{"id":23365,"date":"2017-11-15T16:13:24","date_gmt":"2017-11-15T21:13:24","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/a-sobering-situation-constellation-brands-nafta-renegotiations\/"},"modified":"2017-11-15T16:13:24","modified_gmt":"2017-11-15T21:13:24","slug":"a-sobering-situation-constellation-brands-nafta-renegotiations","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/a-sobering-situation-constellation-brands-nafta-renegotiations\/","title":{"rendered":"A Sobering Situation: Constellation Brands & NAFTA Renegotiations"},"content":{"rendered":"

Trump\u2019s Election Plummets a Beer Brand\u2019s Stock<\/strong><\/p>\n

On November 9, 2016, the Constellation Brands stock plummeted 8%. In January 2017, the alcohol conglomerate, which produces Corona, Modelo, and Pacifico, had not recovered \u2013 its stock hovered at 10% below its pre-election value.[1]<\/a><\/p>\n

\"\"<\/a><\/p>\n

Figure 1:<\/em> Constellation Brands Stock from 11\/9\/2016 to 1\/30\/2017[2]<\/a><\/p>\n

Why would a beer brand have a negative reaction to the election? The answer lies in one of President Trump\u2019s key campaign pillars: to renegotiate trade agreements with Mexico and bolster American industry. President Trump threatened to impose an up-to 35% tax on companies importing goods from Mexico \u2013 and Constellation was doing just that.[3]<\/a><\/p>\n

Constellation entered Mexico in 1993 with its acquisition of Corona and solidified its position in 2013 by acquiring Modelo\u2019s U.S. business.[4]<\/a> Today, Constellation\u2019s Mexican beer business accounts for 52.6% of its total net sales and 63.5% of its total earnings.[5]<\/a> In order to maintain its authenticity and legal standing as a Mexican beer, Constellation centers its entire supply chain for brands like Corona and Modelo in Mexico.[6]<\/a>,<\/sup>[7]<\/a>Approximately 60% of the COGS for these brands are attributed to Mexico and 40% to the U.S.[8]<\/a><\/p>\n

In a post-Trump world, Constellation must decide how to mitigate potential tariff costs and avoid passing them on to U.S. consumers, which could cause a drop in sales. How does CEO Rob Sands protect the crown jewel of his company without acting too rashly in the face of unconfirmed legislation?<\/p>\n

\"\"<\/a><\/p>\n

Figure 2:<\/em> Corona\u2019s supply chain map showcases the path from the brewery in Mexico to consumption in the United States[9]<\/a><\/p>\n

Post-Election: Constellation Reacts \u2013 Without Overreacting<\/strong><\/p>\n

By January 2017, the executive team had developed a measured strategy to protect the company, and Sands attacked concerns about tariffs to calm analysts. From an external (short term) perspective, Sands stressed that Constellation was in discussions with key legislators.[10]<\/a> As a result of these conversations, Constellation was confident that it did not need to rush to overhaul its supply chain. Rather, the company took a medium term approach, dedicating internal resources towards conducting dynamic political scenario analyses. These models would allow Constellation to activate a decision tree if legislation passed placing tariffs on Mexican beer. Potential actions within that tree included shifting packaging or the purchase of natural gas to the U.S. to reduce Mexican COGS on glass production and gain tax breaks at home.<\/p>\n

What I appreciated about this approach was that Constellation remained calm despite uncertainty \u2013 they took steps to mitigate risk, but did not uproot their entire manufacturing process. CFO David Klein reiterated Sands\u2019 plan on CNBC\u2019S Closing Bell<\/em>, explaining that Constellation had analyzed potential effects of the border tax on its business. He stressed that Constellation was prepared to make changes to its manufacturing if, and only if, absolutely necessary.[11]<\/a><\/p>\n

Future Proofing: Is Constellation Complacent?<\/strong><\/p>\n

Constellation does, however, seem to be placing a bet that election rhetoric rarely plays out as truth.[12]<\/a> Will they really be able to act as quickly as they say if they need to? Below are steps Constellation can take to help protect their powerhouse Mexican beer business more completely:<\/p>\n