure to intense pricing competition in thewine market and generate higher margins. Over2007-2012, this process included divesting theeconomy wine brands Almaden and Inglenook inJanuary 2008, and was a key motivation behindthe Accolade divestment of 2011. It also

underpinned the acquisition of Mark West in 2012.

Millennial consumers are proving to be morereceptive to wine than previous generations ofyounger consumers, and are playing anincreasingly important role in driving growth inConstellations key market, the US. In commonwith other major players, Constellation is targetingsuch consumers with new, non-traditional brandsand products, and integrated marketing activity that

makes use of channels such as social media.

Premiumisation Target millennials

Modelo deal Targeted geographic expansion

Key strategic objectives and challengesSTRATEGIC EVALUATION


9/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


10/38


-35-30

-25

-20

-15

-10

-5

0

510

2007/08 2008/09 2009/10 2010/11 2011/12

%y

ear-on-yeargrow

th

Constellation Brands vs Global Wine Volume Growth 2008-2012

World Constellation Brands

Constellation Brands wine volumes declined in 2008 and 2009, as its key developed markets were hit hardby the economic crisis, and the company divested brands in order to reduce its considerable debt burden.

While the company saw positive growth in 2010, its volumes declined dramatically in 2011, as a result ofthe divestment of its UK and Australian operations to CHAMP Private Equity. The sale, which was

prompted by the intense price competition prevailing in the UK and Australian wine markets, led to a muchstronger focus on North America and a more premium-orientated offer.

This shift in emphasis was enhanced by the acquisitions of Ruffino (in October 2011) and Mark West (inJuly 2012), helping to drive a return to positive growth in 2012. Moreover, 2012 represented the first timethat Constellation Brands growth rate outstripped the performance of the overall global wine market duringthe review period.

Sharpening focus of wine operationsCOMPETITIVE POSITIONING


11/38


Wine: Top 10 Global Companies by Volume Share

2011-2012Company 2011 2012

E&J Gallo Winery Inc 2.6 2.6

Constellation Brands Inc 1.9 2.0

Wine Group Inc, The 1.6 1.7

Pernod Ricard Groupe 1.0 1.0

Treasury Wine Estates Ltd 1.0 1.0

Accolade Wines Ltd 1.0 0.9

Via Concha y Toro SA 0.9 0.9

Castel Groupe 0.9 0.9

Grupo Peaflor SA 0.8 0.8

CAVIRO - CooperativeAgricole Viti-FrutticoltoriItaliani Riuniti Organizzatiscarl

0.6 0.6

The top three rankings in the global wine market

reflect the competitive landscape in the relativelyconsolidated North American market, which issupported by a high level of brand-consciousnesscompared with other wine markets. Moreover, strongbrand development in the region was key to theperformances of the most dynamic players in 2012.

Constellation Brands was the worlds fastest growingtop 10 wine producer in volume terms in 2012, with

6% growth, underpinned by rising sales in NorthAmerica. The companys performance was bolsteredby the acquisition of Mark West and increasedpromotional expenditure. As a result, second placedConstellation increased its global volume share andslightly closed the gap on leader, E&J Gallo, in 2012.

The only other top 10 player to increase its shareduring the year was The Wine Group, which also

performed strongly in North America, where itsFranzia is the leading brand.

All three top players are focused on targetingyounger consumers with irreverent brands, such asThe Wine Groups Fish Eye, E&J Gallos Barefoot,and Constellations Simply Naked.

North American players lead global marketCOMPETITIVE POSITIONING


12/38


The global wine market is extremely fragmented, with

the top 10 producers accounting for only 12% ofglobal volumes in 2012, compared with the leaderscombined share of 64% in beer.

This level of fragmentation reflects the degree towhich many traditional wine markets have remainedloyal to local products, and the relativelyunderdeveloped character of branding in wine, whichworks against the strategies and strengths of major

multinational alcoholic drinks players. With wine consumption growing in many non-traditional markets around the world, and a growinginterest in branding driven by New World wines, themarket witnessed notable consolidation between2003 and 2007.

However, the economic difficulties of the latter part ofthe review period intensified pricing competition in key

markets encouraging major players to streamline theiroperations. This led Constellation Brands to divest itsUK and Australian operations, with E&J Gallo andPernod Ricard also looking to trim their portfolios. Asa result, the share of the top five players fell by onepercentage point between 2007 and 2012.

Wine: Consolidation 2003/2007/2012

Top 5 producers Next 5 producers Rest

Inner Circle: % Volume 2003Middle Circle: % Volume 2007Outer Circle: % Volume 2012

Nonetheless, the fragmented market provides

numerous acquisition opportunities, and acquisitionremains a key tool in the development of majorplayers offers, with Constellation enhancing its USpremium wine offer through the acquisitions ofRuffino, in 2011, and Mark West, in 2012.

