WEBVTT 00:00:00.000 --> 00:00:02.000 Welcome back to the Deep Dive, where we take 00:00:02.000 --> 00:00:04.280 the firehose of sources you've shared with us, 00:00:04.400 --> 00:00:07.639 articles, corporate filings, strategic analyses, 00:00:07.839 --> 00:00:11.849 and we try to turn it into... potent distilled 00:00:11.849 --> 00:00:14.429 knowledge that's the goal today we are cracking 00:00:14.429 --> 00:00:17.570 open a company that really it shapes the social 00:00:17.570 --> 00:00:20.269 landscape of america in a way that very few others 00:00:20.269 --> 00:00:23.989 do we're talking about an alcohol giant one whose 00:00:23.989 --> 00:00:27.210 products are so ubiquitous there is well a statistical 00:00:27.210 --> 00:00:29.370 certainty one is probably chilling in your fridge 00:00:29.370 --> 00:00:31.309 while now that's absolutely right we're diving 00:00:31.309 --> 00:00:35.240 deep into constellation brands Inc. And this 00:00:35.240 --> 00:00:37.280 isn't just, you know, a collection of familiar 00:00:37.280 --> 00:00:40.219 names on the shelf. No. This is a Fortune 500 00:00:40.219 --> 00:00:43.359 behemoth. It's an American producer and marketer 00:00:43.359 --> 00:00:46.340 of beer, wine and spirits that somehow manages 00:00:46.340 --> 00:00:48.899 to fly a little bit under the radar corporately. 00:00:48.939 --> 00:00:51.439 Right. While completely dominating consumer choice. 00:00:51.579 --> 00:00:53.899 Exactly. And the complexity of its strategy, 00:00:53.979 --> 00:00:56.759 of its growth, it just far outweighs the simplicity 00:00:56.759 --> 00:00:59.500 of, you know, a six pack. When you look at the 00:00:59.500 --> 00:01:01.820 sheer scale of this operation, you realize pretty 00:01:01.820 --> 00:01:03.640 quickly this isn't just about selling beverages. 00:01:03.920 --> 00:01:07.719 Not at all. This is a story about colossal capital 00:01:07.719 --> 00:01:13.079 allocation, aggressive M &A, and some strategic 00:01:13.079 --> 00:01:15.579 bets that have fundamentally altered the entire 00:01:15.579 --> 00:01:18.579 beverage industry. Big time. Okay, let's unpack 00:01:18.579 --> 00:01:20.980 this. Before we get into the history, the long 00:01:20.980 --> 00:01:23.560 journey, give us a sense of just how massive 00:01:23.560 --> 00:01:25.819 their footprint is, especially in the U .S. beer 00:01:25.819 --> 00:01:28.799 market. Well, their dominance is built on a really 00:01:28.799 --> 00:01:31.439 specific and kind of non -traditional foundation. 00:01:32.430 --> 00:01:35.810 Constellation Brands is, by sales volume, the 00:01:35.810 --> 00:01:38.290 largest beer import company in the U .S. The 00:01:38.290 --> 00:01:40.450 largest import company. Yeah. Think about that. 00:01:40.510 --> 00:01:42.569 They didn't build this market dominance from 00:01:42.569 --> 00:01:45.450 scratch with domestic products. Well, they bought 00:01:45.450 --> 00:01:47.250 their way to the top of the import category. 00:01:47.530 --> 00:01:49.769 And how does that stack up against the big domestic 00:01:49.769 --> 00:01:51.709 players? If you look at the total market share, 00:01:51.750 --> 00:01:54.650 so across all major beer suppliers in the country, 00:01:54.730 --> 00:01:57.349 domestic and foreign, Constellation holds a pretty 00:01:57.349 --> 00:02:00.209 significant 7 .4 % market share. So where does 00:02:00.209 --> 00:02:01.810 that put them in the rankings? That positions 00:02:01.810 --> 00:02:04.129 them as the third largest major beer supplier 00:02:04.129 --> 00:02:06.670 overall. They're just trailing the massive global 00:02:06.670 --> 00:02:09.740 conglomerates. And those market positions, they 00:02:09.740 --> 00:02:12.379 translate into truly staggering financial figures. 00:02:12.539 --> 00:02:15.699 We looked at the 2021 data and the numbers are 00:02:15.699 --> 00:02:18.240 just astronomical. Yeah, they're huge. This company 00:02:18.240 --> 00:02:22.159 recorded U .S. $9 .355 billion in revenue. Right. 00:02:22.319 --> 00:02:25.000 But maybe even more telling of its corporate 00:02:25.000 --> 00:02:28.280 ambition, its reach is its total asset base. 00:02:28.539 --> 00:02:33.659 That clocked in at U .S. $27 .104 billion. And 00:02:33.659 --> 00:02:36.259 that level of financial muscle, that's what allows 00:02:36.259 --> 00:02:39.039 them to make these. strategic moves that small 00:02:39.039 --> 00:02:41.199 competitors, they can't even dream of it. It's 00:02:41.199 --> 00:02:43.500 not just a company. It's a force multiplier in 00:02:43.500 --> 00:02:45.719 the consumer packaged goods space. It really 00:02:45.719 --> 00:02:47.599 is. And what's particularly fascinating about 00:02:47.599 --> 00:02:49.819 Constellation Brands is that, you know, unlike 00:02:49.819 --> 00:02:51.800 some of these established giants who kind of 00:02:51.800 --> 00:02:55.379 resist change, this company's story is defined 00:02:55.379 --> 00:02:57.960 by its willingness to aggressively invest in 00:02:57.960 --> 00:03:00.360 frontier markets. Like the cannabis bet. Exactly. 00:03:00.439 --> 00:03:02.680 The massive controversial bet they made on cannabis, 00:03:02.800 --> 00:03:04.520 which we're definitely going to analyze in detail. 00:03:06.569 --> 00:03:09.150 precisely how this powerhouse was constructed. 00:03:09.469 --> 00:03:12.270 We're going to trace its unlikely path from its, 00:03:12.330 --> 00:03:15.009 I mean, ridiculously humble origins. Truly humble. 00:03:15.069 --> 00:03:18.409 Starting as a tiny, regional, bulk wine cellar 00:03:18.409 --> 00:03:21.870 to the diversified, multi -billion dollar empire 00:03:21.870 --> 00:03:25.469 it is today. Right. We need to dissect the massive 00:03:25.469 --> 00:03:28.090 strategic pivots that defined its recent history. 00:03:28.650 --> 00:03:31.550 Specifically, that game -changing, antitrust 00:03:31.550 --> 00:03:36.129 -mandated beer deal, the continuous clinical 00:03:36.129 --> 00:03:38.909 shedding of low margin brands. And the high stakes 00:03:38.909 --> 00:03:41.430 controversial leap into cannabis. And finally, 00:03:41.449 --> 00:03:43.789 we have to examine the operational and legal 00:03:43.789 --> 00:03:46.810 friction that such rapid, aggressive growth naturally 00:03:46.810 --> 00:03:49.509 generates. I'm thinking particularly about water 00:03:49.509 --> 00:03:52.110 rights in Mexico. A huge issue. So to really 00:03:52.110 --> 00:03:54.449 appreciate the magnitude of Constellation Brands 00:03:54.449 --> 00:03:56.569 today, we have to travel all the way back, back 00:03:56.569 --> 00:03:58.729 to the Finger Lakes region of upstate New York 00:03:58.729 --> 00:04:02.050 in 1945. Yeah. And it's a classic American entrepreneurial 00:04:02.050 --> 00:04:04.669 story. It started with, like you said, very modest 00:04:04.669 --> 00:04:06.740 ambition. It was founded by Marvin Sands, right? 00:04:06.800 --> 00:04:08.300 That's right. Right after World War II. And it 00:04:08.300 --> 00:04:09.979 was initially called Canandaigua Industries. 00:04:10.400 --> 00:04:12.439 And if you think about the Finger Lakes region, 00:04:12.580 --> 00:04:14.520 it was, and it still is, an agricultural area 00:04:14.520 --> 00:04:16.860 well -suited for growing certain types of grapes. 00:04:17.019 --> 00:04:19.759 Mostly for bulk wine, not the fancy stuff. Exactly. 00:04:19.939 --> 00:04:22.579 The kind of grapes used for bulk or fortified 00:04:22.579 --> 00:04:25.459 wines. That was their niche. Their initial business 00:04:25.459 --> 00:04:29.180 model, it wasn't craft beer or premium Napa Cabernet. 