Constellation Brands: does Corona have to be Made in Mexico?

Mexican beers such as Corona are growing the US beer market – but can their maker adapt to a new world of trade?

The U.S.’s Imported Beer

In October of 2017, CEO Robert Sands told investors that out of all the growth in the US’s high-end beer market, 60% came from his company, Constellation Brands.[1] However, despite 93% of Constellation’s sales occurring in the US[2], 60% of their COGS are in Mexico.[3]

While the immediate political risks to trade has subsided since a year earlier, NAFTA renegotiations has opened management’s eyes to the risks isolation presented to their business. However, though automakers, solar panel manufacturers, and call centers have the options to localize their supply chains to the United States, being “Made in Mexico” is core to the Corona, Modelo and Pacifico identity.

A More Flexible Supply Chain

The threat of a changing trade policy followed Constellation’s efforts to take more control of its supply chain. In 2016, Constellation purchased AB InBev’s Obregon Brewery, a large Mexican facility that produced Constellation’s beers.[4] While not management’s purchase rationale, the increased controlled did add levers that the company could adjust in the event of new tariffs. For example, CFO David Klein cited potential flexibility in the energy cost of glass production.[5] While the major glass production occurred in the Nava facility in Mexico, Constellation would have the ability to transfer certain costs based on potential trade policies. Constellation also divested their Canadian Wine and Spirits business in 2017, which eliminated a potential NAFTA concern.[6]

While acquisitions such as Obregon were explicitly for supply chain reasons, Constellation’s commercially-oriented deals also help insulate the company from the trade risks. Two recent acquisitions, Ballast Point (2015) and Funky Buddha (2017), are American-based beer brands with domestic production, and Constellation is investing in their production capabilities.[7] [7] However, Constellation’s supply chain capabilities remain significantly weaker in the US, and it would take significant investment to bring them up to par with the Mexican operation. Given Corona, Modelo, and Pacifico account for most of Constellation’s beer sales, the company remains heavily dependent on Mexican imports for the foreseeable future; however, by focusing acquisition activity on US-centric brands, the company can increase production scale in the United States and lessen the cost disadvantage.

Shift to the US?

A stronger manufacturing footprint in the US would not only make the company less sensitive to changes in trade that adversely impact the cost of Mexican beers, but may also open up the possibility of shifting certain elements of Corona, Modelo, and Pacifico production north. While the “Made in Mexico” designation is crucial to the brands’ identities and commercialization, products that are manufactured using a global supply chain still claim a single country of origin. Though the Federal Trade Commission has issued guidelines for “Made in the USA” claims,[8] companies are less restricted on products marketed as from other countries, which could allow Constellation to optimize for the tax or tariff regime if they had the right capabilities in both geographies, an option Klein alluded to regarding the glass factory.

Even if trade conditions remain stable, Constellation Brands has incentives to invest in its US supply chain: increasing Mexican labor costs and exchange rate volatility create a financial risk for a company whose costs and revenues are misaligned. Constellation should make US production capability a core element of its M&A strategy, both by using it as a screen on potential brand targets and by acquiring existing production assets. Moreover, Constellation should test the commercial implications of being imported. For example, Constellation could change packaging on sub-brands to deemphasize the Mexican ties, test whose outcomes suggest whether an eventual move to a fully US supply chain could be viable.

Questions to consider

Imported products such as Mexican beer rely on their roots in marketing to consumers. If the global trade regime disadvantages imports and forces supply chain adjustments, under what circumstances traditionally-imported brands make the transition to local production?

Without supply chain levers to mitigate tariffs, foreign producers could see sudden cost increases that they may have to pass on to consumer but investing in a US-based supply chain adds cost without certain benefit. How proactive should companies be in anticipating changing trade conditions as it concerns their supply chain?

(793 words)

[1] Constellation Brands Q3 2017 Earnings Call, Capital IQ, Inc., a division of Standard & Poor’s.

[2] Constellation Brands Inc., January 5, 2017 Form 10-K, accessed November 2017

[3] Constellation Brands Q3 2017 Earnings Call, Capital IQ, Inc., a division of Standard & Poor’s.

