In the face of a recession, Constellation Brands is confronting a central question as it changes its strategy to focus on premium wines, beers, and liquors: When times are tight, what happens to sales of booze? Do pricier offerings like premium wines and high-end vodka slump in favor of cheaper fare? Or is it the rotgut stuff that loses sales?
For liquor distributor Constellation, the question is more important than ever because it has been spending big on acquisitions of higher-end wineries and liquor producers while casting off some of its low-end business units.
Among its many recent moves, it purchased the Clos du Bois wine brand, as well as Effen and Svedka vodkas. And it sold off the lower-end Almaden and Inglenook wine labels.
But “with the economy mired in a slump,” writes Rich Duprey of the Motley Fool, Constellation “may find that consumers opt for ripple instead of wine to save a few bucks.”
The company released its fourth-quarter earnings last week, and the results don’t do much to clarify the picture. Reactions were so confused that the Associated Press headline read “Constellation Brands Swings to 4Q Loss,” while Reuters reported, “Constellation Brands Profit Tops View.”
Much of the confusion had to do with one-time charges, but still, the company’s short- and intermediate-term future is hard to pin down. Sales are weak in Australia and Great Britain, but, for now at least, still strong in the United States.
The company’s line of beers – all imports – is doing well, Chief Operating Officer Rob Sands said in a conference call on Thursday.
As for wine, Constellation is well positioned because sales of wines costing between $8 and $20 are still selling, Sands said. “We continue to see very, very strong double digit growth in those categories and we continue to see strong trading-up trends in the wine business.”
That “trading up,” though, doesn’t include high-end wines, which have seen sales fall off in recent months. But, Sands said, “basically, that’s immaterial to the wine business as a whole.”
The company forecasts that fiscal 2009 will see higher-than-expected sales in most of its business units. “Our sense,” wrote Goldman Sachs analyst Judy Hong in a research note “is that while market expectations tilt to the cautious side, we await further clarity on the underlying business fundamentals to adopt a more optimistic view.”
The Motley Fool’s Duprey, was more direct. There is, he noted, a worldwide glut of wine, which could hurt international sales. If so, Constellation’s “formerly improving margins may now fall flat” if the economy continues to tank.