00:04:29.319 --> 00:04:32.379 Oh, no. It was the simplest business model possible. 00:04:32.579 --> 00:04:35.860 Yeah. Just selling bulk wine. Just massive quantities 00:04:35.860 --> 00:04:38.439 of it. Yeah. Their job was to source the product 00:04:38.439 --> 00:04:40.939 and then sell it wholesale in these huge quantities 00:04:40.939 --> 00:04:43.240 to bottlers all throughout the eastern U .S. 00:04:43.259 --> 00:04:46.600 It was a high volume, low margin business just 00:04:46.600 --> 00:04:48.699 designed to move a commodity product efficiently. 00:04:49.040 --> 00:04:50.899 And when we talk about its starting size, it's 00:04:50.899 --> 00:04:53.079 almost laughable compared to where they are now. 00:04:53.259 --> 00:04:56.839 It's incredible. In that first year, 1945, they 00:04:56.839 --> 00:04:59.959 managed to sell roughly 200. thousand gallons 00:04:59.959 --> 00:05:02.500 of wine. Now that sounds like a lot of liquid. 00:05:02.680 --> 00:05:05.279 It does. But the financial return was just minimal. 00:05:05.459 --> 00:05:08.000 Gross sales for that entire year totaled only 00:05:08.000 --> 00:05:12.779 $150 ,000. $150 ,000. It just underscores the 00:05:12.779 --> 00:05:15.160 monumental effort it takes to scale a business 00:05:15.160 --> 00:05:17.279 from the ground up. But the foundation was solid. 00:05:17.399 --> 00:05:19.939 It was centered around family, around continuity. 00:05:20.439 --> 00:05:23.139 That's right. The business grew steadily. And 00:05:23.139 --> 00:05:25.839 they formalized its structure in the early 1970s. 00:05:25.939 --> 00:05:28.959 It incorporated as the Canandaigua Wine Company, 00:05:29.100 --> 00:05:32.199 Inc., in 72. And then they went public. Then 00:05:32.199 --> 00:05:34.759 a critical step. They went public in 1973. And 00:05:34.759 --> 00:05:38.199 this move from a private family venture to a 00:05:38.199 --> 00:05:41.040 publicly scrutinized corporation, even while 00:05:41.040 --> 00:05:43.399 it was still regional. it provided the capital 00:05:43.399 --> 00:05:45.519 structure they needed for future expansion. And 00:05:45.519 --> 00:05:47.600 the family leadership, that stayed a constant, 00:05:47.759 --> 00:05:49.860 right? It provided stability through decades 00:05:49.860 --> 00:05:52.740 of, I mean, just monumental change. It did. Marvin 00:05:52.740 --> 00:05:56.180 Sands was the founder, but his son, Richard Sands, 00:05:56.279 --> 00:05:59.319 he took over as president in 1993 and then CEO 00:05:59.319 --> 00:06:02.639 in 96. He eventually succeeded his father. And 00:06:02.639 --> 00:06:04.740 then another Sands took over after him. Yeah. 00:06:04.759 --> 00:06:07.300 Later, Richard's brother, Rob Sands, became president 00:06:07.300 --> 00:06:10.279 and CEO in 2007. So that sans family involvement, 00:06:10.480 --> 00:06:12.579 it maintained a very specific corporate culture 00:06:12.579 --> 00:06:14.779 that was just focused on aggressive growth and 00:06:14.779 --> 00:06:16.540 market opportunity. And they weren't afraid to 00:06:16.540 --> 00:06:18.800 acquire early on, even when their focus was still 00:06:18.800 --> 00:06:21.629 just on wine. No, not at all. A key indicator 00:06:21.629 --> 00:06:25.189 of their future M &A strategy came in 1987 with 00:06:25.189 --> 00:06:27.649 the purchase of the Manischewitz Winery. Manischewitz, 00:06:27.730 --> 00:06:30.310 really? Yeah. And while Manischewitz is, you 00:06:30.310 --> 00:06:33.089 know, a niche specialized brand, acquiring it 00:06:33.089 --> 00:06:36.629 showed an early ability to fold established known 00:06:36.629 --> 00:06:39.569 brands into their growing portfolio. And they 00:06:39.569 --> 00:06:41.689 still license and sell that name today. But the 00:06:41.689 --> 00:06:44.149 truly pivotal moment. The one where they signal 00:06:44.149 --> 00:06:46.569 to Wall Street and the entire beverage world 00:06:46.569 --> 00:06:49.589 that their ambitions were way bigger than New 00:06:49.589 --> 00:06:51.990 York's Finger Lakes. That happened right at the 00:06:51.990 --> 00:06:53.829 turn of the millennium. That's right. In the 00:06:53.829 --> 00:06:55.889 year 2000, they officially changed their name 00:06:55.889 --> 00:06:59.870 from Canandaigua Wine Company to Constellation 00:06:59.870 --> 00:07:03.709 Brands, Inc. And why dedicate time to a name 00:07:03.709 --> 00:07:06.410 change? What does that really represent? I mean, 00:07:06.430 --> 00:07:08.129 it's the ultimate corporate mission statement. 00:07:08.290 --> 00:07:11.170 It signifies a profound strategic shift. They 00:07:11.170 --> 00:07:13.689 were signaling a new direction. Completely. They 00:07:13.689 --> 00:07:16.110 realized the old name, Canandaigua Wine Company, 00:07:16.310 --> 00:07:18.850 it was just too limiting. It anchored them to 00:07:18.850 --> 00:07:21.550 a specific region and a specific product. Wine 00:07:21.550 --> 00:07:24.730 Company. Exactly. Yeah. The new name. Constellation 00:07:24.730 --> 00:07:27.290 Brands, it signaled that they were now a vast 00:07:27.290 --> 00:07:29.949 collection, a whole universe of brands spanning 00:07:29.949 --> 00:07:32.329 multiple product categories and geographies. 00:07:32.430 --> 00:07:34.870 They were shedding the identity of a regional 00:07:34.870 --> 00:07:37.509 producer and just fully embracing the identity 00:07:37.509 --> 00:07:40.379 of a multinational beverage giant. It's smart 00:07:40.379 --> 00:07:42.620 corporate branding that successfully reflected 00:07:42.620 --> 00:07:46.079 a global mindset. And today, that global mindset 00:07:46.079 --> 00:07:49.300 is physically anchored in Rochester, New York. 00:07:49.439 --> 00:07:51.500 It's a neat piece of corporate continuity. It 00:07:51.500 --> 00:07:53.579 is. Their headquarters are still in Rochester. 00:07:53.879 --> 00:07:57.519 In fact, just this past June 2024, Constellation 00:07:57.519 --> 00:08:02.079 opened its new massive 170 ,000 square foot campus. 00:08:02.240 --> 00:08:04.139 Where did they build that? on the site of the 00:08:04.139 --> 00:08:06.399 historic aqueduct building in downtown Rochester. 00:08:06.660 --> 00:08:08.939 And this move, it wasn't just logistical, it 00:08:08.939 --> 00:08:11.959 was civic and symbolic. How so? Well, it was 00:08:11.959 --> 00:08:14.019 noted in the regional press that Constellation 00:08:14.019 --> 00:08:17.259 Brands was the first Fortune 500 company to operate 00:08:17.259 --> 00:08:19.579 in the city of Rochester in two decades. Wow. 00:08:19.740 --> 00:08:21.740 It just underlines their status as an economic 00:08:21.740 --> 00:08:24.410 anchor for the region. It's a powerful illustration 00:08:24.410 --> 00:08:26.509 of the distance they traveled from those first 00:08:26.509 --> 00:08:30.069 $150 ,000 in bulk wine sales. And that distance 00:08:30.069 --> 00:08:32.769 was covered primarily through the strategy we're 00:08:32.769 --> 00:08:36.549 diving into now, the relentless acquisition spree 00:08:36.549 --> 00:08:39.190 of the 2000s and 2010s. This is where it gets 00:08:39.190 --> 00:08:41.490 wild. Yeah, here's where it gets really interesting, 00:08:41.570 --> 00:08:44.190 because Constellation Brands didn't just buy 00:08:44.190 --> 00:08:46.549 companies and sit on them. They systematically 00:08:46.549 --> 00:08:49.269 engineered their portfolio through these aggressive 00:08:49.269 --> 00:08:53.029 purchases, followed by... Really clinical strategic 00:08:53.029 --> 00:08:55.610 divestment. It was a constant process of optimization. 