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RBJ 75: Building the new Constellation Brands

Rochester Business Journal
July 26, 2013

One could not describe the last year at Constellation Brands Inc. as boring or uneventful.

The Victor-based wine, beer and spirits company completed a multibillion-dollar acquisition that makes it the third-largest beer producer in the United States and nearly doubles the company's annual sales.
 
Constellation in June completed the acquisition of Grupo Modelo S.A.B. de C.V.'s U.S. beer business from Anheuser-Busch InBev SA for some $4.75 billion.
 
The transaction included full ownership of Crown Imports LLC, which provided Constellation with complete, independent control of all aspects of the U.S. commercial business; a brewery in Nava, Mexico; exclusive perpetual brand license in the United States to import, market and sell Corona and the Modelo brands Crown sells; and the freedom to develop brand extensions and innovations for the U.S. market.
 
Along with nearly doubling the firm's sales, the deal is expected to enhance its earnings and free cash flow, diversify its profit stream and provide new avenues for growth, President and CEO Robert Sands says.
 
Constellation Brands, founded in 1945 by the late Marvin Sands as Canandaigua Industries Co., began as a small bulk-wine producer based in Canandaigua with eight employees.
 
Today, the business has roughly 5,500 employees and nearly $3.2 billion in annual sales. The business has more than 100 brands in its portfolio, sales in some 100 countries and operations in roughly 40 facilities.
 
Robert Sands-Marvin Sands' younger son-has been president and CEO since 2007 but has been with Constellation since 1986, when he joined the company as its general counsel.
 
"I always anticipated that I would be in the business," Sands said.
 
He recently sat down with Rochester Business Journal reporter Andrea Deckert to discuss the evolution of the business, his tenure as CEO and the company's plans for future growth. An edited transcript follows:
 
ROCHESTER BUSINESS JOURNAL: How does the Constellation Brands of today differ from what it was six years ago when you took over as CEO?
 
ROBERT SANDS: When I took over six years ago, I'd say the company was completely different than it is today. Number one, we were a very decentralized company, meaning we had different operations and companies all over the world. We were actually a much more international company at that time with a big employment base in the United Kingdom, a big employment base in Australia, Canada, New Zealand, the U.S., etc. And we operated the company much differently, as I said.
 
We operated different locations almost as entirely separate companies, and we operated the corporate headquarters more almost in a holding-company style than in an operating-company style. So flash forward to today. Back then, we had 10,000 employees; today, we have about half that number, interestingly enough, with the same amount and actually more revenues than we had then. We sold our operations in Australia and the U.K.; we sold all of our value business. So back then we were all about a strategy of being everything to everybody in terms of the products that we sold.
 
We wanted to cover every possible tier; we were in a whole bunch of different geographies. Today, we have sold off our non-premium business and are focused almost entirely on premium products. We don't operate in a decentralized fashion anymore. We centralized the company to operate much more as one company and as an operating company. And probably even more importantly, as we sit here right now, about 50 percent of revenues and profit come from beer; about 50 percent of revenues and profit come from wine and spirits, whereas going back when I took over as CEO, more like a quarter of profits were from our beer joint venture.
 
So today we are much more centralized, with 50 percent (of sales from) beer and 50 percent (of sales from) wine and spirits. The focus is premium products only, which doesn't mean expensive-which means in wine over $5 (a bottle) and in beer it's the high-end imported beer category.
 
RBJ: You took over as CEO, succeeding your brother, Richard Sands, who remains company chairman. How does your style differ from his as CEO?
 
SANDS: He's very quantitative, very focused on the numbers. I would say that I'm quantitative, but also he was more focused on building the business through mergers and acquisitions. For instance, since I've been in my job as CEO, I've been more focused on the organic business, driving the business organically, making sure that we've got a healthy underlying business.
 
I mean, is it stylistic? Maybe not. I think it's more a focus of where we were at a different point in time. His focus was more on building the business from a small regional wine company into a larger, more global, major corporation. When I took over we were sort of already there, so the focus was more about how do we take what we've got and put it all together in a way that makes it operate better. Obviously, we did make some acquisitions since I've been CEO, although it's not been our primary focus. We've been much more organically and internally focused, although the latest deal we made (Crown) is a big deal for us.

Learning as CEO
RBJ: What did you learn about the job from Richard?
 
SANDS: He had a big focus on people, on making sure that we got good advice on the things we were doing, making sure that we got a (diversity) of opinions for decision-making purposes. I would say making sure when we made decisions that we had good quantification of the risks that we were taking, if we were taking any risks. Basically, it's really a philosophy about making business decisions and making sure you are knowledgeable enough about what you are doing to control the risks that you are taking. So that was a philosophy he had, and I'd say that is something that translated to me, as well.
 
RBJ: So would he be more of an analytical type than you?
 
SANDS: Yeah, I mean, in a certain way, only in that he has a background in social psychology, which is a very analytical field. Mine is law, so I tend to approach things in a different way. I'm a lawyer. I tend to think more like a lawyer than a quant-type person. On the other hand, I am very analytical too, but it's not my primary skill set. It's more secondary, where it tends to be his primary skill set.
 
