The U.S.\u2019s Imported Beer<\/u><\/p>\n
In October of 2017, CEO Robert Sands told investors that out of all the growth in the US\u2019s high-end beer market, 60% came from his company, Constellation Brands.[1]<\/a> However, despite 93% of Constellation\u2019s sales occurring in the US[2]<\/a>, 60% of their COGS are in Mexico.[3]<\/a><\/p>\n While the immediate political risks to trade has subsided since a year earlier, NAFTA renegotiations has opened management\u2019s eyes to the risks isolation presented to their business. However, though automakers, solar panel manufacturers, and call centers have the options to localize their supply chains to the United States, being \u201cMade in Mexico\u201d is core to the Corona, Modelo and Pacifico identity.<\/p>\n A More Flexible Supply Chain<\/u><\/p>\n The threat of a changing trade policy followed Constellation\u2019s efforts to take more control of its supply chain. In 2016, Constellation purchased AB InBev\u2019s Obregon Brewery, a large Mexican facility that produced Constellation\u2019s beers.[4]<\/a> While not management\u2019s purchase rationale, the increased controlled did add levers that the company could adjust in the event of new tariffs. For example, CFO David Klein cited potential flexibility in the energy cost of glass production.[5]<\/a> While the major glass production occurred in the Nava facility in Mexico, Constellation would have the ability to transfer certain costs based on potential trade policies. Constellation also divested their Canadian Wine and Spirits business in 2017, which eliminated a potential NAFTA concern.[6]<\/a><\/p>\n While acquisitions such as Obregon were explicitly for supply chain reasons, Constellation\u2019s commercially-oriented deals also help insulate the company from the trade risks. Two recent acquisitions, Ballast Point (2015) and Funky Buddha (2017), are American-based beer brands with domestic production, and Constellation is investing in their production capabilities.[7]<\/a> [7] However, Constellation\u2019s supply chain capabilities remain significantly weaker in the US, and it would take significant investment to bring them up to par with the Mexican operation. Given Corona, Modelo, and Pacifico account for most of Constellation\u2019s beer sales, the company remains heavily dependent on Mexican imports for the foreseeable future; however, by focusing acquisition activity on US-centric brands, the company can increase production scale in the United States and lessen the cost disadvantage.<\/p>\n Shift to the US?<\/u><\/p>\n A stronger manufacturing footprint in the US would not only make the company less sensitive to changes in trade that adversely impact the cost of Mexican beers, but may also open up the possibility of shifting certain elements of Corona, Modelo, and Pacifico production north. While the \u201cMade in Mexico\u201d designation is crucial to the brands\u2019 identities and commercialization, products that are manufactured using a global supply chain still claim a single country of origin. Though the Federal Trade Commission has issued guidelines for \u201cMade in the USA\u201d claims,[8]<\/a> companies are less restricted on products marketed as from other countries, which could allow Constellation to optimize for the tax or tariff regime if they had the right capabilities in both geographies, an option Klein alluded to regarding the glass factory.<\/p>\n Even if trade conditions remain stable, Constellation Brands has incentives to invest in its US supply chain: increasing Mexican labor costs and exchange rate volatility create a financial risk for a company whose costs and revenues are misaligned. Constellation should make US production capability a core element of its M&A strategy, both by using it as a screen on potential brand targets and by acquiring existing production assets. Moreover, Constellation should test the commercial implications of being imported. For example, Constellation could change packaging on sub-brands to deemphasize the Mexican ties, test whose outcomes suggest whether an eventual move to a fully US supply chain could be viable.<\/p>\n Questions to consider<\/u><\/p>\n Imported products such as Mexican beer rely on their roots in marketing to consumers. If the global trade regime disadvantages imports and forces supply chain adjustments, under what circumstances traditionally-imported brands make the transition to local production?<\/strong><\/p>\n Without supply chain levers to mitigate tariffs, foreign producers could see sudden cost increases that they may have to pass on to consumer but investing in a US-based supply chain adds cost without certain benefit. How proactive should companies be in anticipating changing trade conditions as it concerns their supply chain?<\/strong><\/p>\n (793 words)<\/p>\n [1]<\/a> Constellation Brands Q3 2017 Earnings Call,\u00a0Capital IQ, Inc., a division of Standard & Poor\u2019s.<\/p>\n [2]<\/a> Constellation Brands Inc., January 5, 2017 Form 10-K, accessed November 2017<\/p>\n [3]<\/a> Constellation Brands Q3 2017 Earnings Call,\u00a0Capital IQ, Inc., a division of Standard & Poor\u2019s.<\/p>\n [4]<\/a> Constellation Brands Inc., January 5, 2017 Form 10-K, accessed November 2017<\/p>\n [5]<\/a> Constellation Brands Q3 2017 Earnings Call,\u00a0Capital IQ, Inc., a division of Standard & Poor\u2019s.<\/p>\n [6]<\/a> Ibid.<\/p>\n [7]<\/a> Laurence Hammack, \u201cBallast Point to hire 175, open craft brewery in Botetourt,\u201d Roanoke Times<\/em>, May 24, 2016, http:\/\/www.roanoke.com\/news\/local\/botetourt_county\/ballast-point-to-hire-open-craft-brewery-in-botetourt\/article_ef293877-cdb3-5572-813c-e57b3022bdce.html<\/a>, accessed November 2017.<\/p>\n [8]<\/a> Federal Trade Commission, \u201cComplying with the Made in the USA Standard.\u201d Ftc.gov, December 1998. https:\/\/www.ftc.gov\/system\/files\/documents\/plain-language\/bus03-complying-made-usa-standard.pdf<\/a>, accessed November 2017.<\/p>\n","protected":false},"excerpt":{"rendered":" Mexican beers such as Corona are growing the US beer market – but can their maker adapt to a new world of trade?<\/p>\n","protected":false},"author":10375,"featured_media":22102,"comment_status":"open","ping_status":"closed","template":"","categories":[64,3237,2515,3219,3266],"class_list":["post-22101","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-beer","category-corona","category-international-trade","category-nafta","category-tariffs","hck-taxonomy-organization-constellation-brands","hck-taxonomy-industry-food-and-beverage","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\n