TRANSITIONAL CHANGES TAKE A TOLL ON CONSTELLATION
Several initiatives characterized Constellation during its first quarter in fiscal 2008, including a reduction in distributor inventories, U.K. market pains, the completion of the Svedka acquisition, Matthew Clark and the $500 million share repurchase program.
Constellation saw a 65% drop in net income during its first quarter, while sales fell 25%. The plunging numbers were due to several “bumps in the road,” the term that Rob and Richard Sands used in referring to the recent initiative to reduce U.S. distributor wine inventory and problems with U.K. retailers.
The company also announced that Robert Sands, 49, was named ceo effective July 26, succeeding Richard Sands, 56, who will remain chairman.
“This is not a big dramatic change,” said Richard. “I want to make clear that I’m staying actively involved...this is just a partnership and Rob is just taking the lead partner role, is how I look at it.”
US WINE BUSINESS TRUCKING ALONG
DISTRIBUTOR INVENTORY. Constellation says that the reduction in distributor wine inventory is going as planned, although they were a little behind in the first quarter. The company achieved 55% of the targeted reduction instead of its initial forecast of 65%, but claims the reduction will be completed by the end of the second quarter.
So what kind of impact will the distributor reduction plan have in the remaining fiscal 2008? Rob says it “will slow the cadence of growth in the coming quarters...after the peak Christmas selling season we won’t be building up the traditional buffer stock in the distributor inventories.”
The completion of the reduction in Q2 will have negative impact on the second quarter’s sales. Expect to see a high net sales growth rate in Q3 that will be offset by a lower growth rate in Q4, says Rob.
And just for emphasis, chairman Richard Sands highlighted the fact that “it was our decision to reduce inventories...we thought it was better for our business and their business.”
WINE. Organic branded wine net sales in North American decreased -13% due to the cutback in distributor inventory, but other than that, things are looking up. Rob called the U.S. wine market “healthy” with continued benefits from the trading up phenomenon. Mix is improving as Constellation’s premium wine portfolio continues to perform very well, lead by brands like Three Blind Moose, Blackstone and Estancia and its New Zealand portfolio. Brands currently outperforming the total premium category include Vincor’s Toasted Head and Hogue and Constellation’s mainstay Woodbridge.
The company enjoyed “continued resurgence” of Woodbridge during the first quarter thanks to increased distribution and promotion, and positive consumer response to the new label and new varietals (namely Pinot Noir and Riesling). Rob said that Woodbridge also benefited from its convenient packaging, including the widely popular 4-pack and the new 12-pack, an industry first. IRI data shows that in the 52 weeks ending May 20, Woodbridge dollar sales grew 7%.
SPIRITS. Speaking of premium brands, the Svedka transition was completed in the early part of the first quarter, but it doesn’t look like Constellation is in any particular rush to premiumize its spirits category just yet.
Rob said “it’s not urgent but we want our portfolio to become more premium.” They plan on achieving their goal through new product development with brands like 1792 and 99 Schnapps, and through acquisitions that fit the company and “are valued appropriately."
“We’re not going to put our financial discipline aside in building our premium spirits portfolio just like we wouldn’t in any other case,” he continued.
Total spirits net sales increased 16% for the quarter, primarily due to Svedka, while organic net sales were up 2%.
FUTURE ACQUISITION STRATEGY
During the question and answer section, Richard said that any future acquisitions will serve three priorities:
1. European expansion to strengthen routes to market
2. Premium spirits growth – “We continue to look for acquisitions albeit we won’t chase something as costly as Absolut.”
3. Filling out our wine portfolio around the world – “We don’t see us continuing with these $1 and $2 billion dollar acquisitions. It’s more likely it will be smaller acquisitions that fill in niches in our portfolio around the world.”
UK SITUATION AT A STALMATE
Rob told listeners that not much has changed in the U.K. marketplace despite a lower 2007 and 2008 Australian grape crush. While the Australian bulk wine market is starting to firm from a pricing perspective, there hasn’t been a significant change in pricing in the UK. In other words, British retailers are continuing to sell private label Australian wines very cheaply, which is killing competition.
Rob maintains that instead of waiting for the competitive situation to change, the company is working to increase its operating efficiencies and improve product and channel mix. Partnering with Punch Taverns in the Matthew Clark joint-venture is one way Constellation is working to help better competition and boost distribution in the UK.
At the same time, Constellation seems to be keeping its fingers crossed with regards to the Australian situation in the U.K. With signs that the Australian grape glut is coming to a close, things seem to be looking up for Constellation, but they’re still reluctant to give any pricing forecasts.
