Bill Newlands on the ‘bold moves’ of Constellation Brands
Constellation Brands’ acquisition of a minority stake in cannabis producer Canopy Growth Corporation is consistent with the group’s “history of identifying early-stage consumer trends and taking action”, COO Bill Newlands says.
*This interview was first published in the December 2017 issue of The Spirits Business magazine
As a wave of cannabis legalisation has gathered pace across the globe in recent years, so too has the debate over whether the drug can complement or obstruct the growth of the alcohol industry. The discussion was cranked up a notch last year when a number of US states legalised the recreational use of cannabis – including California, the country’s largest territory by population.
When Spiros Malandrakis, senior alcoholic drinks analyst at market-intelligence publisher Euromonitor, predicted that cannabis-based beverages would become the “biggest disruptor that ever was” in the US drinks market, there were surely a few raised eyebrows at what may have been seen as hyperbole.
However, one of the world’s biggest alcoholic drinks groups recently added significant clout to the statement when it made a jaw-dropping investment. At the end of October, New York-headquartered Constellation Brands, maker of Svedka vodka and Casa Noble Tequila, spent CA$245 million (US$191m) on acquiring a 9.9% stake in Canada-based Canopy Growth Corporation, the world’s largest provider of medicinal-cannabis products, with a market cap of US$1.55bn. The deal, which gives Constellation the opportunity to purchase additional ownership in the future, is set to be completed in the third quarter of the group’s fiscal 2018 period.
Both companies will “exchange knowledge and expertise” to make cannabis-based drinks, which Constellation has indicated will most likely be non-alcoholic. However, no products will be launched in the US until they are legal at a federal level. According to Canopy Growth’s chairman and CEO, Bruce Linton, 2018 “will see unprecedented growth in medical and adult-use opportunities” for cannabis. Under the partnership, Canopy will exercise its expertise on cannabis regulation, while Constellation will concentrate on new-product development.
The move was not a knee-jerk reaction to a fleeting trend – Constellation had its “eye on the [cannabis] market for quite some time”, says the company’s chief operating officer, Bill Newlands. “Given the consumer trends that are evolving, and the relaxation of governmental restrictions in many jurisdictions, Canada being one of them, we felt it was an appropriate time to take a step in that direction.”
Speaking to me shortly after the acquisition was announced, Newlands notes that “the weighting of the overall tenor of what’s happening is toward legalisation and additional usage” in the US. Indeed, 30 states have legalised medicinal cannabis use, and of those, eight have legalised recreational use.
The deal may have shocked some in the industry – and inevitably solidified the growing importance of the cannabis-based drinks trend – but, for Newlands, it was indicative of the way Constellation has done business from day one. “If you look at the history of our company, one of the hallmarks of our success has been identifying early-stage consumer trends and taking action,” he says. “That is really what this move is about – it’s consistent with who we have always been and how we operate. And it puts us in a position if and when this trend emerges to be able to take a leadership position with a very well-established and well-respected partner to help us learn.”
Newlands joined Constellation in January 2015 from Beam, where he served as president of North America. He was Constellation’s chief growth officer and later took on additional responsibility as president of the group’s wine and spirits division, before stepping into the COO role at the start of 2017. In just three years, he has played a central role in the continued evolution of the company.
Rumours of a potentially transformative bid surfaced in May this year, when CNBC reported that Constellation had approached American whiskey behemoth Brown-Forman with a takeover offer. The report also said the offer was rejected by the family-owned Jack Daniel’s maker. When asked about the speculation, Newlands politely declines to discuss it: “Well we never comment on rumours around here, so I’m not going there.”
True or not, even the whisper of an acquisition of this size can sustain industry gossip for some time. Is Constellation even in the position to make such a purchase? With a market cap of US$40bn and a budget for significant acquisitions – Newlands describes the US$245m Canopy deal as a “relatively small investment” – it seems possible.
“I would say the acquisition of the beer business from Modelo with Corona was game changing,” says Newlands, referring to Constellation’s 2013 purchase of Grupo Modelo’s US beer unit from Anheuser-Busch InBev for US$4.75bn. “So while we don’t rule those things [minority acquisitions] out, our general strategy is certainly to make sure we are doing the things to build our existing portfolio, to do smart acquisitions, and to do outstanding innovation.
