Constellation Plunges as Mexico Trade War Threatens Modelo

(Bloomberg) -- Modelo and Corona are now in the trade war's cross hairs, and that's bad news for Constellation Brands Inc.

The alcohol giant's shares plunged on Friday after U.S. President Donald Trump threatened to put tariffs of as much of 25% on goods coming across the border from Mexico. That would include the beer and tequila brands produced by Constellation, which has gotten a boost in recent years from the rising popularity of Modelo in the U.S.

Constellation generates about two-thirds of its revenue from beer and produces the “vast majority” of it in Mexico, according to Ken Shea, an analyst at Bloomberg Intelligence. That puts the company at risk as Trump threatens to escalate a trade war tied to concerns over illegal immigration. It also sells the tequila brand Casa Noble.

Constellation could manage a proposed 5% tariff set to go into effect June 10, but a potential hike to 25% “poses a material risk to sales and earnings,” Shea said. That would likely force the company to raise prices on its beer, a move that could potentially push price-sensitive beer drinkers to other brands in the competitive industry, he said.

“It becomes much more problematic,” Shea said. “In this environment, I don't think the market is going to accept big price increases.”

Constellation's shares dropped as much as 8.6% to $171.27, the largest intraday drop in almost five months.

The company didn't respond to a request for comment on the tariff threat.

Constellation, mostly known as the producer of Modelo and Corona, has gained attention in recent years with a high-profile investment in Canopy Growth Corp., the Canadian company that is the world's most valuable marijuana firm.

In addition to its Mexican beer brands, Constellation also sells wine and booze. In April, the company announced plans to shed roughly 30 wine and spirits brands, most of which price below $11, to E. & J. Gallo for about $1.7 billion as part of its bid to focus on its more premium products.

Once that deal closes, beer will account for more than 70 percent of the company's net sales, increasing the potential impact of higher tariffs, Shea said.

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Lisa Wolfson, Jonathan Roeder

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