00:08:56.009 --> 00:08:59.169 A churn. A total churn. The M &A strategy is 00:08:59.169 --> 00:09:01.490 the true story of Constellation's transformation. 00:09:02.029 --> 00:09:04.570 The goal wasn't just to get bigger. It was to 00:09:04.570 --> 00:09:07.809 migrate their revenue base away from high -volume, 00:09:07.830 --> 00:09:10.210 low -margin products. The stuff they started 00:09:10.210 --> 00:09:13.149 with. Right. And move toward premium, high -margin 00:09:13.149 --> 00:09:15.330 prestige brands. Let's look at the sheer speed 00:09:15.330 --> 00:09:17.809 and scale of that initial global expansion in 00:09:17.809 --> 00:09:19.909 wine and spirits. The early 2000s were just a 00:09:19.909 --> 00:09:22.669 blur. In 2003, they immediately expanded globally. 00:09:22.789 --> 00:09:25.629 They acquired BRL Hardy in Australia and Nobolo 00:09:25.629 --> 00:09:27.909 in New Zealand. So instant global footprint. 00:09:28.190 --> 00:09:31.250 Instant exposure to the rapidly growing New World 00:09:31.250 --> 00:09:34.950 wine market. In the following year, 2004, they 00:09:34.950 --> 00:09:38.269 made a massive domestic statement. They acquired 00:09:38.269 --> 00:09:41.710 Robert Mondavi Corp. For a billion dollars. One 00:09:41.710 --> 00:09:44.049 billion. And Mondavi is synonymous with premium 00:09:44.049 --> 00:09:47.570 California wine. Exactly. It instantly gave Constellation 00:09:47.570 --> 00:09:50.450 the prestige and the pricing power they desperately 00:09:50.450 --> 00:09:53.429 needed. That Mondavi purchase alone redefined 00:09:53.429 --> 00:09:55.850 their entire wine division. And they quickly 00:09:55.850 --> 00:09:58.110 followed that up with another huge international 00:09:58.110 --> 00:10:01.169 playwright. Yep. In 2006, they acquired VinCore 00:10:01.169 --> 00:10:03.289 International, which was Canada's largest wine 00:10:03.289 --> 00:10:07.529 company, for $1 .44 billion. So not just a brand, 00:10:07.529 --> 00:10:09.899 but the whole operation. Oh, yeah. just a brand 00:10:09.899 --> 00:10:11.860 acquisition. It was purchasing entire vineyard 00:10:11.860 --> 00:10:14.379 operations, distribution channels, and market 00:10:14.379 --> 00:10:16.820 dominance across an entire nation. They were 00:10:16.820 --> 00:10:19.059 becoming a truly global player. And they're moving 00:10:19.059 --> 00:10:21.659 into spirits at the same time. Absolutely. Spirits 00:10:21.659 --> 00:10:23.659 generally carry higher margins, and they're less 00:10:23.659 --> 00:10:26.840 susceptible to agricultural volatility than wine 00:10:26.840 --> 00:10:30.139 is. So in 2007, they acquired Spirits Mark I. 00:10:30.360 --> 00:10:32.659 And that brought them Svedka. That brought them 00:10:32.659 --> 00:10:35.860 Svedka vodka. Then in 2008, they bought Beanwines 00:10:35.860 --> 00:10:39.500 Estates for $885 million, which included major 00:10:39.500 --> 00:10:42.340 assets like Clos du Bois. So by the end of the 00:10:42.340 --> 00:10:44.620 decade, their portfolio was immense, but also 00:10:44.620 --> 00:10:48.200 critically, it was bloated. And that bloat is 00:10:48.200 --> 00:10:50.799 what leads to the second equally important part 00:10:50.799 --> 00:10:54.200 of their strategy, the premium pivot. Why keep 00:10:54.200 --> 00:10:55.740 buying if you're just going to sell off older 00:10:55.740 --> 00:10:57.620 brands at the same time? It's pure financial 00:10:57.620 --> 00:11:00.100 engineering. It's focused on maximizing profitability 00:11:00.100 --> 00:11:03.259 per unit. Right. Those low cost mass market wines 00:11:03.259 --> 00:11:05.200 like the ones they started with, they require 00:11:05.200 --> 00:11:08.080 colossal volume and massive expensive distribution 00:11:08.080 --> 00:11:10.740 networks just to turn a small profit. Whereas 00:11:10.740 --> 00:11:13.340 the premium brands. The premium brands like a 00:11:13.340 --> 00:11:15.720 Mondavi or a Specialized Spirit, they sell at 00:11:15.720 --> 00:11:17.779 much higher price points. That means you need 00:11:17.779 --> 00:11:20.500 less volume to generate significant profit and 00:11:20.500 --> 00:11:23.620 much better returns on investment. So they systematically 00:11:23.620 --> 00:11:26.539 shed their value brands to sharpen that focus. 00:11:26.659 --> 00:11:29.279 What are some of the key examples of this divestment 00:11:29.279 --> 00:11:32.100 strategy? Well, it began almost immediately after 00:11:32.100 --> 00:11:34.980 the major acquisitions. In 2008, they sold off 00:11:34.980 --> 00:11:38.259 classic, high -volume but low -margin properties 00:11:38.259 --> 00:11:41.320 like All Maiden Vineyards, Ingle Nook Winery, 00:11:41.379 --> 00:11:43.659 and the Paul Masson Winery in Madera, California. 00:11:43.940 --> 00:11:45.779 And then they did the same with Spirits. A year 00:11:45.779 --> 00:11:48.879 later, yeah. They completely exited the value 00:11:48.879 --> 00:11:51.679 spirit space, selling that entire portfolio to 00:11:51.679 --> 00:11:53.840 the Sazerac company. And this isn't ancient history. 00:11:53.940 --> 00:11:56.519 This strategic shedding continued right into 00:11:56.519 --> 00:11:58.740 the last few years. Yes, which shows this is 00:11:58.740 --> 00:12:01.740 a constant ongoing process. In January 2021, 00:12:02.100 --> 00:12:03.919 they executed one of their largest portfolio 00:12:03.919 --> 00:12:07.240 cleanups. They sold 30 low -cost wine labels. 00:12:07.440 --> 00:12:11.019 30 labels in one go. 30. including Claude Dubois 00:12:11.019 --> 00:12:15.000 to Ian J. Gallo for $810 million. They are effectively 00:12:15.000 --> 00:12:17.820 saying, we will only manage brands that meet 00:12:17.820 --> 00:12:21.159 a specific high margin premium target profile. 00:12:21.679 --> 00:12:24.159 It's that constant optimization that drives their 00:12:24.159 --> 00:12:26.919 stock price and their financial health. But all 00:12:26.919 --> 00:12:29.039 of these strategic maneuvers, all these billion 00:12:29.039 --> 00:12:32.179 -dollar wine and spirit deals, were utterly eclipsed 00:12:32.179 --> 00:12:35.220 by one single defining acquisition that cemented 00:12:35.220 --> 00:12:37.840 Constellation's status as a true beverage titan. 00:12:37.919 --> 00:12:41.399 A big one. The beer deal of 2013. This is the 00:12:41.399 --> 00:12:43.500 moment Constellation became a household name. 00:12:43.639 --> 00:12:45.580 This was the moment the cash machine was plugged 00:12:45.580 --> 00:12:49.580 in. In 2013, Constellation acquired Grupo Modelo's 00:12:49.580 --> 00:12:52.029 U .S. beer business. Which is the entity that 00:12:52.029 --> 00:12:55.029 sells all the major Mexican beer brands in the 00:12:55.029 --> 00:12:57.929 U .S. Corona, Modelo, Special, Pacifico, all 00:12:57.929 --> 00:13:00.669 of it. They got the U .S. rights to all of it. 00:13:00.750 --> 00:13:03.110 And crucially, this was not a voluntary sale 00:13:03.110 --> 00:13:04.909 on the part of the original owners. This was 00:13:04.909 --> 00:13:07.649 mandated by antitrust regulators, correct? Absolutely 00:13:07.649 --> 00:13:10.529 correct. The global brewing giant Anheuser -Busch 00:13:10.529 --> 00:13:13.230 InBev, or AB InBev, they were in the process 00:13:13.230 --> 00:13:16.149 of acquiring Grupo Modelo worldwide. Right. The 00:13:16.149 --> 00:13:18.169 U .S. Department of Justice, the DOJ, stepped 00:13:18.169 --> 00:13:21.320 in and said, essentially, if you... AB InBev 00:13:21.320 --> 00:13:24.080 acquire Modelo, you will control way too much 00:13:24.080 --> 00:13:26.259 of the U .S. beer market. It'll restrict competition. 