Credit Risk

Constellation's Mexico Dilemma

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Constellation Brands, Inc, the brewer of Corona Extra, spends more on capital investment than any other beverage company.

The country that's been the source of Constellation Brands' biggest profits is now becoming one of its biggest headaches.

In January 2016, Constellation Brands Inc., a leading maker of beer, wine and liquor, announced plans to spend $1.5 billion to build a second Mexican brewery in order to meet the rising demand in the United States for its best selling Mexican beer brands.  But almost four years later, those plans are in jeopardy as the result of local political protests, an unpredictable court system and a new national government potentially less friendly to foreign investment. 

Since acquiring the rights to 10 Mexican beer brands in 2013, the sales of Constellation Brands, based in Victor, New York, have almost tripled from a modest $2.8 billion in 2012 to $8.12 billion last year (see accompanying chart) due largely to a surge in beer sales, a product that represents 64 percent of the company's overall revenue.

Profits have also soared as the company's net income went from an already robust 21 precent in 2016 to 43 percent last year, an increase of 105 percent, making it one of the most profitable beverage companies in the world, according to beverage industry data from the Credit Standards Index (CSI).

Investors took note as the company's market capitalization reached a peak of $44.8 billion in April 2018 for a market value five and half times annual revenue.  The company ranks 5th in credit standards out of 36 beverage companies in the CSI reinforcing the strong relationship between profits and credit standards.

"Our beer business has tremendous, tremendous momentum and continues to gain market share," Chief Executive Rob Sands said in 2016, as reported in the Wall Street Journal.  As a result, Constellation increased capital expenditures to 12.4 percent of net sales in 2016, well above the industry benchmark of 5.4 percent and the highest of any beverage company in the world that year, according to CSI data.

In Mexico alone, Constellation Brands has invested some $3.5 billion in the last few years to more than triple production under something it calls the Mexican Beer Expansion Projects, according to information obtained from the company's annual filing.  Building a second brewery in Mexicali, Mexico, announced in 2016, was a key part of that project at $1.5 billion.

But in recent months, the company's latest expansion project, only partially completed, has come under intense fire from local residents and protest groups who argue that the new brewery will cause water shortages in one of the driest regions of Mexico.  Mexicali is located in Baja California just a few miles from the border with California.

The new state-of-the-art brewing facility, which would provide as many as 750 new jobs to local residents, was originally scheduled for completion in December of 2018, according to a Mexican media source. Now the completion date has been moved forward to the end of 2021.

Constellation Brands has said little on the matter except through conference calls.  "While the political environment in Mexicali has been challenging, Constellation has complied with all regulatory obligations in accordance with Mexican law, which has been verified by the Secretary of the Interior in Mexico," said Bill Newlands, President and Chief Operating officer on a conference call in January. The company did not respond to an email inquiry from CreditPulse.

In September, Mexican President Andres Manuel Lopez Obrador, elected in July of last year, sided with the local protestors when he criticized the location of the brewery, according to a report by Reuters.  "Just imagine the authorization they gave to build a big plant to produce beer in Mexicali. No," the president said, without mentioning Constellation Brands by name.

The persistent anti-market comments from the leftist political leader have some analysts concerned that Mexico may be moving away from the slow economic progress the country has made over the past 25 years. Mary Anastasia O'Grady, the veteran Latin America Correspondent for the Wall Street Journal raised a red flag in her May column.  "From his [Mr. Lopez Obrador] moral high horse he scolds the press, denigrates the entrepreneurial class and scoffs at the law," Ms. O'Grady wrote.

Regardless of the anti-business rhetoric, the Mexican peso has gained 1.69 percent in value against the U.S. dollar through December 8th.  In the third quarter, the peso was down 2.45 percent but faired much better than other Latin American currencies with much lower valuations against the dollar.