Corona Brewer Constellation Struggles With Supply Chain
03 April 2016 - 12:47AM
Dow Jones News
By Tripp Mickle
With Mexican beer sales soaring in the U.S., the biggest hurdle
facing Corona brewer Constellation Brands Inc. is its own supply
chain.
The company, which reports fourth-quarter earnings Wednesday,
issued a recall of Corona in March, its second in the last two
years. Distributors scrambled to pull select 12-packs and 18-packs
of the top-selling Mexican beer from U.S. stores before consumers
drank from bottles containing glass particles.
The recall isn't expected to affect earnings next week because
the fourth quarter ended Feb. 29, but it will raise questions from
analysts about the cause, cost and possibility of future
recalls.
Constellation's ability to avoid another incident hinges in part
on ramping up production at its brewery in Nava, Mexico, so it can
reduce its dependency on Anheuser-Busch InBev NV. That is because
the recently recalled Corona came from AB InBev breweries in
Mexico.
Constellation has been relying on AB InBev for beer production
since the brewers struck an agreement in 2013 with the U.S. Justice
Department, allowing AB InBev to close its acquisition of Mexican
brewer Grupo Modelo by selling Constellation the U.S. rights to
Modelo beers and the Nava brewery.
AB InBev said it discovered the glass defect and traced it back
to a glass manufacturing plant owned by a third-party supplier,
Fevisa.
An AB InBev spokeswoman said the brewer had since reviewed
Fevisa's compliance and control measures to make sure it meets AB
InBev's "strictest internal quality standards." She added, "We
always aim to respect the highest production and safety
standards."
But as long as Constellation isn't controlling its supply, CLSA
analyst Caroline Levy said "there's a small risk" of another recall
happening.
Constellation planned to double production capacity at the Nava
brewery to 17 million barrels this year, but sales of Modelo and
Corona have been so strong they have outpaced the expansion. The
company's beer shipments have increased 23% to 16 million barrels
from 13 million barrels in 2013, according to industry tracker Beer
Marketer's Insights.
To meet demand, Constellation said earlier this year that it
extended its supply agreement with AB InBev through mid-2017. It
also plans to increase the Nava brewery capacity by 4.2 million
barrels, bringing total annual production to 21 million
barrels.
Analyst Ms. Levy projects Constellation will be handling 90% of
its production by next year.
Until then, Constellation will continue to rely on AB InBev to
supply Corona, a situation that is awkward at best since
Constellation's beers are competing with Budweiser and Bud Light in
the U.S. Last month, AB InBev introduced a Mexican beer of its own
-- Estrella Jalisco -- to compete with Constellation.
On Wednesday, Constellation Chief Executive Rob Sands will seek
to assure investors the company's brewery expansion is proceeding
as planned. A spokeswoman said Mr. Sands would address the recall
on Wednesday but what he plans to say remains unclear.
Analysts currently expect the company to report fourth-quarter
earnings of $1.14 a share, according to Thomson Reuters, compared
with last year's $1.06 a share.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
April 02, 2016 09:32 ET (13:32 GMT)
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