00:13:26.600 --> 00:13:28.960 So to get the deal done, they had to sell something 00:13:28.960 --> 00:13:31.440 off. To satisfy those antitrust concerns and 00:13:31.440 --> 00:13:34.259 be allowed to finalize the global deal, AB InBev 00:13:34.259 --> 00:13:36.559 was forced to divest the entire U .S. business 00:13:36.559 --> 00:13:39.360 to a competitor. And Constellation Brands seized 00:13:39.360 --> 00:13:41.580 that once in a lifetime opportunity. This makes 00:13:41.580 --> 00:13:45.340 the resulting transaction so complex. What exactly 00:13:45.340 --> 00:13:47.820 did Constellation secure that gave them such 00:13:47.820 --> 00:13:51.240 immense power? They gained three critical things 00:13:51.240 --> 00:13:53.379 that really guarantee their long -term dominance. 00:13:53.759 --> 00:13:57.440 First, full ownership of Crown Imports LLC, which 00:13:57.440 --> 00:13:59.779 was the existing importer and distributor. Okay, 00:13:59.820 --> 00:14:01.840 so the operational side. The operational side. 00:14:01.919 --> 00:14:03.919 Second, complete independent control over the 00:14:03.919 --> 00:14:07.039 U .S. commercial business marketing, sales, pricing, 00:14:07.159 --> 00:14:09.620 distribution, all of it. And the third piece 00:14:09.620 --> 00:14:13.259 was the real prize. The most valuable asset, 00:14:13.480 --> 00:14:15.679 the foundation of their entire business today, 00:14:15.779 --> 00:14:19.549 was the third. an exclusive perpetual brand license 00:14:19.549 --> 00:14:23.070 in the U .S. to import, market, and sell Corona 00:14:23.070 --> 00:14:26.190 and the Modelo brands. A perpetual license. I 00:14:26.190 --> 00:14:27.750 mean, that's basically an asset with corporate 00:14:27.750 --> 00:14:29.889 immortality. They don't just rent the brands. 00:14:29.909 --> 00:14:31.590 They own them forever in the most profitable 00:14:31.590 --> 00:14:33.929 beer market in the world. Exactly. And the license 00:14:33.929 --> 00:14:36.340 grants them freedom, too. Constellation has the 00:14:36.340 --> 00:14:38.580 ability to develop brand extensions and innovations 00:14:38.580 --> 00:14:41.220 specifically for the U .S. consumer. Without 00:14:41.220 --> 00:14:43.419 needing approval from the global owner. Without 00:14:43.419 --> 00:14:46.039 needing approval from AB InBev. And this is the 00:14:46.039 --> 00:14:48.080 root of the friction, the lawsuits, that we'll 00:14:48.080 --> 00:14:50.600 discuss later. That's a huge competitive advantage. 00:14:50.720 --> 00:14:53.559 But there's also a key operational detail tied 00:14:53.559 --> 00:14:56.100 to this deal that dictates the whole supply chain 00:14:56.100 --> 00:14:59.159 today. Yes, the manufacturing. As part of the 00:14:59.159 --> 00:15:01.840 deal, Constellation Brands acquired a brewery. 00:15:02.059 --> 00:15:04.620 and the responsibility to manufacture these products 00:15:04.620 --> 00:15:06.960 in Mexico specifically for the U .S. market. 00:15:07.220 --> 00:15:09.879 Ah, so they make it, but only for us. Right. 00:15:10.000 --> 00:15:12.340 Grupo Modelo, which is still owned by AB InBev, 00:15:12.460 --> 00:15:14.519 handles production and sales for every other 00:15:14.519 --> 00:15:16.820 country globally. So you have a situation where 00:15:16.820 --> 00:15:20.399 the Corona sold in Los Angeles is produced by 00:15:20.399 --> 00:15:22.639 Constellation. But the Corona sold just across 00:15:22.639 --> 00:15:25.500 the border in Tijuana is produced by AB InBev's 00:15:25.500 --> 00:15:28.840 subsidiary. It's an antitrust -mandated split 00:15:28.840 --> 00:15:32.200 personality for a global icon. With the beer 00:15:32.200 --> 00:15:35.120 division secured as this extraordinary high margin 00:15:35.120 --> 00:15:38.259 cash engine, Constellation continued to look 00:15:38.259 --> 00:15:41.120 for the next wave of growth. They did. Post 2013, 00:15:41.440 --> 00:15:43.700 they started aggressively targeting high end 00:15:43.700 --> 00:15:46.779 craft products and premium spirits, hunting for 00:15:46.779 --> 00:15:49.940 the next big thing. And this quest, it led to 00:15:49.940 --> 00:15:52.779 some of the most expensive and frankly riskiest 00:15:52.779 --> 00:15:56.009 investments in their history. The acquisition 00:15:56.009 --> 00:15:59.029 of Ballast Point Brewing of San Diego in December 00:15:59.029 --> 00:16:02.570 2015 really stands out as a stark strategic lesson. 00:16:02.789 --> 00:16:05.230 Because of the price tag. Because they bought 00:16:05.230 --> 00:16:08.490 it for an astronomical $1 billion. $1 billion 00:16:08.490 --> 00:16:12.879 for one craft brewery. Looking back... Was that 00:16:12.879 --> 00:16:15.519 valuation just wildly irresponsible, even at 00:16:15.519 --> 00:16:17.539 the peak of the craft beer bubble? Financially, 00:16:17.580 --> 00:16:20.259 yes. I mean, it was based on an extremely optimistic 00:16:20.259 --> 00:16:23.559 projection of unlimited rapid growth that just 00:16:23.559 --> 00:16:25.419 never materialized. So what was the thinking? 00:16:25.679 --> 00:16:28.019 It was essentially a desperation purchase to 00:16:28.019 --> 00:16:30.620 gain instant credibility in the highly fragmented 00:16:30.620 --> 00:16:33.500 premium priced craft sector. That billion dollar 00:16:33.500 --> 00:16:36.059 valuation was roughly 10 times Ballast Point's 00:16:36.059 --> 00:16:37.960 annual revenue at the time. So they thought they 00:16:37.960 --> 00:16:40.000 could just scale it up. Constellation believed 00:16:40.000 --> 00:16:41.879 they could leverage their massive distribution 00:16:41.879 --> 00:16:44.139 might to make Ballast Point a national brand 00:16:44.139 --> 00:16:46.659 overnight. But that growth never materialized. 00:16:46.700 --> 00:16:49.200 What happened? The craft beer market, it matured 00:16:49.200 --> 00:16:51.919 rapidly, competition intensified, and consumer 00:16:51.919 --> 00:16:54.340 tastes just splintered. Constellation realized 00:16:54.340 --> 00:16:57.179 they had vastly overpaid, and they were struggling 00:16:57.179 --> 00:17:01.179 to integrate this artisanal brand into a corporate 00:17:01.179 --> 00:17:03.399 structure designed for industrial -scale imports. 00:17:04.119 --> 00:17:06.200 So the key takeaway here is not just that the 00:17:06.200 --> 00:17:09.799 investment failed. No, many investments do. The 00:17:09.799 --> 00:17:12.079 key is that Constellation had the financial discipline 00:17:12.079 --> 00:17:15.900 to accept the massive loss, write down the goodwill, 00:17:15.900 --> 00:17:18.440 and just get out. And they did get out quickly. 