Rob says that he assumes U.K. retailers have contracts in place with Australian bulk wine producers that will carry them through for a period of time, but the bulk wine supply is not likely to be so abundant in the near future.
Constellation saw a 65% drop in net income during its first quarter, while sales fell 25%. The plunging numbers were due to several “bumps in the road,” the term that Rob and Richard Sands used in referring to the recent initiative to reduce U.S. distributor wine inventory and problems with U.K. retailers.
The company also announced that Robert Sands, 49, was named ceo effective July 26, succeeding Richard Sands, 56, who will remain chairman.
“This is not a big dramatic change,” said Richard. “I want to make clear that I’m staying actively involved...this is just a partnership and Rob is just taking the lead partner role, is how I look at it.”
US WINE BUSINESS TRUCKING ALONG
DISTRIBUTOR INVENTORY. Constellation says that the reduction in distributor wine inventory is going as planned, although they were a little behind in the first quarter. The company achieved 55% of the targeted reduction instead of its initial forecast of 65%, but claims the reduction will be completed by the end of the second quarter.
So what kind of impact will the distributor reduction plan have in the remaining fiscal 2008? Rob says it “will slow the cadence of growth in the coming quarters...after the peak Christmas selling season we won’t be building up the traditional buffer stock in the distributor inventories.”
The completion of the reduction in Q2 will have negative impact on the second quarter’s sales. Expect to see a high net sales growth rate in Q3 that will be offset by a lower growth rate in Q4, says Rob.
And just for emphasis, chairman Richard Sands highlighted the fact that “it was our decision to reduce inventories...we thought it was better for our business and their business.”
WINE. Organic branded wine net sales in North American decreased -13% due to the cutback in distributor inventory, but other than that, things are looking up. Rob called the U.S. wine market “healthy” with continued benefits from the trading up phenomenon. Mix is improving as Constellation’s premium wine portfolio continues to perform very well, lead by brands like Three Blind Moose, Blackstone and Estancia and its New Zealand portfolio. Brands currently outperforming the total premium category include Vincor’s Toasted Head and Hogue and Constellation’s mainstay Woodbridge.
The company enjoyed “continued resurgence” of Woodbridge during the first quarter thanks to increased distribution and promotion, and positive consumer response to the new label and new varietals (namely Pinot Noir and Riesling). Rob said that Woodbridge also benefited from its convenient packaging, including the widely popular 4-pack and the new 12-pack, an industry first. IRI data shows that in the 52 weeks ending May 20, Woodbridge dollar sales grew 7%.
SPIRITS. Speaking of premium brands, the Svedka transition was completed in the early part of the first quarter, but it doesn’t look like Constellation is in any particular rush to premiumize its spirits category just yet.
Rob said “it’s not urgent but we want our portfolio to become more premium.” They plan on achieving their goal through new product development with brands like 1792 and 99 Schnapps, and through acquisitions that fit the company and “are valued appropriately."
“We’re not going to put our financial discipline aside in building our premium spirits portfolio just like we wouldn’t in any other case,” he continued.
Total spirits net sales increased 16% for the quarter, primarily due to Svedka, while organic net sales were up 2%.
FUTURE ACQUISITION STRATEGY
During the question and answer section, Richard said that any future acquisitions will serve three priorities:
1. European expansion to strengthen routes to market
2. Premium spirits growth – “We continue to look for acquisitions albeit we won’t chase something as costly as Absolut.”
3. Filling out our wine portfolio around the world – “We don’t see us continuing with these $1 and $2 billion dollar acquisitions. It’s more likely it will be smaller acquisitions that fill in niches in our portfolio around the world.”
UK SITUATION AT A STALMATE
Rob told listeners that not much has changed in the U.K. marketplace despite a lower 2007 and 2008 Australian grape crush. While the Australian bulk wine market is starting to firm from a pricing perspective, there hasn’t been a significant change in pricing in the UK. In other words, British retailers are continuing to sell private label Australian wines very cheaply, which is killing competition.
Rob maintains that instead of waiting for the competitive situation to change, the company is working to increase its operating efficiencies and improve product and channel mix. Partnering with Punch Taverns in the Matthew Clark joint-venture is one way Constellation is working to help better competition and boost distribution in the UK.
At the same time, Constellation seems to be keeping its fingers crossed with regards to the Australian situation in the U.K. With signs that the Australian grape glut is coming to a close, things seem to be looking up for Constellation, but they’re still reluctant to give any pricing forecasts.
Rob says that he assumes U.K. retailers have contracts in place with Australian bulk wine producers that will carry them through for a period of time, but the bulk wine supply is not likely to be so abundant in the near future.
posted at 2:22 PM
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