Market remains fragmentedCOMPETITIVE POSITIONING


13/38


Committed to expansion in beer

Constellation Brands had already benefited from the sale of Modelo beer brands in the US through its 50%stake in Crown Imports, its joint venture with the Mexican brewer. However, the full acquisition of CrownImports and the power to develop innovations and extensions for the US market represents atransformation of the companys beer operations. Furthermore, the company has also acquired the PiedrasNegras brewery in northern Mexico, and has expressed its commitment to developing its beer operationsby planning to double the facilitys capacity to 20 million hectolitres within three years.

Complementary operations?

Constellation believes the Modelo deal will nearly double its sales, as well as diversifying its profit streamand providing new avenues for growth. In terms of its premium focus, the acquisition sits comfortably withConstellations wider premiumisation strategy. Furthermore, the companys wine and beer businesses areset to complement each other by bolstering Constellations strength in negotiations with retailers regardingshelf space and distribution points.

Expanding distribution will be a key element in the Modelo stables battle with rival brands, particularlyHeinekens Mexican brands, such as Dos Equis XX. It will also play an important part in developingConstellations wine sales, especially as the market becomes increasingly brand-orientated and targeted at

younger consumers. Moreover, competition for shelf space is intensifying as the retail environmentbecomes increasingly consolidated.

Modelo deal transforms Constellations businessCOMPETITIVE POSITIONING


14/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


15/38


Western EuropeNorth AmericaLatin America Asia Pacific

Australasia-5

0

5

1015

- 5,000 10,000 15,000%

CAGR2012

-

2017

Market size 2012 (million litres)

Wine: Volumes 2012 and Growth Prospects 2012-2017 by Region

While Constellation achieves a significant share of wine volumes in four regional markets, as well as

registering annual sales of around 1 million litres in Eastern Europe, its operations are dominated by NorthAmerica. This geographic bias was accentuated by the divestment of the companys UK and Australianoperations in 2011, with North America accounting for 94% of Constellations wine volumes in 2012.

Withdrawal from the UK and Australia, which are both characterised by intense discounting, was motivatedby Constellations efforts to focus on higher margins and develop a more premium-orientated portfolio. Thisstrategy fits evolving market conditions in the US, where 2012 saw solid growth across the premiumsegment, with some trading up from sub-premium products. Constellation strengthened its capacity to tapinto growing premium demand through the acquisitions of Ruffino and Mark West towards the end of the

review period. Constellation has shown little ambition to extend its geographic reach, though 2013 saw it sign anagreement with Interfood Importao to develop a key selection of Constellations brands in Brazil, which isexpected to see wine volumes increase by a 6% CAGR over 2102-2017. Elsewhere in Latin America,Mexico also offers potential. Mexico, which borders the US and has become central to the companys beeroperations through the acquisition of a brewery in Piedras Negras, is set to see strong growth with avolume CAGR of 8% for wine over 2012-2017.

Narrow geographic focusMARKET ASSESSMENT

Note: Bubble size indicates company share in the region in 2012. Range displayed 0.1-15.0%


16/38


Fortified wine and vermouth

Sparkling wine

Still light grape wine

0

2

4

6

- 5,000 10,000 15,000 20,000 25,000%C

AGR2012-2

017

Market size 2012 (million litres)

Wine: Volumes 2012 and Growth Prospects 2012-2017 by Category

Note: Bubble size indicates company share in the category in 2012. Range displayed 1.1-3.2%

While still light grape wine dominates Constellations wine operations, the company is also a globallysignificant producer of both sparkling wine, and fortified wine and vermouth. Indeed, the company is theleading player in fortified wine and vermouth in both the US and Canada, though it dropped a place to thirdin the category globally, as North America was outperformed by several other regions. Constellationsfortunes in fortified wine and vermouth highlight the dangers of its narrow geographic focus, though thecompanys move into beer suggests that it is looking to spread risk primarily through product diversificationrather than international expansion.

Fortified wine and vermouth is expected to continue to stagnate in North America over 2012-2017, but theregion is set to outperform the overall global market in both still light grape wine and sparkling wine over the

forecast period. While Constellations narrow geographic range means that it is set to miss out on thedynamism forecast for the Chinese still light grape wine market over 2012-2017, it is well-placed to exploitthe strong performances of the US and Canada, which are expected to see CAGRs of 3% and 4%,respectively. Indeed, as long as its growing beer interests do not divert attention and resources away fromwine, Constellations increased size should strengthen its competitive standing in its domestic market,particularly in off-trade channels.