00:17:19.079 --> 00:17:21.980 They sold Ballast Point to a tiny suburban Illinois 00:17:21.980 --> 00:17:24.720 company, Kings and Convicts Brewery, just four 00:17:24.720 --> 00:17:27.420 years later in December 2019. It's a textbook 00:17:27.420 --> 00:17:29.539 example of admitting a billion -dollar mistake 00:17:29.539 --> 00:17:32.240 and executing a strategic correction. Meanwhile, 00:17:32.480 --> 00:17:34.799 they were making smarter, more targeted moves 00:17:34.799 --> 00:17:36.920 in high -end spirits, where the margins are often 00:17:36.920 --> 00:17:39.160 more consistent. Right, and more insulated from 00:17:39.160 --> 00:17:41.630 those mass market trends. their successful spirits 00:17:41.630 --> 00:17:45.089 plays during this period? In 2016, they acquired 00:17:45.089 --> 00:17:47.609 High West Distillery in Park City, Utah for about 00:17:47.609 --> 00:17:50.910 $160 million. High West is known for high quality 00:17:50.910 --> 00:17:53.450 whiskey and bourbon. Exactly. Hitting that key 00:17:53.450 --> 00:17:56.069 premium profile. Yeah. They followed that up 00:17:56.069 --> 00:17:59.450 in 2019 with a majority stake in Nelson's Greenbrier 00:17:59.450 --> 00:18:02.829 Distillery in Nashville, Tennessee, further solidifying 00:18:02.829 --> 00:18:05.210 their position in American whiskey. We also see 00:18:05.210 --> 00:18:07.769 the continuation of that buy and sell volatility 00:18:07.769 --> 00:18:09.910 in the craft beer and new wine space, though. 00:18:10.069 --> 00:18:13.269 Precisely. They bought Funky Buddha Brewery in 00:18:13.269 --> 00:18:17.029 Florida in 2017, a well -regarded regional craft 00:18:17.029 --> 00:18:19.369 brewer, only to sell it back to its founders 00:18:19.369 --> 00:18:22.650 in 2023. And the Gary Vaynerchuk wine brand. 00:18:22.930 --> 00:18:25.690 Yeah, they acquired Empathy Wines in 2020, co 00:18:25.690 --> 00:18:27.950 -founded by Gary Vaynerchuk, trying to tap into 00:18:27.950 --> 00:18:30.250 that direct -to -consumer wine market. And they 00:18:30.250 --> 00:18:32.750 bought Copper and King's American Brandy in 2020. 00:18:33.009 --> 00:18:35.009 So the strategy remains the same. It's clear. 00:18:35.509 --> 00:18:38.349 Relentless pursuit of niche, high growth categories, 00:18:38.650 --> 00:18:41.269 but with a very accelerated timeline for success. 00:18:41.529 --> 00:18:43.690 If a category doesn't perform quickly, they cut 00:18:43.690 --> 00:18:45.710 their losses and move on. Which brings us to 00:18:45.710 --> 00:18:48.230 what is perhaps the most audacious, highest stakes 00:18:48.230 --> 00:18:51.109 bet in Constellation's entire history. The beer 00:18:51.109 --> 00:18:53.970 division was a cash engine, but every growth 00:18:53.970 --> 00:18:56.920 company needs the next frontier. They found it 00:18:56.920 --> 00:18:59.880 in 2017 when they decided to step completely 00:18:59.880 --> 00:19:02.740 outside of alcohol and into a market that just 00:19:02.740 --> 00:19:05.720 stunned the entire beverage industry. Legal cannabis. 00:19:05.920 --> 00:19:09.400 Legal cannabis. This was revolutionary. Constellation 00:19:09.400 --> 00:19:12.819 Brands became the undisputed pioneer, signaling 00:19:12.819 --> 00:19:15.720 to the entire Fortune 500 that cannabis was a 00:19:15.720 --> 00:19:18.759 legitimate future market. The initial entry point 00:19:18.759 --> 00:19:22.140 was in October 2017. Walk us through that initial 00:19:22.140 --> 00:19:25.450 massive leap. Constellation agreed to pay approximately 00:19:25.450 --> 00:19:30.009 C $245 million, that's about $191 million U .S. 00:19:30.009 --> 00:19:33.450 at the time, for a 9 .9 % minority stake in Canopy 00:19:33.450 --> 00:19:35.549 Growth Corporation. And Canopy Growth was what 00:19:35.549 --> 00:19:37.769 exactly? A Canadian seller of medicinal marijuana 00:19:37.769 --> 00:19:39.789 products. It was a toe dip, but a very, very 00:19:39.789 --> 00:19:42.789 expensive toe dip, into a nascent, highly regulated 00:19:42.789 --> 00:19:45.329 market. And why was that move such a corporate 00:19:45.329 --> 00:19:47.670 landmark? Constellation Brands became the very 00:19:47.670 --> 00:19:50.450 first Fortune 500 company and crucially the first 00:19:50.450 --> 00:19:53.089 major alcoholic beverage maker globally to take 00:19:53.089 --> 00:19:54.829 a stake in a marijuana business. The significance 00:19:54.829 --> 00:19:57.170 of that can't be overstated. It was immense. 00:19:57.470 --> 00:20:00.130 It signaled confidence in the eventual federal 00:20:00.130 --> 00:20:03.490 legalization of cannabis in North America. And 00:20:03.490 --> 00:20:06.230 it hinted at a future where alcohol and cannabis 00:20:06.230 --> 00:20:09.670 products might share distribution channels or 00:20:09.670 --> 00:20:12.029 even integrate into new beverages. But they didn't 00:20:12.029 --> 00:20:14.789 remain a minority investor for long. The following 00:20:14.789 --> 00:20:17.309 year, they doubled down in a way that just defied 00:20:17.309 --> 00:20:19.549 market logic at the time. They went from toe 00:20:19.549 --> 00:20:23.859 dip to total immersion. In August 2018, Constellation 00:20:23.859 --> 00:20:26.039 announced an additional astronomical investment 00:20:26.039 --> 00:20:30.420 of U .S. $4 billion in canopy growth. $4 billion? 00:20:30.619 --> 00:20:33.299 Yeah. This huge infusion of capital increased 00:20:33.299 --> 00:20:36.640 Constellation's total share to 38%. And the timing 00:20:36.640 --> 00:20:39.420 was strategic, coming just before the legalization 00:20:39.420 --> 00:20:41.960 of recreational cannabis in Canada that October. 00:20:42.200 --> 00:20:45.099 $4 billion. That's a capital commitment you typically 00:20:45.099 --> 00:20:47.319 reserve for building, I don't know, multi -billion 00:20:47.319 --> 00:20:49.980 dollar manufacturing plants, not investing in 00:20:49.980 --> 00:20:52.309 a company in a market. It's still federally illegal 00:20:52.309 --> 00:20:54.430 in the United States. Right. What was the rationale 00:20:54.430 --> 00:20:57.430 for such a gigantic bet? The rationale was first 00:20:57.430 --> 00:21:00.369 mover advantage and leveraging expertise. Cannabis 00:21:00.369 --> 00:21:02.210 growth leadership said the funds would be used 00:21:02.210 --> 00:21:05.109 as rocket fuel for international expansion and 00:21:05.109 --> 00:21:08.069 future marketing, explicitly focusing on high 00:21:08.069 --> 00:21:11.309 margin consumable product formats. Like drinks. 00:21:11.470 --> 00:21:13.869 Like cannabis infused beverages and sleep aids. 00:21:15.309 --> 00:21:28.940 Constellation's thinking was clear. They wanted 00:21:28.940 --> 00:21:31.299 to become the Modelo of marijuana. That was the 00:21:31.299 --> 00:21:35.259 dream. But when you make a $4 billion bet... 00:21:35.500 --> 00:21:37.920 On a market that is fundamentally volatile and 00:21:37.920 --> 00:21:40.880 constrained by regulatory red tape, how quickly 00:21:40.880 --> 00:21:42.900 did the reality of the market clash with that 00:21:42.900 --> 00:21:44.859 dream? Almost immediately. I mean, while the 00:21:44.859 --> 00:21:47.059 Canadian market legalized recreational use, the 00:21:47.059 --> 00:21:49.140 rollout was slow, it was fragmented, and the 00:21:49.140 --> 00:21:51.240 black market proved incredibly resilient. And 00:21:51.240 --> 00:21:53.720 the U .S. market? Crucially, the U .S. market, 00:21:53.900 --> 00:21:56.420 which Constellation needed for that massive $4 00:21:56.420 --> 00:21:59.519 billion investment to pay off, remained federally 00:21:59.519 --> 00:22:02.759 illegal. That severely limited Canopy's ability 00:22:02.759 --> 00:22:06.059 to operate or even list on major U .S. exchanges 00:22:06.059 --> 00:22:09.140 without regulatory friction. And the stock price 00:22:09.140 --> 00:22:12.039 of Canopy just collapsed as the initial legalization 00:22:12.039 --> 00:22:15.200 bubble burst. So this led to massive impairments 00:22:15.200 --> 00:22:18.160 on Constellation's balance sheet, a $4 billion 00:22:18.160 --> 00:22:21.259 bet that became a serious financial drag. Exactly. 