Constellation Brands: A beer empire in the heart of wine country
A worldwide force in beer has its roots in a region better known for its wineries.
Constellation Brands is the third largest beer company in the United States, trailing only Anheuser-Busch InBev and Molson Coors.
The Victor-based company holds an enviable position in the premium wine, spirits and beer markets in this country. But it's the growth of beer that's really driving the company forward, according to Paul Hetterich, president of Constellation's Chicago-based beer division.
Strength in the beer business and focus on brand building are two of the hallmarks of Constellation, Hetterich said during an interview from his Victor, Ontario County, office. Constellation got into the beer business around 1993, when it purchased Barton, the company responsible for importing Modelo beers in the western half of the country.
Growth has continued since. Constellation purchased the U.S. rights to Mexican-brewed Corona in 2013. Until that purchase, Constellation had experience as an importer, marketing and logistics company. "We'd never run any breweries at that point," Hetterich said. "We had a great commercial infrastructure that knew how to sell."
Constellation is currently building a massive brewery in Mexico. Corona remains the top-selling import beer in this country. Constellation has also seen rapid growth with Modelo, another Mexican import.
The company made a huge splash in late 2015 with the purchase of San Diego craft beer behemoth Ballast Point Brewing. Constellation bought Ballast Point for $1 billion, adding one of the most well-respected names in craft beer to its deep portfolio. Ballast Point will soon be available in all 50 states.
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Hetterich, who joined Constellation (when it was still Canandaigua Wine Co.) in 1986, shares his vision for the future of Constellation's beer portfolio, offers his outlook on what might happen in the explosive craft beer marketplace, and details how Constellation is dealing with public pressure for political donations it has made. The interview has been edited for space.
How does Constellation look at the brewing industry? How is the beer industry changing?
We tend to look at the industry in terms of high end and low end, which isn’t the most flattering language to those in the low end today. They used to call themselves premium. They were premium way back in the day when things went from regional beers to these nationally marketed brands. The industry is in the midst of change, which is all about premium-ization.
When we look at the high end, it’s comprised of four discrete segments. One is imports. That’s the biggest piece. The second biggest piece is craft. And the third and fourth pieces are about the same size. One is what we call A.B.A, alternative beverage alcohol, things like cider. It’s pretty much everything that looks like beer, because it’s in a beer bottle, and everything that’s malt-based and doesn’t necessarily taste like beer. The fourth segment is domestic super premium, which is largely a one-brand segment at the moment: Michelob Ultra. The reason we call this high-end, it’s just a price filter. If you take low-end beer, it averages something like $19 a case to the consumer. High-end beer averages $32 a case. People are making a discrete decision to pay 70 percent more for this kind of beer, this kind of product.
Craft has just exploded in the past five years. If you go back 10 years, it was maybe a 100 million-case category. It was sort of flat. And then in the last five years, it went from like 100 to 280 million cases. It’s growing at 30 percent per year. It’s very profitable, because it’s the highest average price of everything in the high end.
Ballast Point is well known in San Diego beer. It's renowned for beers like its Sculpin IPA. And to grow the brand, Constellation is building a $48 million East Coast brewery in Virginia and a third smaller brewery to focus on sour production. How much of a game-changing acquisition was the purchase of Ballast Point Brewing for Constellation? What attracted Constellation to Ballast Point? How does Constellation look at the growing craft beer industry?
In some respects, that ($1 billion price tag) is kind of startling. You’ve got to realize this was a business that was growing at over 100 percent a month. That’s why it was a big number in many respects, but it was a very profitable, fast-growing company.
There were a few things we liked about Ballast Point. To us, craft is a little bit more like wine than it is everyday beer. Pretty much all of today’s craft brewers, they brew their own beer. In the past, you saw a lot of craft-oriented brands created. That’s not a bad thing. That was a different day 20 years ago. It’s a lot about authenticity, it’s a lot about a sense of place. You go to San Diego and it’s like the Napa Valley for craft week. You could spend at least a week rolling around to different breweries. It’s fun.
There are real personalities behind these brands. You can meet the brewmaster. It’s more like wine. It’s not like you’re going to look up on the website about the brewmaster at Corona and have some chat with him or her. That’s why it’s called craft.
San Diego seems to be ground zero for craft. It’s really the Napa of craft. Ballast has also been very successful with Sculpin (IPA) at around $14.99 or $15.99 a six-pack. It doesn’t matter what market you go into, that’s been the price. Very good margin. Five years ago, people would’ve said, "Can you really sell beer at $14.99 a six-pack?" Ballast was the first to prove that, yeah, you can sell a lot of beer at that price. Five years from now, the price will probably be higher.
They were starting to expand. They have proven in San Diego that they could be a very big brand. And they were starting to expand into a number of states and it looked like it was still the early days. So we thought they had a lot of potential and a lot of promise.
Their whole DNA for success was innovation.
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Constellation has recently drawn some heat for the donations made to different political action committees, especially those related to House Speaker Paul Ryan. Some in Chicago have called for a boycott of Ballast Point beers. How do you respond to this?
It really isn't about which side of the aisle. I don't think there's anybody on either side of the aisle that we would say we agree with 100 percent of what they stand for. But if you don't get in and have a voice, or at least try to have a voice, then how do you impact what's good or bad for our business? It's really the beverage and alcohol industry. It's about policies that are being contemplated on both sides of the aisle. Some can be good for the industry, some could be bad for the industry. Whether that's distribution at the local level or a border tax, lots of different things.
Do you envision building the brands you have? Do you think there are more craft acquisitions on the horizon? How does Constellation intend to stay active or relevant in craft beer?
We will have more brands over the course of time. It's going to be one of the more fragmented segments of the business; it's just the nature of how consumers want to move around in there. We're not in a huge hurry to expand the portfolio, because there's a big dynamic going on right now, about how the whole market will play out. We want to carefully watch that, but to have a decent share of craft and continue our leadership in the high end. We're the biggest high-end beer company there is when you aggregate everything together.
We'll need to do more than just Ballast in craft, just because of the nature of the category. I don't that you're going to see that you build 30-, 40-, 50 million case brands in craft. You might build 20- or 30 million case brands, but you might need to build two or three of those.
Ballast Point currently has six brewpubs in California. Will we see Ballast Point brewpubs locally?
(After a pause)
Not right at the moment. Our core business is brewing great beer, selling to our distributors, who then sell it to a lot of stores and lots of restaurants and bars. Our core business isn't running restaurants and brewpubs. Where we like to focus on them is in the more metro areas. It's never going to be a huge component to our business. It's more about building the brand. It's more like marketing in a way. It just happens to be marketing that has revenue and profit behind it. But that's not to say that we wouldn't come to cities the size of Rochester. Right now, we're more focused on the bigger metro areas, where we're trying to build out the success we've seen in San Diego.
Constellation is in a unique position. You're big enough to watch and react accordingly, if you have to.
Correct, I think that's just going to bring up opportunities. Perhaps, people had some brilliant ideas on how they were going to position their brand, but they were capital constrained or didn't know how to commercialize that side of the business. There is going to be a lot of opportunity for us down the road.
Beer talk: Ballast Point, Constellation marriage makes sense