Global lead in key categoriesMARKET ASSESSMENT


17/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


18/38


Ranked third in wine in the US behind E&J Gallo and The Wine Group, Constellation performed well in itsdomestic market in 2012. The companys emphasis on its Focus Brands and increased advertisingexpenditure, along with the acquisitions of Ruffino and Mark West, drove volume growth of 4% during theyear. In Black Box and Rex Goliath, which both saw volumes rise by more than 30%, Constellation had thetwo fastest growing major brands in the market in 2012.

Constellations premiumisation strategy, bolstered by 2012s acquisition of Mark West, is in line withevolving trends in the US market. Premium wines, especially within still white and red wines and port, sawstrong growth, while the lowest price band saw its share of off-trade volumes fall in each category in 2012,as consumers opted to consume high-quality products at home. This premiumisation of off-trade

consumption underlines the potential significance of Constellations enhanced power in negotiations withretailers as a result of the acquisition of ModelosUS beer business.

This strength is set to become increasingly important over 2012-2017, for two key reasons. Firstly, with theUS market likely to see a growing divide between consumer wines produced by the likes of Constellationand E&J Gallo, and artisanal wines produced by smaller-scale producers, Constellation has the opportunityto establish itself at the upper end of the market. Secondly, ongoing consolidation in retailing is set to favourlarger suppliers.

05

10152025

E&J GalloWinery Inc

Wine Group Inc, The Constellation BrandsInc

Trinchero Family Estates Treasury Wine Estates Ltd

USA: Leading Wine Companies by Volume Share 2009-2012

2009 2010 2011 2012

%v

olumes

hare

Premiumisation strategy fits evolving US trendsCATEGORY AND GEOGRAPHIC OPPORTUNITIES


19/38


Not immediately promising for premium producers

Initially, the growing importance of millennial consumers to the US wine market may not seem to sit easilywith Constellations premiumisation strategy, given younger consumers lower purchasing power andpreference for easy-drinking products.

Millennial consumers tend to prefer sweeter profiles in wine and to show an interest in red blends,especially blends with slightly sweeter profiles. In addition, younger consumers are moving away fromtraditional modes of wine consumption, instead drinking wine chilled or on the rocks.

Irreverent brands

However, with millennial consumers set to make up 37% of the US drinking population by 2017, they areimpossible to ignore, and Constellation, in common with other major wine producers, is courting them withnew brands. Constellations own additions to the range of new brands targeting millennial consumers withirreverent images include Simply Naked and Primal Roots, which both retail at below US$10 less thanother major new Constellation brands, such as The Dreaming Tree (US$12-15) and Rioja Vega (US$12).

As younger consumers tastes and product knowledge become more sophisticated, there are likely to begrowing opportunities to encourage them to trade up to higher priced products. This may, however, requireproducers to develop premium wines that are suitable for novel modes of consumption.

It should be noted that the pressure to produce wines with a sweeter profile is also being bolstered by theexpansion of the Hispanic community, which also displays a preference for such products. The potentialdistribution benefits of the acquisition of Modelosbeer business to Constellations wine operations includea stronger capacity to target both younger and Hispanic consumers, which are key segments for theModelo beer brands.

Need to meet needs of millennialsCATEGORY AND GEOGRAPHIC OPPORTUNITIES


20/38


Constellations domestic wine interests beyond still light grape wine are expected to face divergent fortunesover the 2012-2017 period. Fortified wine and vermouth, in which the company is the leading player in theUS, is set to see sales stagnate over the forecast period, as it continues to be seen as largely out of stepwith evolving consumption trends. In contrast, other sparkling wine is expected to be the strongestperforming category in the US market over 2012-2017, with a CAGR of 4% in volume terms. Constellationholds a strong second place in US other sparkling wine, though it lags some way behind E&J Gallo.However, the company was one of the weakest performers in the category in both 2011 and 2012, wellbehind other sparkling wines overall performance.

Constellation lacks a brand that has tapped into growing demand among millennial consumers in the way

that E&J Gallos Barefoot Bubbly has. Barefoot Bubbly was the fastest other sparkling wine brand in the USannually throughout 2007-2012. In order to remain competitive over the forecast period, Constellation willneed to address the issue of brand positioning in its sparkling wine portfolio, potentially launching newbrands aimed at younger consumers, as it has dome in still light grape wine. The company also needs to beprepared to develop products aiming beyond traditional consumption patterns and occasions. In 2013, E&JGallo launched Barefoot Refresh, a lightly carbonated product positioned between still and sparkling wine,which is designed to be served over ice.