[4] Constellation Brands Inc., January 5, 2017 Form 10-K, accessed November 2017

[5] Constellation Brands Q3 2017 Earnings Call, Capital IQ, Inc., a division of Standard & Poor’s.

[6] Ibid.

[7] Laurence Hammack, “Ballast Point to hire 175, open craft brewery in Botetourt,” Roanoke Times, May 24, 2016, http://www.roanoke.com/news/local/botetourt_county/ballast-point-to-hire-open-craft-brewery-in-botetourt/article_ef293877-cdb3-5572-813c-e57b3022bdce.html, accessed November 2017.

[8] Federal Trade Commission, “Complying with the Made in the USA Standard.” Ftc.gov, December 1998. https://www.ftc.gov/system/files/documents/plain-language/bus03-complying-made-usa-standard.pdf, accessed November 2017.

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8 thoughts on “Constellation Brands: does Corona have to be Made in Mexico?

  1. Underlying this article is the assumption that companies focused on branded, imported consumer goods operate in a more or less rigid environment, where their pricing power is limited and where production location is essential to their brand heritage.
    I’m not sure this is truly the case.
    When it comes to pricing, there have been numerous articles on how branded goods companies – especially in alcoholic beverages – have been driving prices up over the past years, now resulting in very strong margins. As a result, I think this created a strong enough margin buffer for these businesses to “weather out” trade wars, especially if these are more short term.
    On the longer run, I believe imported brands have a lot of flexibility in terms of production location. The power of their brands relates to their foreign origin and the connotations that come with it. Not so much the fact that the product has been produced there. There are numerous examples of “imported brands” that have local production (e.g. Barilla).

  2. Interesting summary of the issues surrounding the supply chain of Mexican beers sold in the U.S.! This is one of two ways to reverse the imbalance between the domestic portion of sales and the domestic portion of COGS that you lay out in your first paragraph. The second, after increasing COGS in the U.S., would be to increase sales in Mexico. Constellation would have to market to Mexican consumers, develop relationships with retailers and beef up distribution networks. Growing sales in Mexico so as to reverse this imbalance completely is obviously unrealistic in the short-run, but the advantages of following that trend suggest we may be seeing shorter supply chains (in terms of number of borders crossed) and more local marketing for products whose nationality is part of their image.

    To answer your question about how proactive companies should be in anticipating changing trade conditions, I think we’d agree that lower-risk and more rewarding measures should be taken soon if not already. Growing local markets is one such measure: it mitigates the risk of tariffs (assuming C.B. internalizes the cost in the short run) while expanding sales into new markets (assuming the market is sufficiently large, growing, and C.B. can win share).

  3. I found this article very interesting – thank you, Alex Robinson! To address your question of the conditions necessary to transition to local production, my inkling is to focus in on Ballast Point and Funky Buddha’s domestic production. Having just recently acquired them, Constellation Brands should perform a deep dive into each of their operations to understand what processes can be streamlined. This way, Corona, Modelo, and Pacifico can immediately become beneficiaries. The company will be able to leverage certain efficiencies across all product offerings, which could arguably lead to greater economies of scale and lower costs. Over time, they may be able to consolidate all production domestically…which brings up the issue of how significant the country of origin is or isn’t to Constellation Brands.
    On this issue, I agree with FD in that the brand strength tied to the country of origin doesn’t necessarily correspond to actual production location. However, because Mexico as the country of origin is a key aspect of Corona, Modelo, and Pacifico’s value proposition, I would be careful to keep at least some aspect of the product closely tied to Mexico. Perhaps there’s a key ingredient that they can source from Mexico so as to maintain a strong brand image?

  4. Thanks for your article Alex Robinson! Take it from a Mexican that is very concerned with the potential ramifications of the NAFTA negotiations on my home country’s economy. However, I will respectfully disagree with both the underlying core issue that you presented and your action plan.

    As FD mentioned, having a “Mexican brand” does not necessarily require for the products to be produced in Mexico – it is only the brand that needs to resonate with the origin, but production could happen anywhere and still feel the same. Take for example Nike sportswear – the quintessential American sports brand has nearly 100% of its production being done in Southeast Asia, and still consumers perceive it to be an American brand that resonates with them and that they are mostly proud of.