“But one of the talents of this company has always been that it is at the forefront of opportunities when they present themselves. So while we wouldn’t rule it out, it’s certainly not where the focus of our attention is.”
One area where Constellation has focused its attention in recent years is on the fast-growing American whiskey market, and in particular small ‘craft’ distilleries. In October 2016, the group acquired Utah-based High West Distillery for about US$160m. “High West to us was outstanding product in the bottle, it was high growth, it was growing exponentially, but like many earlier-stage companies, it was somewhat constrained just because of the capital needs,” says Newlands. “It costs a lot of money to put down products that need to age for a period of time. So we saw this as a great chance to get one of the high flyers.” Constellation is now funding an expansion of High West Distillery.
The group has also secured a number of minority-stake acquisitions in the American whiskey market. It is now part-owner of Tennessee-based Nelson’s Green Brier Distillery, Kentucky’s Bardstown Bourbon Company, and Catoctin Creek Distilling Company, based in Virginia. According to Newlands, these purchases are part of Constellation’s “existing desire” to grow its footprint in American whiskey, and spirits more broadly.
“Rob Sands [president and CEO of Constellation Brands] often talks about our strategy to be a total beverage alcohol (TBA) player, and that is really important across a couple of dimensions,” explains Newlands. “First of all, it’s what consumers are doing today. So if you look at how consumers act, there has been a tremendous growth in both spirits and wine consumption versus what occurred 20 years ago. We already have an extremely strong play in beer – we have the number-one and the number-two imports – and our wine portfolio is the number-one premium wine portfolio, so we are in a good position there. We have been working to build additional strength in spirits, to create the third leg of the stool. The consumer trends are very good in spirits and we expect that’s going to be an increasingly important part of our business going forward.”
Newlands says Constellation’s position as a TBA player – especially at a time when multinationals seem to be honing their focus – gives it an edge in terms of product innovation. “One of the things that is changing a lot in this marketplace is what I would describe as the blurring of categories,” he observes. “We have sold Bourbon barrel-aged Cabernet and Chardonnay – we could barely keep it in stock. We are now ageing Tequila [Casa Noble] in Robert Mondavi To Kalon wine barrels – again, a really different product profile, and we are selling it for over US$1,000 a bottle. It’s about finding those unique ways to cross-leverage our portfolio of total beverage alcohol, which gives us a unique position.”
For Newlands, innovation is important to sustaining organic growth. “For any organisation, you can’t take your eye off the ball of what you own to just go after something new,” he says. Svedka vodka, which Newlands says is the “number one imported vodka by volume in the US” and the country’s “third-fastest-growing vodka”, has benefited from flavour innovation lately – its new Blue Raspberry edition has proved to be “the most successful flavour launch in the brand’s history”, the executive claims.
He continues: “Despite the talk about brown spirits, the vodka category still represents one out of every three drinks in this country. So we still have a lot of opportunity to expand on the Svedka franchise. We are investing more consumer marketing spend than we have ever invested before, and we’re very excited about the potential growth in that area as well.”
Looking at Constellation’s recent financial performance, Newlands is understandably pleased. In the full-year 2016/17, Constellation’s net sales grew by 12% to reach US$7.3bn, while its reported operating income increased by 36% to US$2.4bn. The current fiscal period has also got off to a good start.
“We have brought almost 40% of the total retail growth across total beverage alcohol – more than three times the next-largest player,” says Newlands. “It’s not only working from a financial basis, which is important for a publicly held company, but it’s also working for the consumer, which is ultimately the real test, because you’ve got to please your consumer, at the end of the day, or it will come back to haunt you.”
This all-encompassing desire to connect with consumers and pre-emptively act on emerging trends means Constellation, despite its size, remains agile and quick to make business decisions. Newlands explains: “We have had three CEOs in our history – all members of the founding family – and their focus has always been on a narrow set of things: people, quality, entrepreneurship, and building brands. The other thing that overlays this is that they are really prepared and willing to make bold moves and follow consumer trends. I have worked with a number of different companies in this space and I have never seen an organisation that was more agile and quick to make smart decisions, not dumb ones, than this organisation.”