Unstaffed expansion
In the first seven months of 2021, construction activity in the manufacturing sector was up 40% over 2020, with food and beverage being one of the three most active areas of industrial construction. CBRE reported that nearly 33.5 million square feet of industrial space had been completed for the food and beverage sector as of August. That represents 8.7% of all commercial construction. However, while the plants are being expanded, labor has been difficult to find. According to the August BLS report, about 45% of the open manufacturing jobs or 393,000 are in non-durable manufacturing, where consumer packaged goods companies are classified. According to the Consumer Brands Association, only 12,000 consumer packaged goods jobs were filled in the second quarter.
Volume declines accelerate (TAP)
Low-quality beat - Molson Coors reported Q3 EPS of $1.75 vs. consensus of $1.53, benefiting from a lower tax rate. Revenue grew 1% in constant currencies while volumes decreased 3.9%, compared to 5.5% growth in Q2. The company's mix shift away from below premium brands has led to volume declines. Sales per hectoliter grew 3.6% due to pricing, brand, and channel mix – down from 5.0% in Q2. Revenue and EBITDA were below consensus expectations, but management reaffirmed guidance for the year for revenue and EBITDA. Two quarters ago, that guidance seemed conservative, and now it doesn't appear very pleasant, counting on better production levels and an easy on-premise comparison in Europe and Canada. The guidance also does not seem to account for worsening inflation impact.
Lower margins - COGS per hectoliter increased 8.9% due to cost inflation, higher freight and input costs, mix impact, and volume deleverage. Molson Coors has been defraying higher transportation costs with long-term contracts and hedging programs, but one-quarter of shipments are at higher spot rates. Molson Coors is effectively on a lag in terms of freight cost inflation, leading to higher costs in the future. MG&A expense increases 3.5% due to higher marketing spend. EBITDA decreased 10.9%, with North America down 14.3% and Europe up 2.7%.
On-premise recovering, but volume declines to worsen - The on-premise channel was 14% of sales in the quarter compared to 16% in 2019. The US on-premise channel was 88% recovered while Canada was 80%. In the US, shipment volumes decreased 6.6%, while brand volumes declined 5.2% compared to 1.2% growth and 4% declines in Q2 respectively. Economy brands were down double digits again. Brand volumes were up 0.5% in Canada, while Latin America was up 9%. In Europe, revenue was up 14.7%, decelerating from 52.3% in Q2. The volume declines are in part purposeful but exacerbate concerns about volume share.
Molson Coors is on our short list.
Higher wages (KR)
Costco's second wage increase of the year went into effect on October 25. Starting wages were raised to $17 per hour. The average tenure of a Costco employee was nine years, and more than half of employees make over $25 per hour. In our Post-pandemic grocery outlook Black Book last week, we highlighted the wage increases in the industry are set to continue. It has elements of an arms race in a tight labor market.
Price increases (FDP)
Fresh Del Monte sent a letter to its customers announcing price increases on bananas, pineapples, and fresh-cut fruit effective November 1. "Despite our efforts to mitigate these increasing costs within our supply chain, they are too great to absorb. The unparalleled costs have been persistent and show no sights of regulating."
