Constellation Has Tough Q3

FILED JANUARY 1, 2010

Dear Client:

Increased inventory at the US distributor level took a toll on third quarter sales to November 30 due to an expected inventory sales shift to the second quarter, Constellation chief Rob Sands said this morning. Organic net sales of branded wine declined -3% in North America. Recall that Constellation shifted $40-$50 million of inventory from the third quarter to the second quarter to ensure “maximum levels of customer service” for distributors and retailers after Constellation began its wholesaler consolidation in September. This resulted in higher than normal distributor inventories at the end of Q3. At the end of the call Rob said they will continue the distributor transition throughout the final quarter of the year, and that although it hasn’t been an entirely smooth process, “we believe it’s the right strategy to pursue for the long term.”

Economic challenges and higher levels of promotional spending prior to the holidays were also factors in disappointing sales. Depletions were softer than expected in the beginning of the third quarter but improved just before Thanksgiving as Constellation’s marketing efforts took effect and promotional activities returned to more normal levels at the end of Q3. Rob said that although their planned promotional activities weren’t implemented until the end of the third quarter, many of their leading brands – including Robert Mondavi Private Selection, Rex Goliath and Kim Crawford – performed in line with the market.

“On the wine side yes we’re seeing some improved performance; I think that’s generally a result of a lot of our efforts – for instance our distributor consolidation, increase in our promotional activities in the third quarter – these things are now kicking in and we’re really starting to see the positive impact of that in the late third quarter and we’ve seen some of the positive impact of that into December and holiday season. We’re pretty optimistic that things are working pretty well at this stage on the wine side,” said Rob.

According to the latest 12-week IRI scan data, US wine grew 4% in dollar sales, while the above $8 wine category grew in the high single digit range. Rob noted that the on-premise remains challenging “although we think it’s stabilizing.” He also said that mass merchandisers and club stores are outperforming grocery stores at the off-premise.

“We saw good promotions and displays for our brands during the holiday season and began to see improving depletions and marketplace trends in the US wine and beer as the quarter progressed,” said cfo Bob Ryder.

Spirits organic net sales decreased -2% in Q3 mainly due to tough comparisons from Q3 2009. In the second quarter of 2009 Svedka experienced glass shortages due to a new bottle changeover. As a result, shipments were much higher in Q3 2009. However, spirits organic net sales for the first nine months of fiscal 2010 increased 18% with Svedka net sales increasing more than 40%.

ROB ON TRADING UP. Rob said that many of the higher priced categories are performing better than the lower priced categories. Trading down exists more within price categories, which ultimately creates a negative mix shift. “Trading up has picked up and fundamentally there’s not trading down in that higher priced segments are growing much faster than lower priced segments, with the super premium plus category growing high single digits. That said, I would still say that within categories there is still some trading down going on...if you look at the $10-$15 segment, within that there could be some trading down towards the lower end of that segment versus the higher end...fundamentally there is trading up but within segments there is trading down...therefore there can be some negative mix shift which is the case, there is some negative mix shift in the business.”

ROB ON WINE GROWTH FOR 2010. With all thing considered, including the on- and off-premises, Rob predicts that overall branded wine volume will grow about 1% in calendar 2010. “Around 1% by volume would be a good guess. Could be higher or a bit lower depending on the state of the economy and that’s for the total wine industry in the US. We’ll see IRI grow faster than that, we’ll see mass merchandise grow faster than that and probably on premise grow slower than that but, volumetrically probably 1% but dollars will be higher than that because of the general trend towards trading up.”

MOST WINE AND SPIRITS GIANTS POST SALES GAINS FOR 2009

In a rare glimpse at early results of year around off-premise scan data, the spirits category saw dollar sales rise 3.9% and volume rise 3.2% in the 52 weeks, according to Bill Pecoriello at ConsumerEdge Research. In looking at the top 10 spirits suppliers, dollar sales of Fortune Brands were flat and Bacardi posted -0.4% declines while the other companies were up for the year. Heaven Hill posted the most dollar sales growth for the year, up 8.3%. Volume, however, was a little shakier as spirits companies increasingly sacrifice volumes for dollar growth. In volume, Fortune (-1.5%), Bacardi (-1.5%), B-F (-0.9%) and Constellation (-2%) all posted declines for their spirits brands. Heaven Hill (4.8%), Moet Hennessy (4.8%) and Skyy Spirits (4.6%) were all tied for top volume growth. Diageo gained 3.2% in sales and volume, respectively, for the 52-weeks.

