When Donald Trump won the election, Constellation Brands’ CEO Rob Sands admittedly prepared for war. No beers were cracked open that winter at the company’s Victor NY headquarters.
Serving Uncertain Cerveza
Between election day and Trump’s inauguration, Constellation’s shares plummeted by almost 15% , even as the rest of the market continued to soar with the “Trump Bump”. As the third largest American beer producer and the parent company of an iconic portfolio of Mexican brands (including Corona, Modelo, and Pacifico), investors were clearly troubled by global supply chain risk given the administration’s heightened rhetoric around protectionist trade policies targeted at Mexican imports. Despite Constellation’s Mexican beer sales growing nearly 16% from 2015 , representing an 8% market share in the U.S. , these new uncertainties demanded an immediate response from the management team.
Specifically, House Republicans looked to eliminate tax deductions on imports while exempting exports in its “border-adjusted” tax proposal. It sought to prevent American companies from deducting costs incurred abroad against corporate U.S. taxes. Additionally, Trump touted the idea of imposing a 20% “border tax” on Mexican imports to fund his wall-building initiative. Constellation’s ability to continue supplying its popular Mexican beers to American consumers at its current prices was severely jeopardized.
A Hops across the Border?
Constellation believes that the authenticity of its beers and their popularity with consumers is inextricable to its Mexican origins, steeped in decades of Mexican brewing tradition . Sands outlined potential steps that the company would consider in order to keep prices in check while maintaining production in Mexico. Currently, 40% of the cost of producing the company’s Mexican beers comes from U.S.-sourced ingredients and freight services . In the short term, Constellation could purchase a larger portion of its production materials from the U.S. to offset the proposal’s tax impact . For example, the company could acquire natural gas from the U.S. instead of Mexico to produce glass for its bottles to realize higher tax deductions. Similarly, packaging materials could be sourced in the U.S. and transported to Mexico.
As expected, the management is also stepping up its lobbying efforts on Capitol Hill. Constellation acquired its Mexican brand assets, implying that no labor was actually outsourced from the U.S. This technicality may afford the company with an exemption of sorts from the proposed legislation meant to target American companies who actively shifted their domestic manufacturing operations abroad . Additionally, the Republican plan to lower overall corporate taxes could work to offset the negative impacts of the border-adjustment tax .
However, the long-term effects of a protectionist trade policy are more difficult to combat for Constellation’s global supply chain. Rising tensions between the Trump administration and the Mexican government could devolve into a bilateral trade war, threatening to dissolve the long-standing NAFTA structure the food and beverage industry has grown accustomed to . If trade and tax policies increasingly favor American companies producing domestically, Constellation would need to reexamine the long-term business and brand viability of relocating its current Mexican beer operations stateside. Otherwise, raising prices on its imported beers would likely impact demand and competitiveness.
Don’t Put All Your Beers in One Cooler
I argue that Constellation Brands should further diversify its product line to hedge against future trade volatility. Mexican beer imports alone accounted for 70% of its profits . Other domestic brands, including Robert Mondavi wines and Svedka vodka represent significant growth opportunities. Constellation even has high hopes for cannabis-infused beverages, taking a 10% stake in a Canadian marijuana company . The recent acquisitions of San Diego-based Ballast Point Brewing and Florida-based Funky Buddha Brewery signal efforts to play in the craft beer segment and shift more production capacity domestically [8,9]. Constellation should additionally build capability to produce a portion of its Mexican brands in the U.S. preventatively. For example, Constellation can additionally seek out small-scale U.S. production facilities in close proximity to significant Mexican-American populations and strive to integrate into these communities to preserve credibility and authenticity as a producer of Mexican beers.
No Trouble Brewing?
Meanwhile, as NAFTA renegotiation talks carry into 2018 , Constellation Brands seems intent to simply wait it out. To their credit, shares rebounded to an all-time high in April 2017 after the quarterly sales and profits beat expectations . As the persistent threats of wall-building and tariff-slapping wanes, Constellation Brands has committed to invest $2.5 billion to expand its production facility in Nava, Mexico . But is it too soon to relax with a cold beer and a wedge of lime?
Questions remain unanswered on how the company will manage shocks to its global supply chain in the long-term. Would another round of protectionist momentum in Washington bring the brewing to a drip? Would a push to increase minimum wages and unionization in Mexico , as part of the NAFTA renegotiation agenda, wipe out Constellation’s labor cost efficiencies? Would consumers react negatively to a bottle of made-in-USA Corona?
(799 words, excluding subtitles and captions)
 Maloney, Vipal. 2017. “Constellation Brands Gearing Up For GOP Border Tax”. WSJ. https://www.wsj.com/articles/constellation-brands-gearing-up-for-gop-border-tax-1483659894.
 Carey, Nick. 2017. “What It Takes To Get A Corona From Mexico To A U.S. Heartland Bar”. U.S.. https://www.reuters.com/article/us-usa-trump-mexico-corona/what-it-takes-to-get-a-corona-from-mexico-to-a-u-s-heartland-bar-idUSKBN15B2BO.
 Trotter, Greg. 2017. “Mexican Beer Prices Won’t Go Up With Tax Reform, Corona Parent Company Says”. Chicagotribune.Com. http://www.chicagotribune.com/business/ct-constellation-brands-border-tax-0106-biz-20170105-story.html.
 “Why President Trump Could Make It A Lot More Expensive To Drink Booze”. 2017. Washington Post. https://www.washingtonpost.com/news/wonk/wp/2017/01/26/why-president-trump-could-make-it-a-lot-more-expensive-to-drink-booze/?hpid=hp_regional-hp-cards_rhp-card-business%3Ahomepage%2Fcard&utm_term=.3aba862a48ad.
 Noland, Marcus, Gary Clyde Hufbauer, Sherman Robinson, and Tyler Moran. 2016. Assessing Trade Agendas In The US Presidential Campaign. Ebook. Peterson Institute for International Economics.
 Townsend, More. 2017. “Trump’S Mexico Tax Would Hammer Firms In $580 Billion Market”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-01-27/trump-s-mexico-tax-would-hammer-companies-in-580-billion-market.
 George-Cosh, Jennifer. 2017. “Big Brewer Makes A Play For Marijuana Beverages”. WSJ. https://www.wsj.com/articles/big-brewer-makes-a-play-for-marijuana-beverages-1509300002.
 “Leading Craft Brewer Ballast Point Joins Constellation Brands | Constellation Brands”. 2017. Cbrands.Com. http://www.cbrands.com/news-media/leading-craft-brewer-ballast-point-joins-constellation-brands.
 “Craft Brewer Funky Buddha Joins Constellation Brands | Constellation Brands”. 2017. Cbrands.Com. http://www.cbrands.com/news-media/craft-brewer-funky-buddha-joins-constellation-brands-0.
 Pramuk, Jacob. 2017. “US Is Not Moving To Scrap NAFTA Despite ‘Challenges’ That Are Delaying Talks”. CNBC. https://www.cnbc.com/2017/10/17/nafta-renegotiation-talks-will-go-into-next-year.html.
 Monica, Paul. 2017. “Corona Owner Constellation Brands Hits All-Time High As Fears About A Trump Tax On Mexico Fade”. Cnnmoney. http://money.cnn.com/2017/04/06/investing/corona-constellation-brands-earnings-mexico/index.html.
 Althaus, Dudley. 2017. “Nafta Talks Target Stubbornly Low Mexican Wages”. WSJ. https://www.wsj.com/articles/nafta-talks-target-stubbornly-low-mexican-wages-1503999002.