-10

-5

0

5

10

2007 2008 2009 2010 2011 2012

%y

ear-on-year

grow

th

USA: Constellation Brands vs Other Sparkling Wine Y-o-Y Volume Growth 2007-2012

Constellation Brands Other sparkling wine

Failing to tap into sparkling wine growthCATEGORY AND GEOGRAPHIC OPPORTUNITIES


21/38


The acquisition of Modelos US beer business makes Constellation Brands the third largest brewer in theUS market in NBO terms, behind Anheuser-Busch InBev and MillerCoors. Moreover, in NBO terms, thecompany is now the leading player in the US premium lager segment, which is forecast significantly tooutperform the stagnant overall US beer market over 2012-2017, with a 1% CAGR.

As well as holding the segment-leading Corona Extra, Constellations portfolio includes the dynamicModelo brand, which saw volumes rise by 20% in 2012. While Heinekens imported Mexican brand, DosEquis XX, has seen dynamic growth driven by its successful The Most Interesting Man in the Worldcampaign, Modelo has posted consistently strong performances with very little marketing support and alimited market presence, expanding from Mexican consumers to the wider Latino population and now to the

general population. Modelo is the third largest brand in the heavily Mexican-influenced imported premiumlager segment in the US. Constellation has the opportunity to drive further growth through investment inmarketing, though, given the nature of Modelos expansion so far, the company needs to be careful not toundermine existing consumers allegiance to a brand they feel they have discovered themselves.

Significant potential in US beerCATEGORY AND GEOGRAPHIC OPPORTUNITIES

USA: Leading Imported Premium Lager Brands 2012

Brand Company Sales (million litres) % y-o-y growth % share

Corona Extra Modelo SA de CV, Grupo 873.2 2.9 27.4

Heineken Heineken NV 515.6 -0.2 16.2

Modelo Modelo SA de CV, Grupo 408.3 19.7 12.8

Dos Equis XX Heineken NV 175.2 24.4 5.5

Tecate Heineken NV 163.0 0.3 5.1


22/38


As well as its domestic wine and beer interests, Constellation is the eighth largest producer of spirits in theUS, where vodka contributes 54% of its spirits volumes. Constellations Svedka, the third largest vodkabrand in the US, further extended the range of its offer with the launch of Svedka Colada in 2012. While itsgrowth slowed in 2012, Svedka was the only one of the top four vodka brands to increase its share in theface of the continued dynamic expansion of fifth placed Pinnacle during the year. In its first year underBeams ownership, Pinnacle saw continued strong growth, driven by demand for its distinctive, super-sweetindulgent flavours, such as Cookie Dough and Cotton Candy, among millennial consumers.

Svedka squared up to the challenge represented by Pinnacle directly in 2013, with the launch of two newvariants, Strawberry Colada and, particularly, Orange Cream Pop. Moreover, the new flavours, along with

the original Svedka variety, were the first to be supported by the brands new national integrated marketingcampaign featuring outdoor, digital, social, print, and experiential activations.

Flavour innovation will continue to play an important role in vodkas expansion over 2012 -2017. Thegrowing diversity of flavours is likely to extend into new areas, with more adult-orientated flavours andhealth-orientated varieties. One notable development in the latter part of the review period, givenConstellations broader alcoholic drinks operations, was the introduction of wine/vodka combinations, suchas Absolut Tune, a mix of vodka and Sauvignon Blanc, and Exclusiv Ros, a mix of Moscato and vodka.

Responding well to challenges in vodkaCATEGORY AND GEOGRAPHIC OPPORTUNITIES

05

101520

Smirnoff (Diageo) Absolut (Pernod Ricard) Svedka (ConstellationBrands)

Grey Goose (Bacardi & Co) Pinnacle* (Beam)

USA: Leading Vodka Brands by Volume Share 2009-2012

2009 2010 2011 2012

%v

olumes

hare

Note: * Pinnacle sales to 2011 under White Rock Distilleries ownership


23/38


As well as its strong presence in vodka in the US, Constellation is a top four player in brandy and Canadianwhisky in its domestic market. While the trend for flavoured spirits has primarily been driven by vodka, ithas increasingly extended into other areas, notably rum. The whiskies category has been more hamstrungby tradition and fears of alienating established consumers, and has thus struggled to attract youngerdrinkers. However, Brown-Formans introduction of Jack Daniels Tennessee Honey and Beams roll-out ofJim Beam Red Stag have spurred growth in flavoured bourbons, while Diageo has launched a honeyvariant of its Bushmills Irish whiskey brand.

In 2012, Constellation introduced a new Toasted Caramel flavoured variant of Black Velvet, the secondlargest Canadian whisky brand in the US. The brands other expressions are the more traditional Black

Velvet and Black Velvet Reserve, which is aged eight years instead of three. The flavour innovation helpedto maintain something of a revival in Black Velvets fortunes, with the brand seeing positive growth in 2011and 2012, having struggled to deal with the expansion of Diageos category leading Crown Royal earlier inthe review period. With Canadian whisky growing at a slower rate than most other whiskies, and newflavours entering a wide range of whiskies categories, flavour innovation is set to be an important elementin strategies to attract the interest of younger consumers, and Constellation should look to build on theinitial success of Black Velvet Toasted Caramel.

