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Constellation moves upscale in beer and wines

In the suds category, Constellation is betting big on the shift to premium beers.

Fred Lum/The Globe and Mail

For Constellation Brands Inc., it's all about trading up.

The Victor, N.Y., company spent the better part of the past decade acquiring high-profile wine brands, including Robert Mondavi in 2004 and Canada's Vincor International Inc. in 2006.

It also did some pruning, getting rid of several down-market wines, such as Paul Masson, Almaden and Inglenook.

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It has a modest spirits segment it wants to build up.

And in the suds category, Constellation is betting big on the shift to premium beers.

Last month, it closed the $4.75-billion (U.S.) acquisition of Grupo Modelo's U.S. beer assets from Belgium's Anheuser-Busch InBev.

The deal – which will almost double Constellation's sales – gives it a Mexican brewery and perpetual rights to three imports that are ranked first, third and eighth in the U.S. market: Corona Extra, Modelo Especial and Corona Light.

Constellation becomes the third-largest beer supplier in the United States, at a time when domestic beer consumption continues to fall, except in the import category.

The corporate strategy at Constellation under chief executive Rob Sands is to not only capitalize on the growing trend to imports, premium and luxury brands in beer – as well as wine and liquor – but also carefully target three key groups: Millennials, women and the Hispanic market.

At a recent investors' conference, the company played up the fact that there are 62 million Millennials between the ages of 21 and 36 in the U.S. and another eight million reaching legal drinking age in the next two years.

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Women make up another important growth category as female alcohol consumption increases.

And the Hispanic market is an increasingly important one in the United States.

Constellation is set to unveil its first-quarter results Tuesday and investors and analysts will want to know more about plans to integrate and fine-tune Grupo Modelo's U.S. business, as well as its proposed $500-million (U.S.) to $600-million expansion of the Peidras Negras brewery in Texas.

Mark Swartzberg, financial analyst with Stifel Nicolaus, says Constellation is making the right moves on the imported beer front to "continue driving volume share gains in the U.S.

"Notable actions include increasing the availability of Modelo Especial 12-pack cans and bottles, increasing the emphasis on draft Corona Light, Modelo line extensions (testing Modelo Light, rolling out Modelo Chelada), and creating a new craft beer with chef Rick Bayless," he said in a recent research note.

In an earlier note, Mr. Swartzberg said higher-end beer consumption continues to drive U.S. beer consumption and Constellation's import business led the trend in the first quarter, beating Heineken NV's namesake lager, the No. 2 import.

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He sees the company putting more emphasis on up-and-coming brands like Modelo Especial, with "a portfolio of brands that is less and less 'Corona and those other brands.'

"Modelo Especial and, to a lesser extent, Negra Modelo and Pacifico are contributing more and more to [the import business's] growth, strengthening the total portfolio's long-term revenue potential, in our opinion."

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