For Constellation which way is up?

 

I previously wrote a post on how Miller has no home run hitter in its craft beer space. I contrasted Miller with Budweiser that has Goose Island, Heineken that has Lagunitas, and Constellation that has Ballast Point. http://irishliquorlawyer.com/millercoors-craft-portfolio-will-its-field-of-dreams-come-true-or-will-it-need-to-find-a-home-run-from-somehwere-else/

Like baseball free agency, sometimes a big spend turns into a flop. In 2015 Constellation paid $1 billion for Ballast Point.  And needless to say, if this was baseball, it would send Ballast Point to the minors.

It seems that Constellation has begun to pull the plug on its billion-dollar baby, and in fact, admits that it is overrated.

Constellation closed two brewing locations and cancelled a San Francisco location which it planned to open. What hurts even more is that one of the facilities is located in Ballast Point’s hometown of San Diego and the other location is 60 miles away. Even in its own backyard, Ballast Point is failing to deliver.

When a hometown beer is losing its backyard, things are really going downhill. Contrast this to Anheuser-Busch’s Goose Island brand. Even with Chicago having one of the most active craft brew scenes in the country, Goose Island has not lost its top billing and has expanded instead of contracting.

But it’s not just the perception of Ballast Point trending downhill, it is also the reality. Constellation has admitted that Ballast Point is hurting the company financially. In Fiscal 2018, Constellation recorded an impairment charge of $87 million to the Ballast Point trademark. Even more troubling, they took another impairment charge this April of $108 million related to the trademark. An “impairment charge” occurs when the asset deteriorates in its ability to generate cash flows, and the fair market value of the good will goes below its book value. Good will is the value of the company’s brand name, customer base, patents, and proprietary technology.

So Constellation has stated publicly that its star acquisition to boost its craft portfolio has gone in the tank!

As a White Sox fan I remember the signing of Adam Dunn for 4 years at $56 million, only to watch him hit 159. In some respects, I feel Constellation’s pain, but unlike a bad baseball signing, they are stuck in perpetuity unless someone decides to take the asset off their hands!

 

So, what is next and what is Constellation telling us about their future?

Constellation is diving head first and aggressively into cannabis. It has invested heavily into Canopy Growth, a Canadian Cannabis Company, and its stake could be up to $4 billion. https://www.cnbc.com/2018/08/15/corona-maker-constellation-ups-bet-on-cannabis-with-4-billion-investm.html

Many alcohol players invested in this field, but it seems that Constellation is making a very aggressive and early move in this market. Anheuser Busch has dipped their feet into the water with a $100 million Joint Venture in Canada. https://www.delish.com/food-news/a25656293/anheuser-busch-inbev-cannabis-drinks/.  While MolsonCoors has entered in partnership to develop cannabis infused drinks, and Lagunitas is developing a cannabis infused drink for Heineken, in my opinion none of them has taken the plunge like Constellation.

So, we can only speculate to what this means for Constellation. Does this mean that Cannabis is becoming king and that Craft is exiled from the Kingdom? It seems so, we shouldn’t expect another craft beer deal anytime soon. But the mistake in craft and the aggressive venture into cannabis, could have created another ripple effect for the company.

Constellation which is the number 3 producer of wine in the United States, sold 30 brands from its wine portfolio to E. & J Gallo Winery, the number 1 producer, for $1.7 billion. Constellation stated that the company would utilize the money to pay down debt. https://www.cnbc.com/2019/04/04/constellation-brands-q4-2019-earnings.html

Constellation hoped that the sell would bring in $3 billion, unfortunately it brought in only $1.7 billion. https://www.cnbc.com/2019/03/15/corona-brewer-constellation-is-nearing-a-deal-to-sell-some-wine-brands.html

 

Where do we go now?

Axl Rose once asked this question repeatedly in the song “Sweet Child of Mine”, and for us fans of the liquor industry we ask this of Constellation.

They have gone all in on crafts with the Ballast Point acquisition, and now are doing a 180 and closing key locations and admitting they made a mistake with Ballast Point.

The new strategy seems to go all in on cannabis and hope national legalization or some form of federal decriminalization happens soon! As we know, these two things happening in the near future are not guaranteed. Further, with a new market like cannabis, there is no stalwart starting out that dominates the industry. So, will Constellation really become the big kid on the cannabis block or could it turn into a Ballast Point disaster?

As for wine, they sold their cheaper portfolio, and will focus on higher-end wine brands. But what was behind the sales, was it really image conscious or was it to pay for the Ballast Point disaster or to make more funds available for cannabis?

Where does Constellation go from here, all signs point to cannabis! But this is arguably the most interesting and unpredictable company in the liquor industry. Never be surprised what move they make next. But after the Ballast Point disaster, they need a new player in the lineup that can deliver the goods.

Constellation can never be counted out regardless of the Ballast Point mistake. They had great results in the 4th quarter, they have made Corona a flourishing success and Modelo is having an amazing run! Truly they have some greatness in them, along with a couple of tricks up their sleeves.

And a final word, never sleep on Constellation!

 

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