00:22:21.920 --> 00:22:24.140 Constellation had to repeatedly write down the 00:22:24.140 --> 00:22:26.220 value of its investment, taking substantial hits 00:22:26.220 --> 00:22:28.839 to its earnings. The lesson here is that even 00:22:28.839 --> 00:22:31.299 with unparalleled distribution and branding power, 00:22:31.599 --> 00:22:34.200 you cannot beat regulatory friction and market 00:22:34.200 --> 00:22:36.720 volatility in a frontier industry. Right. That 00:22:36.720 --> 00:22:39.099 immense cash commitment acted like an anchor 00:22:39.099 --> 00:22:41.140 during a period when their core alcohol market 00:22:41.140 --> 00:22:43.299 remained immensely profitable. And this leads 00:22:43.299 --> 00:22:45.440 us directly to the strategic correction. Despite 00:22:45.440 --> 00:22:48.059 that massive initial enthusiasm, Constellation 00:22:48.059 --> 00:22:50.160 Brands has been steadily stealing back its cannabis 00:22:50.160 --> 00:22:52.750 involvement since 2015. The retreat is clinical. 00:22:53.009 --> 00:22:55.750 They began explicitly signaling a move back from 00:22:55.750 --> 00:22:57.769 the cannabis -infused drinks market, which had 00:22:57.769 --> 00:22:59.970 been the initial target. They cut their losses. 00:23:00.289 --> 00:23:01.950 They've reduced their stake in canopy growth 00:23:01.950 --> 00:23:04.490 through various financial mechanisms and have 00:23:04.490 --> 00:23:06.650 publicly signaled that they might withdraw completely. 00:23:07.049 --> 00:23:09.750 It perfectly mirrors the ballast point situation. 00:23:10.170 --> 00:23:12.890 How so? Constellation is willing to take enormous 00:23:12.890 --> 00:23:15.990 risks, but they are equally willing to execute 00:23:15.990 --> 00:23:20.930 a swift... painful multibillion dollar correction 00:23:20.930 --> 00:23:24.730 if the targeted returns fail to materialize on 00:23:24.730 --> 00:23:27.450 their aggressive timetable. The story of Constellation 00:23:27.450 --> 00:23:30.349 Brands is one of spectacular, almost reckless 00:23:30.349 --> 00:23:33.049 growth, but it's underpinned by this remarkably 00:23:33.049 --> 00:23:35.750 disciplined strategy of premiumization. Right. 00:23:35.869 --> 00:23:38.309 But when a company operates on this multinational 00:23:38.309 --> 00:23:40.930 scale, manufacturing billions of bottles and 00:23:40.930 --> 00:23:43.930 cans for massive market friction with local communities, 00:23:44.130 --> 00:23:47.309 competitors and regulators is. absolutely inevitable. 00:23:47.509 --> 00:23:49.390 It's guaranteed. This brings us to section four, 00:23:49.569 --> 00:23:52.170 the operational footprint and the recurring pattern 00:23:52.170 --> 00:23:54.750 of legal and ethical challenges. The core engine 00:23:54.750 --> 00:23:57.170 of Constellation's revenue, the beer division, 00:23:57.390 --> 00:24:01.269 it dictates a highly specialized and somewhat 00:24:01.269 --> 00:24:04.720 unique operational structure. To satisfy the 00:24:04.720 --> 00:24:07.819 demands of that 2013 perpetual license, they 00:24:07.819 --> 00:24:10.779 have to produce enormous volumes of Corona and 00:24:10.779 --> 00:24:13.220 Modelo for the U .S. consumer. And they have 00:24:13.220 --> 00:24:15.180 to do it in Mexico. They must do it in Mexico. 00:24:15.339 --> 00:24:17.640 So what does that massive Mexican manufacturing 00:24:17.640 --> 00:24:20.400 network look like today? They currently operate 00:24:20.400 --> 00:24:23.940 two massive breweries. One is in Nava, Coahuila, 00:24:24.039 --> 00:24:26.299 which is near the Texas border. And the other 00:24:26.299 --> 00:24:28.920 is in Ciudad Obregón, Sonora. Near the Pacific 00:24:28.920 --> 00:24:31.660 coast. And to ensure that supply chain runs smoothly, 00:24:31.839 --> 00:24:34.579 they've pursued vertical integration. Aggressively. 00:24:34.700 --> 00:24:37.720 In 2014, they finalized a joint venture with 00:24:37.720 --> 00:24:40.720 Owens, Illinois, and acquired AB InBev's glass 00:24:40.720 --> 00:24:42.900 production plant, which is right next to the 00:24:42.900 --> 00:24:44.900 Nava Brewery. Wait, they actually own a glass 00:24:44.900 --> 00:24:47.960 factory? Yes. That's how critical it is to control 00:24:47.960 --> 00:24:49.880 the supply chain when you're moving billions 00:24:49.880 --> 00:24:52.279 of units. It makes sense. By owning the glass 00:24:52.279 --> 00:24:54.480 plant next to the brewery, they control costs. 00:24:55.049 --> 00:24:57.349 They ensure bottle quality and they minimize 00:24:57.349 --> 00:25:00.109 transportation delays. It's a logistical fortress 00:25:00.109 --> 00:25:02.150 designed to make sure the U .S. market never 00:25:02.150 --> 00:25:05.329 runs out of imported beer. However, this necessity 00:25:05.329 --> 00:25:07.910 of using Mexican natural resources, particularly 00:25:07.910 --> 00:25:11.670 water for mass production, led to intense community 00:25:11.670 --> 00:25:14.930 friction, which resulted in a multimillion dollar 00:25:14.930 --> 00:25:18.180 disaster in Baja, California. The Mexicali brewery 00:25:18.180 --> 00:25:20.579 controversy is a classic case study in global 00:25:20.579 --> 00:25:23.240 corporations, underestimating local environmental 00:25:23.240 --> 00:25:25.839 and political resistance. What was the plan there? 00:25:26.339 --> 00:25:28.180 Constellation planned to build a third major 00:25:28.180 --> 00:25:30.740 brewery in Mexicali, Baja, California. It was 00:25:30.740 --> 00:25:33.500 an investment worth over $1 .4 billion. However, 00:25:33.619 --> 00:25:36.019 that project was never finished. And this was 00:25:36.019 --> 00:25:38.339 due to massive civil unrest, wasn't it? Tell 00:25:38.339 --> 00:25:40.890 us about the water rates dispute. The dispute 00:25:40.890 --> 00:25:43.450 turned into a massive geopolitical and social 00:25:43.450 --> 00:25:45.970 flashpoint. The brewery was designed to consume 00:25:45.970 --> 00:25:48.230 vast amounts of water from the already highly 00:25:48.230 --> 00:25:50.670 stressed Colorado River system. And Mexicali 00:25:50.670 --> 00:25:54.750 is a desert. A hyper -arid region. Local populations, 00:25:54.990 --> 00:25:58.950 farmers, and activists argued vehemently that 00:25:58.950 --> 00:26:01.150 the water was essential for human consumption, 00:26:01.450 --> 00:26:05.180 local agriculture, and regional stability. It 00:26:05.180 --> 00:26:06.880 wasn't just a local issue either, because that 00:26:06.880 --> 00:26:10.279 water serves an entire coastal metropolitan area. 00:26:10.480 --> 00:26:12.400 Correct. The water sourced in that valley is 00:26:12.400 --> 00:26:14.900 critical. It supplies Mexicali, the surrounding 00:26:14.900 --> 00:26:17.339 agricultural valley, and it's piped over the 00:26:17.339 --> 00:26:20.700 mountains to coastal cities like Tijuana, Tecate, 00:26:20.859 --> 00:26:23.460 Rosarito, and parts of Ensenada. So the community 00:26:23.460 --> 00:26:26.799 felt that Constellation... They felt Constellation 00:26:26.799 --> 00:26:29.680 was prioritizing corporate profit. over basic 00:26:29.680 --> 00:26:33.019 human and environmental needs. The protests became 00:26:33.019 --> 00:26:35.779 so widespread and intense that the Mexican government 00:26:35.779 --> 00:26:37.859 was forced to intervene. What was the ultimate 00:26:37.859 --> 00:26:40.599 outcome of that community backlash? It was a 00:26:40.599 --> 00:26:42.980 shocking defeat for the corporate giant. The 00:26:42.980 --> 00:26:45.279 Mexican government held a public referendum and 00:26:45.279 --> 00:26:47.799 the community overwhelmingly voted no to the 00:26:47.799 --> 00:26:50.200 brewery project. Wow. Imagine being a Fortune 00:26:50.200 --> 00:26:53.019 500 company having a multi -million dollar state 00:26:53.019 --> 00:26:55.339 -of -the -art manufacturing plant already partially 00:26:55.339 --> 00:26:57.759 constructed. And having it halted. Alted entirely 00:26:57.759 --> 00:27:01.019 because you failed to properly calculate the 00:27:01.019 --> 00:27:03.900 geopolitical and environmental sensitivity of 00:27:03.900 --> 00:27:06.339 the single most crucial resource in a hyper -arid 00:27:06.339 --> 00:27:09.000 region. It was a failure of local due diligence 00:27:09.000 --> 00:27:11.500 at a global scale. And how did Constellation 00:27:11.500 --> 00:27:14.640 resolve the operational shortfall? They pivoted, 00:27:14.640 --> 00:27:16.759 again, demonstrating that corporate flexibility. 