Meanwhile, dollar sales of wine increased 5.3% for the year and 3% in volume. Out of the top 10 wine suppliers, Trinchero Wine Estates posted the biggest leap in dollar sales, up 17.1%, while Kendall Jackson was down -4.2%. In volume, Trinchero again posted the most growth, up 12.2%, while Constellation was down -0.4% and K-J declined -5.6%. All the other major wine suppliers were up in both sales and volume. EJ Gallo saw sales rise 7.6% for the year and volume rise 0.8%. Sales of Constellation were up 0.8%.

The four-week data is another story. Bill noted that 5 of the top 10 wine producers had negative year over year pricing in the last four weeks. His results show that wine volumes deteriorated some in the latest 4 weeks with volumes up 3% versus a -1.6% decline a year ago. In the 12 weeks, volumes grew 2.8% versus a tougher comparison of +0.2%, said Bill.

MORE NEGATIVE PRESS FOR NEW HANOVER, NC

Another North Carolina county is coming under investigation for reportedly allowing the same Diageo rep that paid for a pricey dinner in Mecklenburg County (about $12,700) to also take them out for meals (which is illegal in the state). The Diageo rep told state alcohol investigators that he also bought meals for officials with the New Hanover ABC, although they are denying such claims. New Hanover ABC officials are already under investigation for a salary related incident.

QUICK BACKGROUND. As it turns out, the father and son who run the New Hanover ABC recently came under fire for especially large salaries and even larger bonuses. Recall that Billy Williams received $232,000 in salary a year, plus a $30,000 bonus. His son, Bradley Williams, received $115,500 and a $20,000 bonus. Although that county brings in the largest profit margins for the state and perhaps officials deserve a pay bump, they were paid more than the state ABC Commission chairman and the state administrator. Yesterday, three members of the county ABC which oversaw the Williams' salaries resigned. Interim ABC board members were assigned.

In an Alcohol Law Enforcement report that mainly focuses on the Mecklenburg incident, the Diageo rep said he "has paid for meals for other North Carolina local ABC board employees," including employees in New Hanover, but did not specify how many meals or for whom they were purchased. The other counties named in the report are Asheville, Lenoir, Greensboro, Carteret County, Onslow County and the Triad ABC in Winston-Salem. The state ABC commission has asked Diageo to provide copies of any receipts to prove they paid for meals with New Hanover ABC officials but no word yet when or if those records will be handed over. Meanwhile, ABC Administrator Billy Williams said he went to lunch with a sales rep from Diageo over a year ago but paid for his own meal. Former board member Stephen Culbreth said he'd never been treated by Diageo representatives to a meal.

WSD BRIEFS:

KORBEL CALIFORNIA CHAMPAGNE said 2009 shipments increased 4.2% or 53,300 cases over 2008. The company said that preliminary analysis shows sales growth to be broad based, with significant increases in most major markets, including New York, Florida, Texas and California.

COSTCO COMPARABLE SALES including gas prices and foreign currencies grew 5% in the US in December and 2% in the 18 weeks to January 3.

RUSSIAN STANDARD USA has appointed Michael Stoner to the role of vp of marketing in the US. He will be based in the New York office and report to Leonid Yangarber, chief of Russian Standard Vodka USA. The company has also appointed Bob MacNevin as vp of national accounts and military. Bob formerly held a variety of executive positions at Pernod Ricard and Diageo. He will be based in New York and report to Dana Chandler, vp of national sales & distribution.


Until tomorrow, Megan

A bird does not sing because it has an answer. It sings because it has a song.
Chinese Proverb

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