Ice, Cold Corona – Get it here for a 35% higher price!

Soon, it might become a lot more expensive for you to enjoy a bottle of your favorite import beer. U.S.-based Constellation Brands, best known for selling Mexican beer Corona in the U.S., is one of the world’s largest importers and producers of beer, wine, and spirits. The potential renegotiation of the North America Free Trade Agreement (NAFTA), espoused by Trump and his isolationist policy agenda, could drastically hurt Constellation’s business, as almost its entire import beer portfolio is manufactured in Mexico.

A Beer Empire at NAFTA’s Mercy

In June 2013, Constellation acquired the remaining 50% interest in Modelo’s U.S. beer business that it doesn’t already own, thereby gaining exclusive perpetual brand rights to import, market, and sell Corona and other Mexican beer brands such as Modelo, Pacifico, and Victoria in the U.S.[1]. Constellation owns the brewery in Mexico that produces about half of its Mexican beer supply and also formed a joint venture with Owens-Illinois, the world’s largest glass container manufacturer, to make beer bottles in a glass production plant located adjacent to the brewery. The remainder of its Mexican beer production capacity is fulfilled in Mexico through an interim supply agreement with Anheuser-Busch InBev [2].

Figure 1 – Corona’s supply chain map highlights the web of trade relationships between U.S.-based Constellation Brands, its Mexico-based breweries and glass plants, and the U.S.-based farms that supply raw materials [3].

Under NAFTA, Constellation enjoyed no tariffs on its beer imports from Mexico. However, with Trump’s rumored repeal of the trade agreement, Constellation could potentially face tariffs or new border taxes ranging from the pre-NAFTA level of 2%[4] to as high as 35%[5]. With 53% of its total net sales and 64% [6] of its total earnings coming from the Mexican beer import business, Constellation is facing tremendous business uncertainty.

Action Plan in Response to Trump

In the short term, Constellation will continue to engage in frequent discussions with House Speaker Paul Ryan and U.S. Senate Majority Leader Charles Schumer to express concerns about Trump’s proposed trade and tariff plans [5]. Over the medium term, the company has also come up with a contingency plan to minimize the impact of any potential new tariffs. Currently, most of the glass bottle supply for Constellation’s Mexican beers come from the glass plant at its Nava brewery in Mexico and other Mexico-based suppliers [3]. Constellation can purchase more packaging materials from inside the U.S. instead of from Mexico and could also make its glass bottles with more U.S. natural gas rather than rely on mostly Mexican natural gas as it does now [5]. Passing on the impact of tariffs to consumers by increasing imported beer prices is another possibility.

Additional Considerations

In my opinion, Constellation should work more with other large beer importers such as Heineken and Anheuser-Busch InBev in the short-run to consolidate bargaining power at the negotiation table with U.S. policy makers. In the medium term, it could also consider shifting manufacturing from its own Mexican breweries to more partnership supply agreements with other importers operating in Mexico to share the burdens of capital investments and any import tariffs. Finally, while completely moving manufacturing from Mexico to the U.S. has been ruled out by CEO Robert Sands, as he believes imported Mexican brands can only be authentically produced in Mexico[5], because the Mexican beers are actually made from hops, barley, and other grains that are produced in the U.S.[3], Constellation can test a product line of U.S.-made versions of its popular Corona and Modelo brands. These products can be sold at a cheaper price point than their Mexican-manufactured counterparts, post-tariff, to see if there is any customer demand. After all, the recipe and taste should be largely identical– it all comes down to effective branding!

As Constellation Brands thinks through how to adapt its operations in the face of unfavorable trade policies, what impact will the changes mentioned above have on its employees – particularly those based in Mexico? And how can Constellation start to communicate those potential changes? What can the company do to continue motivating its work force in this period of uncertainty and transition?

 

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[1] Constellation Brands, 2016 Annual Report (New York: Constellation Brands, 2016), p. 2.

[2] Constellation Brands, 2016 Annual Report (New York: Constellation Brands, 2016), p. 6.

[3] Nick Carey, “What it takes to get a Corona from Mexico to a U.S. heartland bar,” Reuters, January 28, 2017, accessed November 2017.

