When I left the market in 2002 and moved to the US I was at a loss as to what to do with myself. Like many who retire from the world of finance, I was lucky enough to have options, and decided to pursue a passion ... I opened a wine store. Twenty years of life as a foreign exchange broker and entertaining clients on an unlimited expense account had given me an appreciation of, and taste for, good wine, which I thought would stand me in good stead. I envisaged my store becoming the place for Burgundy and Bordeaux, my particular favorites, in my little corner of the Southern United States.
Sad to say, I quickly became disillusioned. What I came to understand was that my idealized view of the wine business ... small artisanal producers concerned only with the search for perfection, and customers seeking the same ... was far from the truth. In reality, wine is like any other business; volume and sales matter. After a fairly short time of standing behind the counter in an empty store, I realized not only that "good" and "popular" were not the same thing, but also that my view of "good" wasn't shared by everybody. Wine snobbery has a way of disappearing when bills have to be paid.
A large part of my education in that area came from a sales rep with Constellation Brands (STZ). She was the one that pointed out to me a simple fact. What makes a wine "good" is not terroir, balance or complexity, it's whether or not the customer likes it. Constellation have long understood that the market in alcoholic beverages is inherently trendy and, while quality is great, popularity is profitable.
Their method has generally been to let smaller companies do the heavy lifting and establish brands then step in, buy them, and increase their distribution. For evidence I would cite Kim Crawford or, more recently, Mark West. As a purist, I didn't like that. How can you maintain quality when you increase production exponentially? But as a businessman I couldn't help but admire it.
That business model isn't just for wine either. In February of last year, when Constellation finalized a deal to purchase the US rights to Grupo Modelo beers, most notably Corona, the stock jumped 37% in a day. That may have looked a little overdone at the time, but to STZ, maximizing profit on an established brand is just what they do and they have, as you can see, executed.
This week, they knocked it out of the park again, announcing Q3 profits that had nearly doubled and increasing the earnings outlook for this year to $3.10 to $3.20 from the previous $2.80 to $3.10 range. Much of this is down to the Corona deal, and analysts are now falling over themselves to increase earnings and price targets.
My natural tendency here would be to look for a negative; I learned a long time ago to be wary of consensus in markets. I tried, and a couple of obvious ones jumped out. Firstly, Corona was already popular when STZ took control and therefore growth should be limited. Not every beer drinker will drink Corona, lime wedge notwithstanding, and those that do can only consume so much. Secondly, as I said, the alcoholic beverage market is inherently trendy. Some would say that the very fact that a beer such as Corona is growing in popularity presages a collapse ... it will quickly become passé.
There may be some truth to both of these arguments, but I still believe STZ has significant potential again this year. They are acutely aware of both of these dangers and have handled them before. Wine people, for example, have been looking down their well trained noses at New Zealand Sauvignon Blanc for years now, but the Kim Crawford brand still passed the 1 million case sales mark in March.
Even if Corona does lose some cache, there are still several years of stellar sales ahead, and I trust Constellation to have other brands and product lines in place to take up the slack should it happen.
In short, if you had asked me several years ago what I thought of Constellation brands, I would have replied with barely contained disdain. They represent everything that a wine or beer snob detests, most notably commercialization. Ask me now, however, and I will tell you that what I see is an extremely well-run company that is constantly cultivating a pipeline of products and, regardless of popular taste, is likely to continue growing. Good management and a proven growth strategy may not make for great wine or beer, but they do make for improving earnings and that in turn makes for an even higher share price.