    If that is the case, then why hasn’t Constellation moved production to the US? Because, at least up until now, the economics don’t make sense.

    When such large M&A’s happen, the acquiring company is buying both the brands AND the production capabilities. At this point, a lot of different scenarios are analyzed to try to find synergies that would allow to reduce COGS and improve margins. Not being an expert on the industry I would have to guess that the COGS of producing in Mexico + transportation costs are still more cost effective than bringing any part of the production up to the US, starting with the crazy high capital expenditures that are required to expand mass production of beer.

    While the recent stance from the administration is definitely something to watch out for, the food and beverages industry as a whole definitely has enough lobbying power to ensure that the economic opportunities that they currently benefit from are not completely wiped out.

    Here’s to hoping we can keep discussing this issue while drinking some Coronas!

  5. I really enjoyed your article Alex Robinson! I agree that uncertainties around trade relations create incentives to invest in production and supply chain infrastructure for CB’s portfolio of Mexican beer in the US. However, I have to side with JJFG that current economics will most likely deter management from making the capital-intensive investments necessary for mass production north of the Rio Grande.

    There is a long history of imported beer brands successfully shifting production for US consumption to US-based facilities: Red Stripe, Beck’s, Foster’s, Kirin, and others. [1] However, these beers are all imports from locations with high production and transportation costs, such as Jamaica, Australia, Germany, and Japan. While most of these brands have not been been crippled by transferring production locations, it is important to note that CB will have to be careful about messaging on their packaging. A precedent was established when AB-Inbev settled a class action lawsuit related to misleading consumers around whether or not they were purchasing imported beer. [1]

    [1] Brad Tuttle, “5 ‘Imported’ Beers That Are Really Brewed in the U.S.A.” January 9, 2015. http://time.com/money/3660627/fake-import-beer-kirin/. Accessed November 2017.

  6. Alex – This article raises some important questions about the very long term impacts of protectionism on the future of brands made internationally. First, the risk of protectionist policies change with the global political climate, and so an extreme reaction from companies (i.e. acquiring new plants or sub-brands as you mentioned) may always get whipsawed, one step behind and lagging the current political environment. While NAFTA does create cause for concern, Constellation may still be too reactive in its investment and divestment of operations in different locations instead may want to employ more muted strategies to hedge the risk of isolationist policies.

    In the very long term, if isolationism does persist as a prevailing global political view for a long time, I wonder if we will see fewer brands proudly promote “Made in Mexico” or other similar countries as tastes shift. Perhaps American consumers will no longer prefer French wine or Italian pasta and preferences will align with nationalist sentiment. Some companies already promote their items as “Made in America” to appeal to patriotic consumers and may lead the way in this trend, considering that most customers already prefer items to be made here anyway. [1]

    [1] Consumer Reports. https://www.consumerreports.org/cro/magazine/2015/05/made-in-america/index.htm

  7. Excellent read! I agree with JJFG that the economics make it difficult for CB to relocate production to the US. And the threat of Trump’s NAFTA dissolution has passed (for the moment). Still, I believe there is another reason why relocation of operations would be difficult and costly for CB: raw materials. I presume that another benefit CB claims from having Corona beers, for example, produced in Mexico is the proximity to its suppliers. Wheat, hops, barley and other raw materials sell for cheaper in Mexico and are probably nearer to the CB facilities than they would be if in the U.S. We do not know the details of CB’s raw material intake from suppliers but considering the efficiency we have seen in other cases where the manufacturer is near to the supplier, I imagine there are preferable synergies present that further incentivize CB to maintain its operations in Mexico and not move them to the US.

  8. Very interesting article on the effect of protectionism on brands that are identified as imported. Other commenters have already pointed out the likelihood that minimum conditions for maintaining geographical indicators or a shift in consumer preferences for imported goods may lessen the risk on the marketing side. The issues of re-establishing a supply chain and production facility remains key to the discussion. It is unlikely that building such a presence can be achieved painlessly.

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