U.S. consumers craving luxury products

Despite market volatility and economic weakness, U.S. consumers are still spending money on higher-quality products. As a result, more companies may enter the luxury market.

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“If you look at the typical grocery space, consumers are demanding higher-quality foods,” such as organic and fresh offerings, says Marc Scott, portfolio manager at American Century Investments in Kansas City, Missouri. He co-manages the Renaissance U.S. Equity Growth Fund.

And, the same shift toward luxury offerings is occurring in the beer, wine and spirits industry, says Scott, who recently attended a market analysis event hosted by luxury alcohol producer Constellation Brands, which he owns. He took the opportunity to find out about the company’s third-quarter earnings and growth plans, and asked about trends in the alcohol space.

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During the event, Scott learned that wine consumption is changing in the U.S. “Today, we’re seeing most of the growth in $10 to $15 bottles of wine,” versus people choosing to buy lower-priced options.

Currently, he says, two-thirds of Constellation’s product offerings are in the beer space, including names such as Corona, Modelo, and Pacifico. But the rest of the company’s lineup is in the wine and spirits space, and includes names such as Black Box, Kim Crawford and Robert Mondavi.

As a result, gaining more share in the luxury market is a good call for companies like Constellation. Already, he explains, “Corona and Modelo are seen as a more premium types of beer versus, let’s say, a Bud Light or Coors Light.”

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To build on its reputation, Constellation plans to increasingly focus on producing premium beers and wines, says Scott. He notes the company recently acquired a small craft brewery from California called Ballast Point Brewing Company. “[They] paid about US$1 billion for this business. It’s a very premium beer. They sell a six pack of beer for around $15 to $16, so [it has] a very high margin.”

Additional growth opportunities

By 2020, Constellation Brands also wants to grow its beer market share in the U.S. from 10% to 20%, says Scott. The company wants to increase beer sales, in particular, because its “distribution points are far below its peers. Some of their brands such as Modelo only have about 65% distribution across the U.S.”

Further, Corona is mostly bought by the bottle rather than by the can. In comparison, says Scott, “the industry norm [is] about 50% of your business is in cans,” and Constellation Brands has already seen their can business move from 2% to 3% of their volume to about 5% or 6%.

One way the company plans to boost sales is through increasing its keg presence at bars, he adds. “Their typical keg penetration is about 2% or 3% of their volume, versus the industry norm of around 10%. So, they’ve been growing [the] number of taps in bars that you see.”

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But, as the company grows its market share, its main challenge will be keeping up with demand, says Scott. “[Growing] its business from 10% to 20% market share takes a ton of new brewing capacity. Today, they have 160 million cases of beer capacity, and they’re more than doubling that to 350 million cases of beer capacity by 2020.”

To overcome this hurdle, “[Constellation] is expanding a plant in Mexico. They’re also doing a brand new build of a plant on the northwestern fringe of Mexico to give them a closer presence to their core California market.”