Having blazed a trail in the world drinks market for some years, Constellation Brands suffered something of a reversal in its last fiscal year, recording a net loss of US$610. In this month's two-part just-drinks interview, CEO Rob Sands tells Olly Wehring why the group is untroubled by last year's result and, in spite of some worrying economic and market trends, remains upbeat about the future.

With a somewhat swashbuckling reputation within the drinks industry, driven by its healthy history of acquisition in recent years, Constellation Brands appeared earlier this year to have come unstuck. For the year to February, the company saw a net profit of US$321m in fiscal 2006/7 reverse to become a net loss of $610m.

While some observers may have been fearing that the Constellation bubble had burst, the US wine and spirits giant appears to have taken last year's hit in its stride, at least if the demeanour of CEO Rob Sands is anything to go by.

To begin with, Sands does not see last year's performance in those terms. "I wouldn't call it a big hit," he says. "It was an accounting charge, a non-cash, non-recurring charge that basically has no impact at all on Constellation in terms of either its historical or future performance.

"It was related to the fact that our Australia business, as you may know, has suffered some significant margin compression, as a result of a number of factors relating to the surplus, to the UK duty situation and to currency. Under accounting rules, which are very specific and definitive when it comes to goodwill, we had to take that non-cash, non-recurring charge."

So Australia would seem like a good place to begin. In spite of what developed into something of a perfect storm scenario over the last two to three years - first a glut, then a drought - Sands is upbeat about the current situation down under.  "I think that the situation is definitely improving," he says. "The wine surplus is definitely turning the corner, and potentially will result in a shortage as a result of the last two relatively low harvests - they've both been about 30% below what would be a normal harvest."

Sands believes that the surplus of bulk wine has finally made its way through the system. "Now, there isn't very much bulk wine in the marketplace - a lot of bulk wine created a lot of downward pressure on pricing. That bulk wine has largely dried up, so the pressure on pricing is not there," he says. "Most of the major companies have taken pricing, which is positive for the product. As a consequence, on a value basis, the Australian wine business is not doing too badly."
In the UK - the largest market for Constellation's Australian wines - the company, like all other alcoholic drinks companies, was slapped with a large duty increase earlier this year. Sands describes this tax hike as "not a good thing for the industry, not a good thing for the consumer". He adds: "We've had no alternative but to pass that duty increase on. As a consequence of that, hopefully we won't see any more margin compression."

Constellation Brands CEO Rob Sands

With Constellation's reputation for value-driven growth, there is therefore the very real possibility that things could get worse for the company in the UK, with the duty rise coinciding with a broad concern in the country over the current economic climate. Sands disagrees: "We do see some pretty good growth in various segments in the UK market," he says. "The wine industry in general in the UK remains fairly strong, with some pretty good trading-up trends as well. These have actually accelerated over the shorter term. The segments above the GBP3.99-GBP4.49 price point, up in the GBP4.99-GBP5.99 price points, are growing much more rapidly than they have in the past. We're not particularly pessimistic about the UK market, because consumption for wine remains pretty strong, and we're the market leader by a factor of around three-to-one."
However, where Sands does see change coming in the UK is in what he calls "the round-pound pricing" area. "Moving price points from GBP.49 or GBP.99 to, say, GBP.67 or GBP.78 is going to be a positive thing for the industry in the end," he says.
As previously touched upon, the 'credit crunch' in the US is making its presence felt in many other countries. Despite the risk of consumers tightening their belts - at the possible expense of drinks companies - Sands remains confident that alcohol is not the first item removed from shopping lists.

"The economic downturn is primarily driven by the US potentially moving into recession," he says. "Historically, in the US, the beverage alcohol business has been, largely, not counter-cyclical, but non-cyclical. People don't drink less in a recessionary environment."

Where changes can be expected, Sands feels, is in a switch of location for consumption. "What we tend to see is maybe some venue shift, where people switch from on-premise to off-premise consumption," Sands says. "But we really don't see much of a volumetric hit in that regard. Although there's talk of recession, in terms of our company - although we're certainly cautious that it could have a potential impact - historically it has not particularly affected our company and our products."

Sands is equally dismissive of any suggestion that the credit crunch could put pressure on, or even curb, Constellation's ability to make acquisitions going forward. For a company that has to a degree been defined by its acquisitive zeal, this is clearly an important consideration.

The second part of this interview, in which Robert Sands discusses the company's acquisition strategy, will be published next Tuesday.