Does Constellation Understand Beer?
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Constellation (NYSE: STZ) is taking a big jump into the beer business with their recent $1.85 billion purchase of the other half of Crown Imports they didn't already own. This purchase, part of a pretty interesting transaction with AB InBev (NYSE: BUD), described in a previous article here, will give Constellation full control of the marketing of brands like Pacifico, Corona, Modelo, and Victoria. While AB InBev will control production, Constellation will be responsible for the hard part: branding.
In FY2012, Constellation's 50% share in Crown Imports brought in $2.5 billion in net sales. The other main arm of Constellation's business, Constellation Wines North America (that is everything else), brought in $2.6 billion. So, just to reiterate, Constellation's portfolio of 200 wine and spirits brands around the world -- including Robert Mondavi, Clos du Bois, Ravenswood, Kim Crawford, Svedka Vodka, and Black Velvet Whiskey -- made about the same amount of money as their half share in a beer marketing company catering to one country. Now that Constellation is a US beer marketing company with a wine producing business on the side, I have to ask: Did Constellation bite off more than they can chew?
It is safe to say that wine marketing is a tad different from beer marketing. Wine changes every year -- a vineyard could have a bad season and the brand could lose its appeal for good. American wine marketing is especially hard because it is based on the grape, rather than the region. A Sauvignon Blanc from California can taste vastly different from one from New Zealand, simply because of the growing region, and the person who thought they didn't like that California Sauv Blanc is amazed by the deliciousness of the New Zealand one. So the marketer has to work extra hard to get their customers to find a wine and stick with it. The most market share a popular wine could ever expect to have is around 4-5%. Compare that with the US beer market, where the top 3 control 40% of the market (Bud Lite, Bud, Miller Lite).
By purchasing the entirety of Crown, Constellation will be absorbing Crown's marketing department. As we know form the popularity of Corona (#6 in the US) and the ubiquity of those sitting on the beach ads, the Corona marketing team is doing something right. But is Constellation willing to stomach the increased marketing budget from the current 20% of sales to something like Diageo (NYSE: DEO), which requires over 30%?
Though Diageo is far more dependent on promotion-heavy spirits, it is worrisome that Constellation might take a wine-like light marketing path for their new acquisition. If a slip occurs in the incredibly competitive US beer market, the hit to Constellation could be huge. Of course, the flip side is that Constellation is poised to take advantage of the current trend of import and craft beers stealing market share from the big guys. Let's just hope that Constellation knows how to keep a good thing going.
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