00:27:17.420 --> 00:27:19.700 Instead of trying to force the issue in Baja, 00:27:19.759 --> 00:27:22.220 California, they announced they would build their 00:27:22.220 --> 00:27:25.319 third brewery in Veracruz, Mexico. A region with 00:27:25.319 --> 00:27:28.779 more water. a region situated near a river, mitigating 00:27:28.779 --> 00:27:32.000 the acute local water scarcity concerns that 00:27:32.000 --> 00:27:34.839 plagued the Mexicali project. It was a very costly, 00:27:35.059 --> 00:27:37.960 humbling lesson. Moving beyond operational friction, 00:27:38.240 --> 00:27:40.440 let's look at the recurring pattern of legal 00:27:40.440 --> 00:27:42.420 and ethical headaches that come with managing 00:27:42.420 --> 00:27:45.160 global brands. Let's start with a throwback to 00:27:45.160 --> 00:27:49.059 1991, predating the constellation name, the infamous 00:27:49.059 --> 00:27:52.099 Cisco wine controversy. The Cisco case is highly 00:27:52.099 --> 00:27:54.460 illustrative of the ethical challenges of marketing 00:27:54.460 --> 00:27:57.920 alcohol. In 1991, the company, then still Canadego 00:27:57.920 --> 00:28:00.259 Industries, was forced to reach a consent agreement 00:28:00.259 --> 00:28:02.500 with the Federal Trade Commission. The FTC. The 00:28:02.500 --> 00:28:04.859 FTC alleged that the packaging and marketing 00:28:04.859 --> 00:28:09.099 of Cisco wine were deceptively similar to popular 00:28:09.099 --> 00:28:12.119 low -alcohol wine coolers. Which were huge at 00:28:12.119 --> 00:28:14.420 the time. Very popular. But the crucial difference 00:28:14.420 --> 00:28:16.980 was the alcohol content, right? Exactly. Wine 00:28:16.980 --> 00:28:19.900 coolers were typically low ABV. Cisco, however, 00:28:20.039 --> 00:28:22.359 was a fortified wine with a much, much higher 00:28:22.359 --> 00:28:25.359 alcohol content, upwards of 20 % closer to port 00:28:25.359 --> 00:28:27.750 or sherry. So the concern was that consumers 00:28:27.750 --> 00:28:29.869 would mistake it for something else. The concern 00:28:29.869 --> 00:28:32.230 was that younger consumers or those unfamiliar 00:28:32.230 --> 00:28:34.650 with the product would mistake this colorful, 00:28:34.829 --> 00:28:38.190 sweet, deceptively packaged product for a lower 00:28:38.190 --> 00:28:41.670 alcohol beverage, leading to unintended and dangerous 00:28:41.670 --> 00:28:44.470 intoxication. So the FTC made them change everything. 00:28:44.710 --> 00:28:47.430 The agreement mandated a complete change in packaging 00:28:47.430 --> 00:28:49.769 and marketing to clearly delineate the product's 00:28:49.769 --> 00:28:51.630 strength. Okay, then there's a controversy that 00:28:51.630 --> 00:28:53.329 hits right at the heart of the prestige wine 00:28:53.329 --> 00:28:57.390 world. The fake Pinot Noir scandal of 2010. This 00:28:57.390 --> 00:28:59.849 was not a marketing issue. This was about authenticity 00:28:59.849 --> 00:29:02.549 and outright fraud. This was a major international 00:29:02.549 --> 00:29:05.829 scandal centered in France. A French court convicted 00:29:05.829 --> 00:29:08.769 Constellation Brands, along with 11 other wine 00:29:08.769 --> 00:29:11.230 traders and producers, for participating in a 00:29:11.230 --> 00:29:14.109 massive fraud scheme that lasted between 2006 00:29:14.109 --> 00:29:17.829 and 2008. And what was the conviction for? They 00:29:17.829 --> 00:29:20.890 were found guilty of selling fake... Pinot Noir 00:29:20.890 --> 00:29:24.309 wine to U .S. buyers. What exactly was the fraud? 00:29:24.390 --> 00:29:26.150 What were they selling instead of Pinot Noir? 00:29:26.190 --> 00:29:29.509 It was a sophisticated scheme. It involved substituting 00:29:29.509 --> 00:29:31.710 cheaper, lower quality grapes, often Merlot, 00:29:31.869 --> 00:29:34.789 for the significantly more expensive Pinot Noir 00:29:34.789 --> 00:29:37.250 grape, and then labeling the wine as authentic 00:29:37.250 --> 00:29:40.490 Pinot Noir. Just to boost the margins. Drastically. 00:29:41.119 --> 00:29:43.740 Since Pinot Noir is a prestigious grape, this 00:29:43.740 --> 00:29:46.099 substitution just massively increased the fraudster's 00:29:46.099 --> 00:29:48.740 margins. And Constellation was importing these 00:29:48.740 --> 00:29:50.420 fraudulent products and selling them into the 00:29:50.420 --> 00:29:52.619 U .S. market. So Constellation was convicted 00:29:52.619 --> 00:29:56.160 overseas. What were the repercussions domestically 00:29:56.160 --> 00:29:58.400 for being involved in this kind of global fraud? 00:29:58.720 --> 00:30:01.140 Well, Constellation later faced and settled a 00:30:01.140 --> 00:30:03.640 major U .S. class action lawsuit related to this 00:30:03.640 --> 00:30:06.279 and the key legal argument against them, even 00:30:06.279 --> 00:30:08.140 though they weren't the ones doing the substituting. 00:30:08.140 --> 00:30:10.799 Right. was that as a massive, sophisticated global 00:30:10.799 --> 00:30:13.759 distributor, they should have known that the 00:30:13.759 --> 00:30:16.259 wine they were purchasing and reselling was fake. 00:30:16.880 --> 00:30:19.460 Based on what? The price. Based on the quantity, 00:30:19.539 --> 00:30:21.180 the price points, the logistics involved, it 00:30:21.180 --> 00:30:23.359 underscored their due diligence responsibility 00:30:23.359 --> 00:30:26.900 or their lack of it as the gatekeeper for these 00:30:26.900 --> 00:30:29.700 products entering the American market. And finally, 00:30:29.839 --> 00:30:32.279 let's revisit the core of their business, the 00:30:32.279 --> 00:30:34.880 beer division, where that dynamic created by 00:30:34.880 --> 00:30:37.380 the perpetual license generates constant legal 00:30:37.380 --> 00:30:40.720 challenges. In 2021, they were sued by their 00:30:40.720 --> 00:30:43.119 former partner and current global brand owner, 00:30:43.319 --> 00:30:46.799 AB InBev. This lawsuit perfectly illustrates 00:30:46.799 --> 00:30:49.299 the complexity of that antitrust mandated split. 00:30:50.000 --> 00:30:53.720 AB InBev, the global owner of Modelo, sued Constellation 00:30:53.720 --> 00:30:56.259 Brands over the U .S. launch of two new Modelo 00:30:56.259 --> 00:30:58.579 -branded beers. And the suit wasn't about selling 00:30:58.579 --> 00:31:00.980 too much beer. No, it was about Constellation's 00:31:00.980 --> 00:31:02.839 right to innovate with the brands they control 00:31:02.839 --> 00:31:05.519 exclusively in the U .S. What were the specific 00:31:05.519 --> 00:31:08.299 legal arguments over these new brand extensions? 