Wine sale will be a catalyst (STZ)
The Napa County wine industry said the Glass Fire's potential losses that damaged 30 wineries and vineyards alone might reach $1B. Smoke damage to grapes will cost growers hundreds of millions of dollars, and crop insurance rarely equals the full market price. Grapes are the most vulnerable to smoke taint between veraison and harvest when the fires broke out. 15% of the wine grapes had been picked before the fires began, and 90% had been harvested when the Glass Fire started. More than 25% of the harvest will go unpicked in Sonoma Country due to the pandemic and fires with an estimated value of $150M. For the grapes picked after the fires had started, it may be several months before they can determine if the smoke taint has ruined the harvest. The aromatic compounds that could develop in the grapes can’t be detected until they have been fermented, and in some cases, that could take years. For many California wines, 2020 will be the vintage to forget. Constellation Brands estimated the fires' impact to be $25-35M in FQ3 and $10-15M in FQ4.
Shares of Constellation Brands have fallen 13% since the end of September and look attractive here, in our opinion. Improving beer inventory levels drives better sales growth, and the company has easy comparisons in the coming quarters. In terms of catalysts, the closing of the low-priced wine brands sale to E&J Gallo should be a positive de-leveraging event. The wine and spirits portfolio sale at $11 retail and below was first announced in April 2019 for $1.7B. By May, the deal was delayed after additional information requests by the FTC. After several revisions of which brands would be included, the sale price was marked down to $1B. On the last conference call, Constellation Brands said the deal would close by the end of FQ3 (Nov. 30). A separate deal with Gallo for Nobilo and related assets for $130M would also be completed simultaneously. Constellation Brands is focusing its portfolio on the higher price points where growth has been faster. In the four weeks ended Sept. 5, wine brands priced over $20 grew more than 30% compared to the total wine industry growing 16%.
Wine sales remain robust at home (STZ)
The off-premise and direct to consumer shipments channels have been robust for wine during the pandemic, but not enough to make up for the drop in on-premise sales. Due to the higher markup in the on-premise channel, it represents 42% of wine dollar sales. Direct to consumer shipments by value increased 17% in September, decelerating from the 30% growth rate in June, July, and August. The average price for DTC has generally been lower than last year during the pandemic, with the average price in September at $38.29 per bottle, 6% lower than the prior year. The wine was up 21% in dollars in the off-premise channel in the four weeks ended Oct. 3 and up 13% by volume. That is up from 17% in dollars and 10% by volume in the previous four-week period, as seen in the charts below. The average price in the off-premise channel was $11.28 per bottle.
Constellation Brands has several of the top 20 fastest growing wine brands in the off-premise channel in the 52 weeks ended Sept. 26, 2020. Black Box was the 6th fastest growing brand (included in the proposed sale to Gallo), followed by Woodbridge at #7, Meiomi at #9, and Kim Crawford at #14.
Thanksgiving plans (ACI)
Household grocery spend to increase 7% in the weeks before Thanksgiving. 73% of respondents in a survey conducted by NCSolutions said they expect to increase or maintain their Thanksgiving spending in 2020, with 15% planning on spending more and 27% expecting to spend less. 59% of the respondents expect the same number of attendees this year, 31% expect fewer, and 10% expect more. 14% of respondents expect many fewer, which is a sign of the difficulty with travel and socializing outside of your group. With the decrease in the groups' size, there will likely be an increase in the number of small gatherings for Thanksgiving.