[4] Michelle Shuey, “Liquid gold: Corona conquers market share,” Business Mexico vol. 4, nos. 1, 2 (1994): 56, ABI/INFORM via ProQuest, accessed November 2017.

[5] Matt Egan, “Corona has a Trump-Mexico Problem,” CNN, January 17, 2017, http://money.cnn.com/2017/01/17/investing/corona-trump-constellation-brands/index.html, accessed November 2017.

[6] Laura Berman, “Constellation Brands sells off as investors brace for trade turbulence with Mexico,” TheStreet, November 9, 2016, https://www.thestreet.com/story/13886931/1/constellation-brands-sells-off-as-investors-brace-for-trade-turbulence-with-mexico.html, accessed November 2017.

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11 thoughts on “Ice, Cold Corona – Get it here for a 35% higher price!

  1. As an avid beer drinker, I find this article super interesting (and depressing should the price of a Corona actually increase). In this context, it is interesting to look at the European equivalent of an American NAFTA repeal, Brexit, and how it is likely going to affect the European beer industry. The expected new beer tariff structure under Brexit may lower the cost of some imports into the UK while raising the price of others. While this sounds counter-intuitive, it is because that as part of the free-trade zone, EU member-countries do not pay tariffs on goods they trade bilaterally- however, they do pay tariffs on goods imported from outside the EU. Once Britain leaves the EU, it will most likely drop the EU-mandated tariffs it had been paying on say, malt from South Africa while it may decide to start charging tariffs on hops from Poland and cider apples from Spain. The EU will almost definitely impose tariffs on British goods, which will mean that a Danish brewer will pay more for earthy English hops. Perhaps we will see some of the same dynamics unfold between the US, Canada, and Mexico, should NAFTA be repealed.

  2. As a Canadian, I’m very familiar with the current renegotiation of NAFTA in the wake of isolationist policies and it’s very interesting to see a potential outcome that would directly result in increased costs to US consumers. The uncertainty of the whole issue creates a really difficult situation for companies like Constellation Brands that need to be prepared to adjust their supply chain quickly should anything change but don’t want to overreact and change prematurely as a truly renegotiated/canceled NAFTA is still an exercise in theory. To your question of how to maintain morale and communication with your employees, I think Constellation needs to push transparency around it’s lobbying efforts and emphasize that 47% of their revenue is currently generated outside the US, while also developing a plan to improve their international market size. One thing you didn’t touch on that I’m curious about is the response of US national breweries and if they support the isolationist policy or if their supply chains also have a significant international component that will drive similar (although possibly lower) cost increases.

  3. this article reminds me of the Li & Fung case. would it be possible that through those strict laws and the renegotiation of NAFTA that employees that end up losing their jobs establish their own brewery that competes with corona and the the likes? other measure that breweries could consider , especially if 64% of earnings is on the line, is to build a plant and ask the government for subsidies or tax cuts for doing so.

  4. Thank you for the article!

    The issues that Constellation faces are indeed similar to what other companies experience due to Brexit. Employers in the UK also struggle to reassure their employees. It seems important for the companies to engage their employees more during this uncertain period, for example by helping employees interpret the political decisions and developments via in-house e-mail or internal communication. [1]

    [1] https://www.ft.com/content/d5d0716a-1494-11e7-80f4-13e067d5072c

  5. What I find most interesting about this is that the proposed medium term solutions (“[purchasing] more packaging materials from inside the U.S. instead of from Mexico and…[making] its glass bottles with more U.S. natural gas rather than rely on mostly Mexican natural gas as it does now”) is precisely the impact that the Trump administration wants. They want to influence companies to spend more and produce more in the United States. The option of passing on the potentially higher costs to the consumers via an increase in price of beer depends on competitive dynamics, price elasticity of demand, and the consumers tendency to switch beers. Can Constellation maintain it’s market share at higher prices? If not, then they will have to take on the increased COGS. A potential implication and necessary action is that Constellation work with US suppliers to reduce production cost.

  6. Great post CN! First off, I never knew that the most popular Mexican beers in the U.S. are all sold by Constellation – what a monopoly!

