Restaurants
Impossible Nuggets
Burger King says it will be the first quick-service restaurant to test out the new plant-based chicken nuggets from Impossible Foods (IMPF). The Brand is starting the alternative nugget initiative in Des Moines, Boston, and Miami on October 11. Eight-piece orders will be available with a choice of dipping sauce. B.K. is also rolling out new Ghost Pepper Chicken Nuggets nationwide for a limited time only. The menu addition is made with white meat chicken kicked up with "fiery" ghost pepper.
L.A.
The Los Angeles City Council has passed an ordinance requiring proof of COVID-19 vaccine to enter restaurants, movie theaters, malls, gyms, and other indoor venues. The regulation goes into effect on November 4, the Los Angeles Times reports. Customers who present religious or medical exemptions will be required to use outdoor facilities. If there are no outdoor facilities, customers need to show proof of a recent negative test. The new law will expire when the city lifts its emergency declaration on the pandemic. In August, New York City enacted a similar regulation.
Worker shortage
Raising Cane's Chicken Fingers sends corporate staff to work in restaurants as the chain struggles to fill job openings. Starting this week, about half of the office employees will work as fry cooks and cashiers. The chain has 530 locations and is trying to hire 10,000 new restaurant workers in the next 50 days.
Canadian restaurant recovery (QSR)
A new survey by Restaurants Canada reported that 47% of foodservice operators in Canada said they would increase their menu prices by 4% over the next 12 months. In addition, 60% of the full-service restaurants said they were operating at a loss as of July. Before the pandemic, there were an estimated 65,000 restaurants in Canada. Ten thousand are estimated to have closed permanently as a result of the pandemic. Sylvain Charlebois, a professor at Dalhousie and director of Agri-Food Analytics Lab, said, "Over the next year it is predicted that 42% of restaurants will experience an increase in the number of vacant positions, and more than 53% plan to increase their employers' salaries in the coming months." He predicts the labor shortage will be a significant hindrance for restaurants to return to 65,000. The restaurant industry outlook in Canada has turned the corner with 70% of adults vaccinated, easing restrictions, easy comparisons, and fewer competitors.
Consumer Staples
Too much seltzer, not enough beer (STZ)
Constellation Brands reported FQ2 EPS of $2.52 vs. consensus expectations of $2.79. The shortfall was in the beer business due to Corona hard seltzer's missing plan. The company took a $66M obsolescence expense for hard seltzer, a significant write-off given the size of the hard seltzer business. Boston Beer had to write off hard seltzer as well but did not disclose the magnitude.
The beer business had shipment growth of 11.7% and depletion growth of 7.3%. Management believes disruptions and out-of-stock held back depletion growth by 2-3% in the quarter. In IRI channels, its beer brands were the top dollar share gainer with 1.3 market share points during the quarter. The beer business sales growth was 14%, with the return of the on-premise channel, which is 11% of the division's sales, down from 15% pre-pandemic. Modelo Especial depletion growth was 16%, while Corona Extra depletion growth was 5%. Gross margins contracted 280bps with 350bps from the obsolescence expense. Price increases and cost savings were somewhat offset by labor inflation in Mexico, capacity expansion expenses, additional depreciation expenses at the Obregon, and inflationary material pressure. Operating margins for the beer business contracted 530bps due to the obsolescence expense. Wholesaler depletions continued to outpace shipments resulting in low inventory levels at distributors. Inventories are expected to return to normal at the end of the fiscal year.
The wine and spirits business revenues decreased 18% due to divestitures and brutal pandemic-driven comparisons. Organic growth was 15%, with shipments up 5.7% and depletions down 2.3%. Operating margins contracted 620bps due to higher marketing and SG&A spend, increased COGS, and smoke-tainted bulk wine sales. In the future additional marketing expense and SG&A, deleverage will be a headwind to the division's margins.
Management raised EPS guidance for the year from $10 - $10.30 to $10.15 - $10.45 due to an improved outlook for the beer business. Beer sales growth is expected to be 9-11% with 4-6% operating income growth, up from 7-9% and 3-5%, respectively. Wine and spirits organic growth is expected to be 2-4%. Management views the share price as undervalued and repurchased $1.4B of shares during Q2. Constellation Brands is the best idea long. The beer business continues to have some of the best growth drivers in the industry. It is also well-positioned to pass on the inflationary pressures without hurting its future growth, which would be more visible (and rewarded) if not for the added depreciation expense from factory expansions.
Alcohol imports (STZ)
Total alcohol beverage imports grew 15% by value over the last 12 months ended July. Over the last three months, imports accelerated to 31% by value. 35% of all imported beverage alcohol by value came from Mexico over the last 12 months. Total beverage alcohol exports grew 4% by value over the last 12 months and grew 22% over the last three months. 26% of all exported beverage alcohol by value went to Canada over the last 12 months.
Imported beer grew 17% by volume and grew 19% by value over the last 12 months. Over the last three months, imports grew 11% by volume and grew 14% by value. 74% of imported beer by value comes from Mexico. Exported beer grew 11% by value over the last 12 months and grew 66% by value. Constellation Brands represents a majority of Mexican beer imports and 60% of imported beer. The latest three months indicate growth in price/mix.
Imported packaged wine grew 18% by volume and 18% by value over the last 12 months and 35% by volume, and 57% by value over the last three months. Imported packaged spirits grew 15% by volume and 15% by value over the last 12 months. Over the last three months, spirits volumes grew 21% by volume and 34% by value.
Supreme Court wine hearing (VWE)
On Friday, the Supreme Court will consider a wine shipping case in Sarasota Wine Market v. Schmitt. Similar cases are making their way through eight of the 12 circuit courts. The issue is whether a state must permit out-of-state retailers to ship wine to its residents if it allows its own retailer to ship. In this case, Missouri residents wanted to order wine from a Florida wine shop, but Missouri does not allow out-of-state shops without a brick and mortar store in the state to ship to them. Instead, Missouri law allows local wine shops to ship to their residents. Schmitt is the attorney general for Missouri. Currently, the courts have ruled that states can discriminate against out-of-state liquor stores.
Consideration does not mean the Supreme Court will hear the case, especially since none of the district courts are in disagreement. However, the Supreme Court requested that Schmitt responds to the lawsuit giving hope to the National Association of Wine Retailers that the top court would make a ruling that opened up the country for sales. If the Supreme Court does accept the case, a hearing will be in the next couple of months. If the court does not, it may take years before cross-state wine buyers can get their wish.
