In America's ever varying beer market, consumers have
voted for their new favorite: Mexican beers — like Corona, Pacifico and
Modelo. Move over, Bud Light. There's a new king of beers here in America, and it's
Mexican, Modelo Especial. Modelo Especial dethroned Bud Light in May 2023 and
again in June, snapping its 22 year reign as the king of beers. There's really no scenario at this point where you
would see Bud Light regain its number one position. Experts say it's only a glimpse at what's to come. According to them, Mexican beer was already ruling the
US market prior to Bud Light's fall. Yeah, we always have to have backup kegs. Always, because any day we can sell an entire keg, two
kegs. Budweiser and particularly Bud Light was a huge, huge
draw. And that has it hasn't fallen away completely, but
it's definitely depleted. One company in particular is reaping the benefits. Constellation Brands, which distributes Modelo. And in the quarter ending May 31st reported revenue of
$2.51 billion, a 6.4% increase from the same quarter last
year. And Wall Street is responding favorably. In 2013, Modelo Especial was not even a top ten brand
in the States, and here we are today as the number one beer in America by
revenue. In May, news about Modelo's new best-seller status may
have surprised consumers, but not experts. Modelo had been a faster-growing beer for years,
growing double digits. And so as the number two beer brand in the US market
prior to the marketing controversy, it was only really a matter of time
before the brand would have overtaken Bud Light as the largest brand in the United States. In June 2023, Modelo Especial accounted for almost 11%
of total beer sales, while Bud Light had fallen to 9%, a shift from
March, when Modelo represented 9.5% in total beer sales and Bud Light was at 12.5%. We always anticipated that Modelo Especial would become
the number one beer in America by revenue. It just, you know, happened quicker than
we anticipated. And we plan on being the number one beer for three,
five, seven, ten more years going forward. Some of that comes from the backlash and boycotts Bud
Light and AB InBev faced over partnering with transgender activist Dylan Mulvaney, the effects
of which are still impacting the US market. It was long a matter of, if not when. These trends have been building for a long time and so
certainly the timeline accelerated with some of the unique events in the last six months. But Modelo has been on a rise and Bud Light has been
on a decline, as we've seen overall shifts in the beer market. Mexico exports more beer to the United States than any
other country Between 2013 and 2023, Mexican beer imports doubled. You talk about Mexican imports in the US, our portfolio
is over 90% of the revenue in the US. Since being introduced to the US market in 1982, Modelo
Especial has grown double digits in 37 of those 41 years. While consumers are buying less beer overall, they're
spending more on each one. Hence the rise of craft beers. That's also where brews like Modelo Especial come in. What we've been able to do over the last ten, 12 years
is drive this portfolio of Mexican imports. And with the consumer, they yes, of course they
understand these brands are from Mexico and they really enjoy this product, but they enjoy this product
because they're great beer brands. Another key factor, demographics. Hispanics make up about 19% of the US population
growing to 62.1 million in 2020, according to the last census. That's a 23% increase from 2010, far outpacing the
nation's overall population growth rate of 7.4%. So as more consumers turn 21, that's more consumers
incrementally into the category, and it's consumers that have a tendency to favor
Modelo Especial. And Constellation knows this well. Much of the company's marketing dollars are spent
targeting the minority group. But the beverage behemoth is also expanding its
advertising strategy, making sure it appeals to a broader customer base. Our drinker base for Modelo, especially today, is
actually about 50/50. It's about half Hispanic and about half non-Hispanic
consumers. So we've been really successful That Hispanic consumer
is our foundation. It's our core. It's super important to us. But we've had a ton of success bringing in a lot of
those non-Hispanic consumers. In 2013, former CEO Rob Sands predicted Modelo's rise,
telling the Wall Street Journal he could see Modelo Especial being potentially
as big or bigger than Corona in the next five years. The Modelo brand family caught up to Corona in the
summer of 2019 and then shortly after exceeded Corona in size. Modelo has been larger ever since. There's Modelo, then there's everyone else. They really know how to market behind Modelo. They know who their core consumer is. And I think that it's just, you know, the authenticity
and knowing the brand is why you've really seen outperformance not only to
Mexican imports, but also to the to the broad beer category. In Constellation's earnings report released in June
2023, the company's beer business delivered double digit net sales growth of 11%, which the company says
was driven by the strong performance of its top seller. The success we're having across the country right now
is incredible and we are seeing double digit growth in a lot of these eastern markets. There's markets like New York and Miami, where Modelo
Especial is now the number two selling beer in the market behind, by the way, Corona, which is number
one. Another key brand that performed well in the same
quarter is Corona Extra, which represents around 6% of total beer sales in the US. The overall Corona brand family accounts for almost 9%
and the momentum likely isn't ending anytime soon. We're thrilled and excited to be the number one selling
beer over the past couple of months in dollar sales. We're not there in volume sales. And we believe that we can get there and will get
there, but we'll have to stay focused to continue to do it. Globally. Modelo, Corona, Pacifico and Victoria are
owned and distributed by the world's largest brewer, Anheuser-Busch InBev, or AB InBev. But in the US, those rights belong to Constellation
Brands. It goes back to 2013 when the Justice Department
blocked a proposed merger between AB InBev and Grupo Modelo, the Mexican brewery that produces