00:31:08.900 --> 00:31:11.160 The arguments hinged on Constellation pushing 00:31:11.160 --> 00:31:13.619 the boundaries of the license agreement, specifically 00:31:13.619 --> 00:31:16.000 regarding the Mexican identity of the brands. 00:31:16.819 --> 00:31:20.819 There were two main points. Okay. First, AB InBev 00:31:20.819 --> 00:31:23.180 argued that one beer illegally used the term 00:31:23.180 --> 00:31:25.579 tequila to describe the barrels where it was 00:31:25.579 --> 00:31:29.059 aged. Second, and this is the more philosophically 00:31:29.059 --> 00:31:31.819 telling challenge, was their argument that Constellation 00:31:31.819 --> 00:31:34.700 was inappropriately using the term bourbon to 00:31:34.700 --> 00:31:37.059 describe the barrels used for the second extension. 00:31:37.460 --> 00:31:40.039 Why does bourbon specifically matter in this 00:31:40.039 --> 00:31:43.000 context? The rationale was that bourbon has absolutely 00:31:43.000 --> 00:31:46.559 zero connection to Mexico. It's an American product 00:31:46.559 --> 00:31:49.000 with specific geographic and production requirements. 00:31:49.259 --> 00:31:51.759 So AB InBev's argument was? Their argument was 00:31:51.759 --> 00:31:54.440 that by launching a bourbon barrel -aged Modelo, 00:31:54.619 --> 00:31:57.019 Constellation was stretching the definition of 00:31:57.019 --> 00:31:59.559 their license and fundamentally violating the 00:31:59.559 --> 00:32:02.299 brand's core Mexican identity. They said it was 00:32:02.299 --> 00:32:04.759 confusing consumers and damaging the global brand 00:32:04.759 --> 00:32:07.650 integrity. It's a clear case of two giants fighting 00:32:07.650 --> 00:32:09.869 over the limits of perpetual ownership and brand 00:32:09.869 --> 00:32:12.950 evolution. That legal friction truly underscores 00:32:12.950 --> 00:32:15.710 the incredible complexity of running a fractured 00:32:15.710 --> 00:32:18.630 global enterprise that is constantly pushing 00:32:18.630 --> 00:32:21.150 the boundaries of what's acceptable. It's a good 00:32:21.150 --> 00:32:23.190 moment to zoom back out and synthesize our analysis. 00:32:24.640 --> 00:32:27.279 the remarkable trajectory of Constellation Brands. 00:32:27.279 --> 00:32:30.119 Right. I mean, we started in 1945 looking at 00:32:30.119 --> 00:32:32.880 a local bulk wine cellar with a minimal $150 00:32:32.880 --> 00:32:35.980 ,000 in sales. Right. And we tracked its transformation. 00:32:37.090 --> 00:32:40.630 Through decades of aggressive M &A and the clinical 00:32:40.630 --> 00:32:43.170 discipline shedding of low margin assets, it 00:32:43.170 --> 00:32:45.789 became this diversified multibillion dollar company 00:32:45.789 --> 00:32:48.170 that just dominates the U .S. beer import market 00:32:48.170 --> 00:32:51.230 and commands a robust portfolio of premium wine 00:32:51.230 --> 00:32:53.470 and spirits. The history of this company is really 00:32:53.470 --> 00:32:56.170 defined by its strategic audacity. Its willingness 00:32:56.170 --> 00:32:58.470 to take these enormous, bold, high stakes bets 00:32:58.470 --> 00:33:00.650 on the future, but coupled with the executive 00:33:00.650 --> 00:33:03.549 strength to execute swift strategic corrections 00:33:03.549 --> 00:33:06.539 when those bets. don't materialize. Think about 00:33:06.539 --> 00:33:08.440 the two largest corrective measures we detailed. 00:33:08.599 --> 00:33:11.160 That initial $1 billion purchase of Ballast Point, 00:33:11.359 --> 00:33:13.420 which was sold off just four years later to cut 00:33:13.420 --> 00:33:15.980 the loss. A huge write -down. And the staggering 00:33:15.980 --> 00:33:19.160 $4 billion investment in Canopy Growth, which 00:33:19.160 --> 00:33:21.759 is now being systematically scaled back. These 00:33:21.759 --> 00:33:24.480 moves demonstrate a remarkable financial calculus. 00:33:24.819 --> 00:33:26.740 What do you mean by that? Constellation is willing 00:33:26.740 --> 00:33:29.000 to pay very high tuition for market intelligence, 00:33:29.220 --> 00:33:31.099 but they refuse to pour more good money after 00:33:31.099 --> 00:33:34.480 bad. That's the definition of rapid, opportunistic 00:33:34.480 --> 00:33:37.160 and sometimes controversial growth. And their 00:33:37.160 --> 00:33:39.599 operational failures, particularly the Mexicali 00:33:39.599 --> 00:33:42.619 water dispute, they highlight a universal business 00:33:42.619 --> 00:33:46.599 lesson. Global scale always brings hyper -local 00:33:46.599 --> 00:33:49.799 impact and scrutiny. A company can successfully 00:33:49.799 --> 00:33:53.400 manage a $27 billion balance sheet, yet still 00:33:53.400 --> 00:33:56.240 fail spectacularly because it misunderstood the 00:33:56.240 --> 00:33:58.740 local necessity of a single resource in a remote 00:33:58.740 --> 00:34:01.140 region. That tension between global ambition 00:34:01.140 --> 00:34:03.910 and local reality is constant. But let's end 00:34:03.910 --> 00:34:05.710 with a final provocative thought, tying back 00:34:05.710 --> 00:34:07.789 to the engine that powers this entire enterprise, 00:34:08.090 --> 00:34:11.130 that 2013 beer deal. The exclusive perpetual 00:34:11.130 --> 00:34:14.789 license for Corona and Modelo in the U .S. Precisely. 00:34:15.730 --> 00:34:18.369 Constellation Brands holds this exclusive perpetual 00:34:18.369 --> 00:34:21.030 license for the world's most profitable beer 00:34:21.030 --> 00:34:24.110 market, the U .S., while the original Grupo Modelo 00:34:24.519 --> 00:34:27.440 owned by AB InBev, still serves every other country 00:34:27.440 --> 00:34:30.000 on Earth. It's such a strange arrangement. This 00:34:30.000 --> 00:34:32.039 arrangement creates a fascinating structural 00:34:32.039 --> 00:34:35.059 dilemma for these global brands. What does it 00:34:35.059 --> 00:34:37.340 mean for a brand's long -term integrity and identity 00:34:37.340 --> 00:34:40.019 when its biggest market is essentially handled 00:34:40.019 --> 00:34:43.360 by a completely independent, potentially competing 00:34:43.360 --> 00:34:46.090 entity? An entity that has the legal freedom 00:34:46.090 --> 00:34:49.150 to launch products like bourbon barrel aged Modelo 00:34:49.150 --> 00:34:51.769 that the global owner vehemently objects to. 00:34:51.929 --> 00:34:54.510 Exactly. It raises these fundamental questions 00:34:54.510 --> 00:34:57.550 about who truly controls a global brand's destiny. 00:34:57.849 --> 00:35:00.730 Is it the traditional owner or is it the licensee 00:35:00.730 --> 00:35:02.670 who controls the most profitable market? That 00:35:02.670 --> 00:35:04.769 strategic friction where billions of dollars 00:35:04.769 --> 00:35:07.230 are at stake is an ongoing corporate and legal 00:35:07.230 --> 00:35:09.230 battle. That's definitely something for you to 00:35:09.230 --> 00:35:11.369 mull over the next time you reach for a six -pack 00:35:11.369 --> 00:35:14.590 produced by this complex corporate giant. An 00:35:14.590 --> 00:35:16.550 excellent note to end on. Thank you for joining 00:35:16.550 --> 00:35:18.610 us for this deep dive into the anatomy of an 00:35:18.610 --> 00:35:20.989 American alcohol giant. We'll catch you next 00:35:20.989 --> 00:35:22.590 time for more Essential Insights.