Flavour-based competition extends into whiskiesCATEGORY AND GEOGRAPHIC OPPORTUNITIES

-10

0

1020

-10,000

0

10,00020,000

Bourbon/Other USWhiskey

Canadian Whisky Irish Whiskey Blended Scoth Whisky Single Malt Scotch Whisky %C

AGR2012-20

17

Million

litres

USA: Whiskies Growth Prospects by Category 2012-2017

Total volume growth 2012-2017 % CAGR 2012-2017


24/38


Strong position in CanadaCATEGORY AND GEOGRAPHIC OPPORTUNITIES

Constellations second largest wine market, Canada, accounted for16% of company wine volumes in 2012. The company leadsCanadian wine sales, some way ahead of second placed AndrewPeller, even after the divestment of the operations that went to form

Accolade Wines. Accolade itself held a 4% share of Canadianvolumes in 2011, though this dropped to 1% in 2012.

Constellation is the largest player in still light grape wine, and fortifiedwine and vermouth, and ranks second, behind Andrew Peller, insparkling wine. The company was the most dynamic major player in

wine in 2012, with 21% volume growth, spurred by the strongperformance of the market-leading still light grape wine brand,Jackson Triggs.

With Canadian wine volumes expected to grow by a 4% CAGR over2012-2017, Constellations market lead and strong branding provide afirm foundation for expansion. Moreover, young urban consumers areset to play a key role in driving growth, providing opportunities forConstellation to broaden the reach of the marketing and branding

strategies it is employing to reach such consumers in the US. Thepotential for such developments was enhanced in 2012, when its localsubsidiary, Vincor Canada, began operating under the ConstellationBrands name, as Constellation looked to align its operatingcompanies in the US, Canada and New Zealand and move towardsbeing a more unified organisation

-6

-4

-2

0

2

4

0

100

200

300

400

500

Fortifiedwine andvermouth

Sparklingwine

Still lightgrapewine

%C

AGR2012-2

017

Million

litres

Canada: Wine Volumes in2012 and Growth

Prospects 2012-2017 byCategory

Other players' volume 2012

Constellation brands' volume2012


25/38


Canada dominates Constellations cider/perry operations, accounting for 80% of its volumes in the categoryin 2012. Constellation holds a strong lead in the Canadian cider/perry category, its 44% volume share morethan double that of its nearest rival, C&C Group. However, the companys share fell annually throughout the2007-2012 period, as several competitors, including C&C Group and world leader, Heineken, expanded inthe market. Indeed, C&C Groups acquisition of Constellations UK cider business, The Gaymer CiderCompany, significantly closed the gap between the two companies in the Canadian market in 2010, as theGaymers and Blackthorn brands both have a strong presence in Canada.

Constellation is itself now entirely focused on the market-leading Growers brand in Canada. Despite seeing5% growth in 2012, on the back of Canadian consumers growing taste for cider, Growers saw its share

drop, largely as a result of the aggressive expansion of Heinekens Strongbow. The second -ranked brand inthe market, Strongbow benefits from the high-quality image of imported brands in Canada.

With Canada offering a 6 million litre rise in sales over 2012-2017, on the back of a 5% CAGR,Constellation is likely to face intensifying competition, especially as a number of major brewers are turningto cider to generate growth. The company, therefore, needs to decide what place cider/perry has in itswider strategy. With Constellation looking to develop greater unity across its international operations, muchcould depend on whether the companys new US beer business encourages it to move into cider in itsdomestic market, where the category is forecast to post a 29% CAGR over 2012-2017.

Intensifying competition in Canadian ciderCATEGORY AND GEOGRAPHIC OPPORTUNITIES

0

5

10

15

2009 2010 2011 2012%y

ear-on-year

grow

th

Canada: Growers vs Heineken vs Total Cider/Perry Y-o-Y Volume Growth 2009-2012

Growers Strongbow Total Cider/Perry


26/38


Constellation has shown limited geographic ambitions since the divestment of its UK and Australian wineoperations significantly narrowed its international scope. However, March 2013 saw the company sign anagreement with Interfood Importao for the import and distribution of a selection of Constellations wineand spirits brands in the Brazilian market.