RBJ: Who's more fun at a party?
 
SANDS: Depends on the day. (Laughter)
 
RBJ: What did you learn from your dad (the late Marvin Sands)?
 
SANDS: He was sort of a blend between the two of us in many respects. He was analytical, but not as analytical or quantitative as Richard was. He was a real people person, very outgoing, very congenial and very open-door. He loved to be with people. He was probably more fun at a party than either one of us. (Laughter)
 
RBJ: In terms of decisions you have made since becoming CEO, are there any you would have done differently?
 
SANDS: You know, I won't say there are any decisions I wish I'd done differently. I think that all of the major decisions that have been made are definitely the right decisions. I think that any CEO would tell you that from time to time they wished they'd made decisions more quickly. And I don't think that's an uncommon thing, but there are things that we've done over the years that I've been CEO, in retrospect, things we could have either moved more quickly to do or made the decisions or pulled the trigger a little more quickly than we did. On the other hand, it's all about managing risk and making sure we've gotten good counsel on all of the decisions we've made, so sometimes that takes time. But I can honestly say sometimes we just wish we had moved faster.
 
RBJ: Are you thinking of a particular example?
 
SANDS: Not really. I would say as it related to our Australian and U.K. business that we sold, it took us a long time to sell that business. ... But coming to the decision, I would say, we perseverated over that for a long period of time and, you know, it's a decision we probably could have made a little quicker and been more resolute at making that happen.
 
But, on the other hand, it was a big deal and it was a large part of the company and we wanted to make sure it was the right decision, so we took a number of steps that took a period of time. It got us focused on the part of the business that was important and strategic for the future. We could have gotten to that quicker than we had done.

The Crown deal
RBJ: What are you most proud of during your tenure?
 
SANDS: I think that clearly the Crown deal that we just put together is one of the things that we as a company should be most proud of because it's a terrific deal and it's done a lot for the company. But I'd say on the other hand getting our people really focused on growing the business internally, putting together an organization that was more geared toward taking a world-class approach to consumer products marketing-these things are hard to do.
 
You don't just flip a switch, you don't just sign a contract and the deal is done. Making sure you have an organization in place that is capable of growing a business, building brands, innovating, driving organic growth. I think we've got a very good organization in that regard. And getting everybody focused and getting the organization in a place to do all that is something that we should be proud of, because it's a hard thing to do. It's a real nuts-and-boltsy thing to do. It's not like the fun deal. It's not like we made a great big deal, we spent a lot of money, we bought a company. It's meetings and meetings and meetings and making sure that you have the right people in the right positions and making sure the people are focused on the right things.
 
RBJ: The topic has been well-covered this year in media outlets, including ours, but talk a bit about the Crown acquisition and the impact it will have on how you run the business moving forward.
 
SANDS: It was a significant acquisition-the biggest one we've ever made-and it does a number of things for us. It doubles the sales of the company, doubles the profitability of the company (and) makes us the largest multi-category supplier of alcoholic beverages in the U.S., meaning a supplier of beer, wine and spirits. It makes us the third-largest beverage alcohol company in the U.S. overall.
 
What's the relevance of that? It makes us very important to our retail customers. Beverage alcohol is probably the most important category in grocery to the mass merchandisers today, because it is one of the largest categories and the one that is growing. The other large categories-cigarettes, dairy and carbonated soft drinks-are all declining categories. Alcoholic beverages is growing and profitable and important. So being one of the largest suppliers in the U.S. puts us in a very strong position with our retail customers.
 
RBJ: How will the changes made by the acquisitions, such as expanding the Mexican brewery, impact jobs?
 
SANDS: Adding the brewery is a big deal for us. We are also expanding the brewery. It is a big project we have undertaken and will spend $5 million to $6 million on expanding that brewery into one of the largest in the world. In terms of managing all activities around that, I'm sure there will be some additions of people here, but most of our additions are taking place in other parts of the country. We are in the process of setting up an office in San Antonio (Texas) at the moment, which is close by the brewery right over the Mexican border. And our beer business is run from our Chicago headquarters.
 
RBJ: What was the hardest part of putting the deal together?
 
SANDS: It was a complicated deal, and the hardest part was getting the clearance by the government, the Department of Justice; that was a yearlong process and a relatively rocky road. The Department of Justice decided to block the transaction at a point during that yearlong period and commenced litigation to block the transaction. But fortunately, all of us-the seller, Anheuser-Busch, and ourselves-were very flexible and able to refashion the deal in a manner that ultimately could receive, and did receive, Department of Justice approval. So we were able to settle that case and proceed with the deal.
 
RBJ: Were you surprised at the Department of Justice's decision to proceed with litigation?
 
SANDS: We were surprised they decided to litigate as opposed to simply negotiate what they wanted. But perhaps they felt litigating put them in the best negotiating position. So it was a tactic on their part.
 
RBJ: Was there a time during the process when you thought the deal wasn't going to happen?
 