    I really think your proposed action plan / additional considerations are spot on. In the short-term, I would take it a step further and have Constellation join forces with all importers / companies that will be impacted by NAFTA – the more bargaining power the better! Moving operations to the U.S. in the long-term was my immediate thought while reading this article too. Constellation could brand the new U.S.-made beers similar to Apple’s “designed by apple in California assembled in China”, a message that hopefully keeps some of that Mexican authenticity. I would believe the CEO, however, when he says that Constellation is not considering moving its operations to the U.S. at this time. The other actions plans that you highlight are much more likely in my opinion. Moving operations to the U.S. should be a last resort if all else fails.

  7. I’m curious how/if this risk has continued to affect Constellation’s stock price, as it has increased more than 40% since the inauguration [1], largely due to higher-than-expected profits on beer sales in the U.S. [2]. I wonder if the impact of potential tariffs is simply outweighed by Constellation’s improving business prospects, as the company has also raised its guidance on next year’s earnings (but not sales) and committed over $1 billion in additional investment in their Mexican beer production operations [2]. Conversely, I wonder if the market is generally assigning a low probability to the passing of higher import taxes. I suspect both of these benefits are occurring, while Constellation’s share price continues to receive bullish recommendations from analysts [3].

    [1] https://finance.google.com/finance?q=NYSE:STZ
    [2] http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=12314183&RcvdDate=10/5/2017&CoName=CONSTELLATION%20BRANDS%2C%20INC.&FormType=10-Q&View=html
    [3] http://quotes.wsj.com/STZ/research-ratings

  8. Very insightful piece, Cindy. This is a particularly interesting industry to analyze because it has become so consolidated (ABI acquiring Modelo, SAB, etc), so as we think about JVs, acquisitions, etc., the universe of potential partners is not very large. This is because there are few remaining players of scale, but more importantly, because antitrust laws restrict ABI from interacting with many of the remaining players. In fact, the ceding of control of the Corona unit to Constellation was imposed on ABI by regulators in evaluating the competitiveness of the Modelo acquisition.

    I’m hopeful that in the weeks leading up to the NAFTA renegotiation, independent analyses come out that highlight the pricing consequences of U.S. tariff imposition on importers, across industries. If the general public were to learn that the price of a bottle of Corona will go up 40%, perhaps some of Trump´s base might actually appreciate what this strategy of isolationism means for U.S. consumers.

  9. Great post! In addition to working with the other large beer importers to consolidate bargaining power at the negotiation table with U.S. policy makers, I am wondering whether the US barley and grain producers that supply Constellation and these other companies could support them in their effort to lobby the US government? Getting the whole supply chain involved might yield higher negotiating power.

  10. Great article, CN! It is really interesting to think of the implications that an isolationist trade policy would have on one of the favorite past times in the United States. I personally cannot imagine going to a Mexican restaurant or a hot summer day and not being able to order a cheap Corona to enjoy!

    Though all of your suggestions are great, this article actually made me think that Constellation Brands should start to diversify the end-market for Corona to non-US markets. Foremost, they would be able to avoid the implications of a potential NAFTA breakdown and diversify the risk to other markets. Second, in my experience traveling abroad, I noticed that Corona sold for much higher prices and to more fanfare than in the United States. Constellation Brands should build on that momentum and create better supply chains to those markets, whereby decreasing the price to provide while maintaining the elevated end-price to consumers. They would also be able to use these new supply chains to bring their other brands, notably their wines, as consumer taste shifts towards new alcohol beverages in underserved markets.

  11. All great points you have made. I think the key question is how quickly firms such as Constellation can make changes as outlined above, such as purchasing more bottles from the US or shifting other pieces of operations to the US. This, of course, has to be considered in the context of how much lead time before legislation is passed vs. gets takes affect in the market. Severe changes in business models can have consequences on employees in the plants in Mexico, but I think another key question to ask is how drastic should changes to business models be if a different administration comes in 2 years later and moves the US legal system back towards globalism, away from isolationism. A constant swinging pendulum could paralyze management teams into inaction. This relates to the questions posed at the end of this essay – not only how should management react, but also how do they communicate their reactions to customers and the public without negative repercussions on the brand, vision or management team?

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