Constellation Brands latest to face headwinds in slowing hard seltzer space

Brief:

• Constellation Brands CEO William Newlands said the hard seltzer landscape has “has shifted considerably in recent months,” prompting the maker of Corona Hard Seltzer to lower growth expectations for the product and record a “sizable obsolescence charge” of $80 million.
• Newlands said in the company’s second quarter earnings call that Constellation will be changing the flavor and taste profile of its seltzer portfolio to align more with “changing consumer preferences” while also introducing single-serve packages for the growing convenience channel. The change to the brand is in response to consumer demand for a “more robust taste and flavor.”
• Constellation’s challenges in hard seltzer come as the once red-hot pace of growth in the category has suddenly slowed, leaving companies with too much supply. Some brands have been pulled from the market, with those in the beer industry expecting more to be discontinued.

Dive Insight:

For years, the hard seltzer segment was a welcome reprieve to many alcohol companies suffering from falling demand for their core beers. With triple-digit growth rates not uncommon, nearly every beer company, including Constellation, Molson Coors and AB InBev, inundated the category with hard seltzer offerings.

But the once rosy segment has suddenly fallen on hard times. Boston Beer slashed its full-year guidance in July after overestimating demand for its popular hard seltzer brand Truly, causing its stock price to fall nearly 25% in a single day and wiping billions off its market cap. A few months later, it pulled its earnings guidance, citing continued weak hard seltzer demand. Molson Coors announced this summer it was discontinuing Coors Hard Seltzer in the U.S. to focus on more promising offerings. Analysts and alcohol makers expect more brands to fold.

“In the short to medium term, we believe that there will be consolidation within the hard seltzer/ABA space primarily due to the chaos of SKU and brand proliferation, with too many new entrants that don’t have the velocity or consumer demand to warrant shelf space,” Newlands said during Constellation’s earnings call. “ABA” refers to the alternative beverage alcohol segment.

The news from Constellation echoes a similar mantra sweeping throughout the space: Growth suddenly slowed in hard seltzer during the summer and companies were left with too much inventory. The difficulties have been compounded by the fact that the category is crowded with brands that have done little to differentiate themselves. Boston Beer President and CEO Dave Burwick noted there are an estimated 220 brands and 1,000 SKUs, a figure that is about 50% higher than last year. 

Constellation has separated itself from its beer competitors by posting stellar growth in its Mexican offerings, such as Modelo and Corona. Newlands noted hard seltzer makes up a “relatively small percentage of our overall growth profile,” so its prospering beer business has proven to be more than enough to offset the challenges in hard seltzer. This lack of dependence on hard seltzer for growth is why the company’s stock rose more than 2% the day after its earnings came out despite the dire news surrounding the product.

Newlands told analysts the company was optimistic the flavor changes and new product innovations would help Corona Hard Seltzer differentiate itself. He said the category will evolve beyond low-calorie, low-carb offerings into more flavors, different alcohol bases and functional benefits. He noted that Constellation has Corona Refresca, which comes in flavors such as coconut lime and mango citrus, as well as Corona Hard Seltzer Limonada, made with real lemon and lime juice.

“We’re going to focus our attention on where we think we bring differentiated products that are distinct,” he said.

But at least one analyst predicted the changes would not be enough. “On Seltzer, we believe category growth isn’t enough to deliver Corona Hard Seltzer expectations, and the brand is at risk of being discontinued,” MKM Partners’ Bill Kirk said in a note cited by MarketWatch.

Despite the news from Constellation and Boston Beer, hard seltzer remains among the fastest growing parts of alcohol with analysts predicting increases of between 20% and 40% annually during the next three to five years. There also are upbeat signs among some brands. Bud Light Hard Seltzer has been grabbing market share and Molson Coors’ Topo Chico Hard Seltzer recently announced plans to expand the brand nationally in 2022 while introducing margarita-flavored drinks.