Faced with the general disruption of activity, Constellation still managed to increase its free cash flow by 24% over one year in the first fiscal quarter (ended May 31), revenues having decreased by 6%. And it still has $ 2 billion in available credit, not to mention $ 303 million in cash and cash equivalents. As a result, Constellation Brands has the liquidity and the strength to invest in its next big growth projects: hard seltzer and cannabis.
Crown hard seltzer
The Constellation Corona Hard Seltzer was launched this spring for a rather warm welcome. In just a few months, this product has already become the No. 4 seltzer with approximately 6% market share in the U.S. The successful launch has propelled the Constellation Corona brand to double-digit sales growth, much better than most of its other segments. CEO Bill Newlands spent $ 40 million (the biggest brand investment ever made for the company) for Constellation’s aggressive push in the category – and for good reason.
From 2018 to 2019, the class of hard salt drinks increased from 1% to 2.6% of total alcohol sales. Consumers bought 82.5 million cases of sparkling alcohol-infused water, driving growth of 226% in 2019 alone. By 2023, case consumption is expected to triple to 281 million cases. Obviously, Constellation is following the right trend.
The population is more aware than ever of the limitation of sugar consumption. With this in mind, the hard seltzer is an ideal alternative to sweet mixed drinks or even wine. Constellation’s product contains no grams of sugar and an iconic Corona brand to exploit in this segment.
Constellation partnership with a cannabis player Canopy growth (NYSE: CGC) is the next major effort. This year, Canopy launched a THC-infused drink (the first of its kind) to mimic the intoxicating effects of beer or wine, under the brand name Tweed. Compared to the considerable calories, carbohydrates and sugar found in traditional alcoholic beverages, the new Canopy offerings may have as few as three calories and no sugar or carbohydrates. Drinking the drink emulates the feeling of your favorite brew, in a healthier way, according to the company, and it is an area of major interest for the marijuana business in the future.
This spring, Constellation Brands exercised its warrants to buy an additional 5.1% of the company. The latest purchase brought its total stake in Canopy Growth to 38.6%.
The former CEO of Canopy was undeniably a cannabis visionary. He was also an aggressive spender. With retail deployments taking longer than expected and still no federal legalization in the United States, a more cautious approach to investment and expansion was required. For Constellation, the company has made significant write-downs of its multi-billion dollar investment in the rearview mirror, with Canopy’s new CEO David Klein previously serving as CFO at Constellation Brands. Klein seems to be the right person to conserve cash while carefully targeting investments in Canopy’s most promising projects like his THC-infused drinks.
Like the hard seltzer, cannabis drinks are on an impressive growth trajectory. For the category, annual growth of 17.8% is expected until 2025, according to Grand View Research. This would bring the size of the market to almost $ 3 billion over the next five years.
In the beverage industry, you’d be hard pressed to find two more compelling growth stories than salt and THC beverages, and Constellation Brands exploits both categories.