While the Brazilian alcoholic drinks market was adversely affected by high inflation and weakened growth indisposable incomes early in 2013, the market retains longer term potential, and is set to see sales boostedby Brazils hosting of the 2014 FIFA World Cup and the 2016 Olympic Games. These events and ongoingchanges in the behaviour of Brazilian consumers are forecast to lead wine volumes to grow by a 6% CAGRover 2012-2017. Moreover, the market is significantly more fragmented than the US, with the top four

players jointly holding a national volume share less than the leading player, E&J Gallo, does in the US. Furthermore, while the Brazilian market is dominated by lower priced products, it is displaying a notabletrend towards premiumisation, creating significant potential for Constellations premium brands. The winebrands included in the agreement include several Robert Mondavi labels from California, Inniskillin Ice Winefrom Canada, Kim Crawford from New Zealand, and Ruffino from Italy. Interfood Importao will also importand distribute Constellations Svedka brand in vodka, a category which is predicted to see sales rise by 17million litres over 2012-2017, on the back of a 5% CAGR.

Moving into BrazilCATEGORY AND GEOGRAPHIC OPPORTUNITIES

-10

0

10

20

-20

80

180

Fortified wine andvermouth

Champagne Other sparkling wine Still red wine Still ros wine Still white wine

%C

AGR2012-2

017

Million

litres

Brazil: Wine Growth Prospects by Category 2012-2017

Total volume growth 2012-2017 % CAGR 2012-2017


27/38


As well as moving into Brazil, there are opportunities forConstellation to build a presence in the Mexican market.Not only does Mexico neighbour the US, it is also centralto Constellations newly acquired beer business, with thecompany owning a brewery in the north of the country.

Mexico is forecast to see wine volumes post an 8%CAGR over 2012-2017, leading to absolute growth of 31million litres. Still red wine, which accounted for 56% ofMexican wine volumes in 2012, is set to be particularly

dynamic, with a 10% CAGR. Growth is being spurred by educational initiatives on thepart of producers and retailers, with retailers such as CityMarket, the upscale supermarket format of theControladora Comercial Mexicana retailingconglomerate, organising gourmet tasting events on aregular basis.

While such developments have primarily focused on

Mexico City, they are increasingly spreading around thecountry, opening up new opportunities for growth.Mexicos annual per capita consumption of wine is lessthan one litre, even less than Brazils, providingsignificant potential for long-term development now thatmomentum is being gained.

Potential in MexicoCATEGORY AND GEOGRAPHIC OPPORTUNITIES

0

20

40

60

80

100

120

2007 2012 2017

Million

litres

Mexico: Historic and Forecast WineVolumes by Category

2007/2012/2017

Still white wine Still ros wine

Still red wine Sparkling wine

Fortified wine and vermouth


28/38


While the US accounted for nearly 100% of the Svedka vodka brands volumes in 2012, Constellation islooking to develop its international profile in order to take advantage of strong growth in the categoryelsewhere. As well as including Svedka in its deal with Brazilian importer and distributor InterfoodImportao in 2013, the company also signed an agreement with South Koreas second largest spiritscompany, Lotte Liquor, for the import and distribution of Svedka throughout South Korea.

While vodka is a small category in South Korea, where it accounts for only 0.1% of spirits volumes, it isforecast to see volumes grow by a 7% CAGR over 2012-2017, making it the fastest growing spirits categoryoutside liqueurs. Furthermore, premium brands represent the fastest growing segment in vodka, takingshare from lower and higher priced brands over the 2007-2012 period. Currently, Pernod Ricards Absolut

dominates the South Korean vodka category. However, Lottes extensive distribution reach and Svedkasstrong and distinctive branding place the brand in a strong position to raise consumer awareness,particularly amongst younger consumers, and tap into the categorys forecast expansion.

Targeting strong growth in South KoreaCATEGORY AND GEOGRAPHIC OPPORTUNITIES

0

20

40

60

80

Absolut (Pernod Ricard) Smirnoff (Diageo) Finlandia (Brown-Forman) Stolichnaya(Soyuzplodimport)

Others

South Korea: Leading Vodka Brands by Volume Share 2009-2012

2009 2010 2011 2012

%v

olum

es

hare


29/38


Potential to utilise agreement with Accolade

The Accolade divestment significantly reduced Constellations presence in both Eastern and WesternEurope. The company retained a minor presence in Poland and Russia, and the UK, Denmark and Finlandin 2012. However, under the terms of the divestment deal, Accolade and Constellation have agreed todistribute each others brands, providing potential for Constellation to reassert itself in certain marketsoffering attractive opportunities.

Few such opportunities exist in Western Europe, though the Netherlands and Norway stand out as marketsin which Constellation previously registered a significant presence that offer absolute growth in wine ofmore than 10 million litres over 2012-2017. Italian still red wine has become very popular in Norway, with

Italian wine leading overall volumes in the market in 2012. Since withdrawing from the Norwegian marketas a result of the Accolade divestment, Constellation has acquired the Italian producer Ruffino.

