CONSTELLATION INVENTORY DESTOCK TAKES ITS TOLL
Recent distributor inventory reductions and continued pressure from the Australian grape glut resulted in Constellation’s wine business in North America dropping 4% in the second quarter. Hardships in the US offset strong growth in Constellation’s Canadian business. The good news, though, is that spirits sales were strong and grew 25% propelled mainly by Svedka.
Why did the inventory end up lower than expected? Rob Sands, the newly appointed ceo, said it was due to mix impact.
“The mix of the reduction inventory was SKUed towards higher margin products and therefore the sales impact was lower than expected but the earnings impact was within the range we specified. We accomplished in general the goal we were trying to.”
Later in the call, Rob was asked how he thought distributors viewed the reduction. Here’s his response:
“We’re working well with our distributors. The reduction has benefited them and they’re very willing to partner with us to continue to build our brands in our portfolio. We’re very positive in that regard.”
The company continues to see growth in its premium portfolio, which includes brands like Robert Mondavi Private Selection, Toasted Head and Rex Goliath.
2007 U.S. HARVEST LOOKS GOOD. So far, the US grape harvest is looking good. Overall yields are expected to decline in the mid-single digit range as compared to last year’s harvest. Furthermore, Constellation is expecting a high quality output.
Grape prices are expected to increase for popular varietals, including Pinot Noir, Pinot Grigio and Chardonnay. Meanwhile, Constellation predicts stable prices for generic wine varietals
“The US wine market is very healthy. Overall, supply and demand should remain in balance,” said Rob.
UK MARKET, DIFFERENT STORY. As it turns out, UK market conditions are basically the same. As you’ll recall, the Australian grape glut is enabling retailers in the UK to purchase Aussie bulk wine on the cheap and then sell it next to nothing under private label wine brands, resulting in tough competition for Constellation.
Rob stated that the drought in Australia is expected to reduce the output of the 2008 harvest although they can’t (or won’t) be specific at this time. Combined with a lower harvest in 2007, the Australian bulk wine market has started to dry up but the UK marketed pricing has not changed significantly.
“We remain cautious, but we believe the tightening supply in Australia and indications of trading up activity in the UK are positive trends,” said Rob.
STRONG MOMENTUM FROM SVEDKA. Strong double-digit growth ytd from Constellation’s latest acquisition, Swedish-based Svedka, has helped turn around the company’s spirits business.
Rob said the Svedka integration is “substantially” complete and that the company is “channeling strength with retailers in the wine channel to benefit our spirits business.”
WHAT THE ANALYSTS ARE SAYING. Kaumil Gajrawala of UBS believes strong Constellation spirits indicates a positive outlook for Brown-Forman, Diageo and Pernod because all three companies have significant exposure to the US.
“We expect the spirits growth story to continue, particularly high-end,” he said.
This is good news for the US spirits industry where lately insiders, analysts and press had reported that growth was starting to decline. Meanwhile, Kaumil expressed concern for the UK retail environment and Australian glut which he believes may cause distributors to shift focus to other suppliers.
“Our concern with the UK retail environment continues as we believe 2Q results indicated no real shift in UK market conditions. We also do not see any near-term impact from tighter harvests in Australia or California. Finally, we believe distributors may shift their focus from STZ brands as they re-evaluate the status of current deals such as Fosters.”
Why did the inventory end up lower than expected? Rob Sands, the newly appointed ceo, said it was due to mix impact.
“The mix of the reduction inventory was SKUed towards higher margin products and therefore the sales impact was lower than expected but the earnings impact was within the range we specified. We accomplished in general the goal we were trying to.”
Later in the call, Rob was asked how he thought distributors viewed the reduction. Here’s his response:
“We’re working well with our distributors. The reduction has benefited them and they’re very willing to partner with us to continue to build our brands in our portfolio. We’re very positive in that regard.”
The company continues to see growth in its premium portfolio, which includes brands like Robert Mondavi Private Selection, Toasted Head and Rex Goliath.
2007 U.S. HARVEST LOOKS GOOD. So far, the US grape harvest is looking good. Overall yields are expected to decline in the mid-single digit range as compared to last year’s harvest. Furthermore, Constellation is expecting a high quality output.
Grape prices are expected to increase for popular varietals, including Pinot Noir, Pinot Grigio and Chardonnay. Meanwhile, Constellation predicts stable prices for generic wine varietals
“The US wine market is very healthy. Overall, supply and demand should remain in balance,” said Rob.
UK MARKET, DIFFERENT STORY. As it turns out, UK market conditions are basically the same. As you’ll recall, the Australian grape glut is enabling retailers in the UK to purchase Aussie bulk wine on the cheap and then sell it next to nothing under private label wine brands, resulting in tough competition for Constellation.
Rob stated that the drought in Australia is expected to reduce the output of the 2008 harvest although they can’t (or won’t) be specific at this time. Combined with a lower harvest in 2007, the Australian bulk wine market has started to dry up but the UK marketed pricing has not changed significantly.
“We remain cautious, but we believe the tightening supply in Australia and indications of trading up activity in the UK are positive trends,” said Rob.
STRONG MOMENTUM FROM SVEDKA. Strong double-digit growth ytd from Constellation’s latest acquisition, Swedish-based Svedka, has helped turn around the company’s spirits business.
Rob said the Svedka integration is “substantially” complete and that the company is “channeling strength with retailers in the wine channel to benefit our spirits business.”
WHAT THE ANALYSTS ARE SAYING. Kaumil Gajrawala of UBS believes strong Constellation spirits indicates a positive outlook for Brown-Forman, Diageo and Pernod because all three companies have significant exposure to the US.
“We expect the spirits growth story to continue, particularly high-end,” he said.
This is good news for the US spirits industry where lately insiders, analysts and press had reported that growth was starting to decline. Meanwhile, Kaumil expressed concern for the UK retail environment and Australian glut which he believes may cause distributors to shift focus to other suppliers.
“Our concern with the UK retail environment continues as we believe 2Q results indicated no real shift in UK market conditions. We also do not see any near-term impact from tighter harvests in Australia or California. Finally, we believe distributors may shift their focus from STZ brands as they re-evaluate the status of current deals such as Fosters.”
posted at 1:17 PM
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