these beers. Regulators cited antitrust concerns, arguing this
would lessen competition by creating a beer giant with a dominant share of the US market. Ab InBev was already the biggest brewer in the world. The government forced the parties to reach a
settlement and as a result, the acquisition moved forward with several stipulations. AB InBev and Modelo divested Modelo's entire US
business to Constellation Brands. Grupo Modelo's most technologically advanced brewery
was sold to Constellation and AB InBev granted Constellation the perpetual rights of
the Corona and Modelo brands for $2.9 billion. It was a turning point for the brand, it kind of
completely changed their financials. And when you look at trends in the United States, you
know, Mexican imports in particular have been one of the best-performing categories, subcategories in all
of beer. And so it was a great acquisition for Constellation
Brands and it really changed the trajectory of the company. Now, Constellation boasts a wide portfolio of
successful wine spirits and beers, though a whopping 85% of its revenue stems from its
beer sales. We didn't anticipate that where we sit today that we
would be the second largest beer company in America and now have the number one beer in
America by revenue with Modelo special. So we were very excited with the opportunity,
but I don't think anybody realized the potential that these brands had in the
US. Its net sales are up 94% in 2023 from 2014, the first
full fiscal year after its acquisition of the Grupo Modelo
brands. Constellation isn't America's only Mexican beer
distributor, but it's definitely the most successful. Heineken, the world's second-largest brewer, added Dos
Equis, Tecate, Sol and more to its portfolio in 2010. Dos Equis is a top seller but does not come close to
having a number one or number two spot. Each company has different levels of focus on Mexican
beer in their portfolio. For Constellation, that is their beer portfolio. That's all they're focused on. For a company like Heineken, which certainly has been
successful with Dos Equis over time, if you look at those volumes, it's just one part of their portfolio. Corona and Modelo were first brewed in the same Mexico
City brewery, Cerveceria Modelo in the 1920s, which later became Grupo Modelo. It took until 1976 for the United States to allow the
brewery to begin exporting into the country. Dos Equis was first brewed in Veracruz, Mexico, in
1897, then imported to the US in 1983. Tecate was even earlier in 1947, 43 years before
Modelo. So what prevented these brands from capitalizing on
their first mover advantage in the US market? Marketing has been a big part of the rise of Mexican
imports, with some of the most successful branding campaigns coming in the space from the most
interesting man in the world with Dos Equis to find your beach with Corona. But think it's a complication of multiple factors,
including focus for Heineken. Despite rising operational costs due to inflation, the
beer business continues to be lucrative. The industry has adapted partly by raising
prices. From June 2022 to June 2023, the price of beer rose
5.4%. Shares of Constellation Brands fell 9.7% on January
5th after it reported mixed results in its third quarter 2023,
despite beer sales being up 8% year over year. Adjusted operating income was down 7%. The company pointed to ongoing supply chain issues,
but has since rebounded. The biggest challenge that we saw in the quarter was
that we raised additional price in October. And as you know, when you raise price, you have a
short-term hit to your volume metrics. We've seen basically everything that goes into making
beer increase in price in the last six months to a year. Aluminum cans, malts, labor, packaging,
supplies, shipping. So making beer has become more expensive and many
producers have decided they can't just eat those cost increases and they have to pass it on. Constellation is adapted to failure before. In 2020, a dispute with Mexicali residents over water
access caused it to halt construction of its nearly completed brewery in the Mexican border
city. The project was initially marked as an investment
worth around $1.5 billion. Instead, the company reported losses of $665.9 million
from the closure. The company is planning a new brewery by a
major river in the Gulf Coast state of Veracruz. As for constellations and Mexican beer's
overall longevity, experts say their growth looks promising for now. The risk is that there could always be changes in
consumer preference that you see a slowdown in the brand. Modelo remains the key driver behind them being
able to deliver on their long-term targets. Just ten years ago, the company looked a lot different
with a portfolio of just wine and spirits. Now it boasts an entirely new segment in beer and a
$4.2 billion investment in a cannabis company over two
years in 2017 and 2018. However, that segment has been less than
successful. The company took a $1 billion write-down to its stake
in October 2022. The company reported about a $950 million loss in
their fiscal year 2023. It's going to be interesting to watch whether they
double down there or they continue to look to diversify. You know, what we've seen from them over
the last ten years is a lot of bets and new growing m arkets. Besides Modelo, there are other high-profit performers. Corona Extra and Pacifico also saw great results this
past quarter with the potential for more. We're just scratching the surface on a brand like
Pacifico. So just on our Mexican beer portfolio, we've got a ton
more room to grow and we're focused on doing that as more and more
people become aware and the brand becomes even more top of mind, that's more opportunity for us to bring more
people in to increase household penetration and to keep that momentum going. A brand's popularity often cycles as consumer
preferences change, but since the next generation of 21 and up drinkers will be more Hispanic than the
current one, experts predict that Mexican beer will continue to stay relevant. I think broadly. We see Mexican culture infusing in American culture
more and more and more. And again, you know, these are Mexican import beers. But think increasingly, many of these leading brands
we should be thinking of as American brands just as much as we think of them as Mexican brands.