The Ruffino acquisition also enhanced Constellations potential for expansion in the Russian and Polishmarkets. Italian wine led overall wine volumes in Poland and ranked second in Russia, behind Spanishwine, in 2012. Russia is expected to see a 193 million litre rise in sales over 2012-2017, on the back of a3% CAGR, with wine benefiting in part from government activity to reduce consumption of other alcoholicdrinks, including raising excise taxes on beer and RTDs, and imposing a minimum retail price for vodka.Constellation held a 0.1% share in the highly fragmented Russian wine market in 2012.

With absolute growth in wine of 31 million litres, Poland is set to outperform all Western European marketsover 2012-2017. Growth is being driven by increasing international travel and the discovery of new tastesand cuisines, the ageing of the population leading to a shift from beer and spirits to wine, and growinghealth consciousness. Moreover, as long as purchasing power is not hit hard by wider economic difficulties,the increasingly sophisticated tastes of Polish consumers are likely to drive a premiumisation trend thatcreates significant potential for Constellation to develop its brands in the market.

Opportunities to reassert European presenceCATEGORY AND GEOGRAPHIC OPPORTUNITIES


30/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


31/38


Refining the brand offer

Even in relatively brand-conscious markets, such as the US, brand loyalty is more fragile in wine than inother areas of alcoholic drinks, and brand-building is a complicated matter. Having previously been a leaderin terms of consolidation, Constellation made some significant divestments during the 2007-2012 period,including selling the Almaden and Inglenook brands to The Wine Group in 2008, and divesting its UK and

Australian operations in 2011.

This streamlining was aimed at a more focused approach to portfolio development that reduces costs andplaces a particular emphasis on premiumisation. This approach does not preclude further acquisitions, butmore recent purchases, including Ruffino and Mark West, have fitted the companys developing premium-orientated strategy. With the US displaying a trend towards premiumisation but also likely to see a growingsplit between major wine players and smaller artisanal producers, this strategy gives Constellation anopportunity to attract mainstream wine consumers moving in an upmarket direction.

Targeting millennial consumers

However, the increasingly important role of millennial consumers in driving growth in its key wine markets isalso encouraging Constellation to expand its portfolio through the development of its own new brandsoriented to evolving market conditions. Brands such as Simply Naked and Primal Roots have beendeveloped with an irreverent non-traditional image and are supported by integrated marketing that includesa strong emphasis on social media, as well as more traditional channels.

The Simply Naked range focuses on simplicity in both its product range and brand image in order to appealto younger wine consumers who may be deterred by the aura of history and sophistication surroundingwine. The range is entirely aged in stainless steel to remove the influence of oak and deliver fruit -driven,easy-drinking wine, which is suitable for a wide range of consumption occasions and reflects the drinkinghabits of younger consumers.

Developing a more focused wine portfolioBRAND STRATEGY


32/38


Branding has a much more established and prominent role inConstellations alcoholic drinks operations beyond wine, and thecompanys venture into beer will further increase the importance ofits brand strategy. Constellations portfolio now contains CoronaExtra, the leading premium lager brand in the US, and Modelo, themarkets fourth largest premium lager brand. Modelo has registereddynamic growth in the US over a number of years, despite onlyminimal marketing support.

Before Constellation gained full ownership of Crown Imports, the

importer and distributor was aiming to expand Modelos availabilityon draught from 27 to 41 states in 2012, and increase the brandsadvertising support. In order to maintain the momentum of Modelosmove from the Latino population into the mainstream in anincreasingly competitive environment, Constellation will need toreassert this commitment to stronger advertising investment.

In addition, the company is likely to need to make use of its newpower to develop innovations and extensions for its Mexican brands

in the US market. Heinekens rival Mexican brand, Tecate, notablyintroduced the Michelada brand extension, in the US in 2012. Thenew Tecate product targets the growing demand for flavoured beerand beer mixes in the US, following the traditional micheladarecipe,mixing beer with lime, spices and a hint of chilli pepper.

0 200 400 600 800 1000

Victoria

Pacifico

Corona Light

Modelo

Corona Extra

Modelo Beer BrandsVolumes in the US

2010-2012

2012 2011 2010

Million Litres

Time to step up support for beer brandsBRAND STRATEGY


33/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


34/38


Constellation operates 18 wineries in the US, where wine is produced primarily from grapes grown in theNapa, Sonoma, Monterey and San Joaquin regions of California. 16 of these wineries are owned by thecompany, with one in Napa and one in Sonoma leased.