SANDS: No, I think we felt that we'd work something out all the way along and that we'd make it happen, but we're optimists. (Laughter) And we were right.
 
RBJ: So now, how are you going to top this deal? Are you worried or fearful about growing too fast or handling that growth?
 
SANDS: We don't have any fear. We have a lot to work on. Infrastructure is what we're working on now, working on plans to expand the brewery, doubling its capacity. And we have a lot of brands on the wine, spirits and beer sides that need constant love and attention. We have to be cognizant of that and make sure nothing falls through the cracks. (So) we're working on a lot of things. We're not too worried about topping the deal; it's more how do we take it and now make it into something great, which is what we fully intend to do.

Street expectations
RBJ: What is your reaction to the (fiscal 2014) first-quarter results, which missed Street estimates?
 
SANDS: Our first-quarter results were, I'd say, right on our plans. So, therefore, from an internal perspective, we felt they were good results because it met all our expectations. And we were able to increase our guidance for the year during the first quarter due primarily to the fact that the interest expense is lower than we originally anticipated it would be. The Street didn't love our first-quarter results because we don't give quarterly guidance, and basically they had the calendarization wrong.
 
RBJ: So why not just provide quarterly guidance?
 
SANDS: Primarily it's just too difficult to project with that degree of accuracy quarterly guidance and we don't think the Street should be focused on quarter-to-quarter earnings. There are too many factors and too much volatility from quarter to quarter. We give them annual guidance, and we think that's where they should be focused. Trying to predict exactly how the business is going to do every three months is not where we think the Street should be focused and not what we should be spending our time on.

New products
RBJ: Talk about some of the new product development this year.
 
SANDS: We have a lot of new product intros this year, line extensions and even new brands. We have two to three brands coming out that we are excited about. One is Milestone, which will be introduced shortly, in the table wine category. In the beer category, we are introducing a new product under Modelo Especial, which is our fastest-growing beer brand, called a chelada, which is like a spicy tomato juice and beer mixture.
 
We are rolling out new product in draft format around the country and we just introduced a new line, an extension to our Dreaming Tree wines, called Everyday White, a white blend. Last year, we introduced Arbor Mist frozen wine pouches-made in Canandaigua-and this year we launched frozen spirits pouches.
 
We are also introducing a cinnamon-flavored whiskey called Black Velvet Cinnamon Rush, and we're excited about that one, because cinnamon is one of the hottest flavors in flavored whiskey right now.
 
RBJ: Last year, you introduced Black Velvet Toasted Caramel and had said you were surprised at its popularity.
 
SANDS: The Canadian whiskey category has not been a growing category for a number of years and is a little old-school. The Black Velvet brand has done well; it has been kind of flattish, but the category is growing due to a number of things. (The television show) "Mad Men," where they are drinking Canadian whiskey, has brought it back into vogue, and then flavors have really gotten the whiskey category growing again.

Giving back
RBJ: Talk about your philanthropic efforts. It is such a big part of Constellation Brands. Do you think the giving has an impact on the local workforce?
 
SANDS: I think it has an impact on local workforce in that when a company is philanthropic in the community where people live, it makes them feel good about their employers and what they do. I think it makes people feel proud to work for the company. I think people feel better about working for a company that gives back to the communities that the company operates in.
 
RBJ: Do you think your family's philanthropic endeavors here are so strong because this is where you grew up?
 
SANDS: Part of it is because we grew up here and our company was founded and headquartered here, but we also give in other communities we are in. We support things in a number of places where we do business, in Chicago, in California. We do do a lot here, and it is because the headquarters is here and we grew up here. There is a strong sense of wanting to give back to the community that spawned all this, so to speak.
 
RBJ: Do you think your dad (who died in 1999) would be surprised at where the company is today?
 
SANDS: I think he'd be very surprised at where we are today. He certainly saw us grow the company into a fairly large company, but I don't think he would have anticipated that we would have owned the whole beer business entirely today. I don't think he would have anticipated that we'd own the Mondavi company and some of the others we bought, such as Clos du Bois and Canada's largest wine company, Vincor. So I think that he would have been pleasantly surprised.
 
RBJ: What are your plans for growth? Where do you see the company five years from now?
 
SANDS: We want to grow and are putting a lot of effort behind growing and our innovation efforts. Five years from now, I'd like to see us as an even stronger beer company and wine company and spirits company. I don't see us really being outside of those three businesses-beer, wine and spirits-but I do see us continuing to innovate around our portfolio, continuing to grow like we have been growing. The goal is to be an even bigger and stronger beverage alcohol company, and I'd like to see that our brands continue to grow.
 
RBJ: What are the challenges you face in meeting those goals?
 
SANDS: It's a highly competitive market. There are a lot of forces out there that impact profitability and limit what you can spend on growing the business and growing your brands. It's a very competitive landscape, so we have to be bigger, better, faster, stronger than our competitors.
 
RBJ: What are you most looking forward to?
 
SANDS: Well, you know, drinking a cold beer when the day is over. (Laughter)

7/26/13: RBJ 75 Special Supplement (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.
 


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