The company also operates nine wineries in Canada (seven of which are owned, with one in BritishColumbia and one in Ontario leased), four in New Zealand (all company-owned) and five in Italy (allleased). Grapes are crushed at most of these wineries and stored as wine until packaged for sale under thecompanys brand names, or sold in bulk.

In its spirits operations, Constellations Canadian whisky is produced and aged at its Canadian distillery inLethbridge, Alberta. The grain and bulk spirits it uses in the production of Canadian whisky are purchased

from various suppliers. As well as distilling, bottling and storing Canadian whisky for the companys brandedoffer, this facility distills and/or bottles and stores Canadian whisky, vodka, rum, gin and liqueurs for thirdparties.

The deal to acquire Modelos US beer business extended Constellations production infrastructure, addinga brewery near Piedras Negras, Coahuila, in northern Mexico to its operations.

Production (1)OPERATIONS


35/38


Constellation Brands: Principal Wineries 2012

US

Mission Bell winery, Madera (California);Canandaigua winery, Canandaigua (New York); Franciscan Vineyards winery, Rutherford (California);Woodbridge Winery, Acampo (California);Turner Road Vintners Wineries, Lodi (California); Robert Mondavi Winery, Oakville (California);Clos du Bois Winery, Geyserville (California); Gonzales Winery, Gonzales (California)

Outside US

Oliver Winery, Oliver (British Columbia, Canada);Nobilo Winery, Huapai, West Auckland (North Island, New Zealand);Drylands Winery, Marlborough (South Island, New Zealand);Poggio Casciano Winery, Bagno a Ripoli, San Polo, Florence (Italy);Gretole Winery, Castellina, Chianti, Siena (Italy);Pontassieve Winery, Pontassieve, Florence (Italy)

Production (2)OPERATIONS


36/38

OVERVIEW


MARKET ASSESSMENT


OPERATIONS

RECOMMENDATIONS


37/38


2013 saw Constellation enter into agreements withlocal players to develop its positions in Brazil andSouth Korea. While these markets offer significantgrowth opportunities in key areas, the company

needs to develop a coherent approach tointernational expansion. Brazil could provide aplatform for the development of Constellationsposition in the wider Latin American market, whiledeveloping its Italian wine offer could help toexpand the companys presence in Europe.

As it seeks to develop a more unified approach,Constellation needs to decide on the role of cider inits business. The companys cider activity isstrongly focused on Canada, which is set to see

strong category growth over 2012-2017. However,its market-leading brand, Growers, facesintensifying competition and will require significantinvestment to remain competitive. There may alsobe potential to utilise its new beer business to helpto extend Growers into the dynamic US market.

The acquisition of Modelos US beer businessprovides significant opportunities. However, thecompany needs to work hard to integrate the newbusiness with its existing operations in order toachieve cost-saving synergies (particularlyimportant in light of its increased debt burden) andprevent a lack of strategic focus developing.

Reducing its considerable debt burden should be apriority for the company. Constellations currenthigh level of debt stands to impact its profitabilitynegatively and limit its financial flexibility,undermining the companys capacity to invest inthe developments necessary to remain competitivein key areas of its business. The company shouldconsider further streamlining its still broad brand

portfolio with the divestment of low-margindomestic brands.

Focus on integration Reduce debt burden

Decide on role of cider Develop a coherent approach to international

expansion

Focus on integration and debt reductionRECOMMENDATIONS


38/38


This research from Euromonitor International is part of a global

strategic intelligence system that offers a complete picture of the

commercial environment. Also available from Euromonitor

International:

Global Briefings

Timely, relevant insight published every month on the state of themarket, emerging trends and pressing industry issues.

Interactive Statistical Database

Complete market analysis at a level of detail beyond any other source.Market sizes, market shares, distribution channels and forecasts.

Strategy Briefings

Executive debate on the global trends changing the consumer marketsof the future.

Global Company Profiles

The competitive positioning and strategic direction of leading

companies including uniquely sector-specific sales and share data.Country Market Insight Reports

The key drivers influencing the industry in each country;comprehensive coverage of supply-side and demand trends and howthey shape the future outlook.

Learn MoreTo find out more aboutEuromonitor International'scomplete range of businessintelligence on industries,countries and consumers pleasevisit www.euromonitor.com orcontact your local EuromonitorInternational office:

London+44 (0)20 7251 8024Chicago+1 312 922 1115

Singapore+65 6429 0590

Shanghai+86 21 6372 6288

Vilnius+370 5 243 1577

Dubai+971 4 372 4363

Cape Town +27 21 552 0037

Santiago+56 2 915 7200

Sydney+61 2 9275 8869

Tokyo+81 3 5403 4790

Bangalore +91 80 4904 0500

Experience more...

Download - Constellation Brands Inc in Alcoholic Drinks (World)

Top Related