Environmental assessment

Introduction

Constellation Brand is the World’s second largest wine producer and also the global leader in imported premium lager. It is an international producer and marketer of over 200 alcoholic beverage brands that consist of premium spirits, premium wines, imported beers, and other alcoholic beverage products. The company usually conducts business through the entities that it wholly owns and also through a variety of joint ventures. The business strategy of Constellation is to remain focused on the consumer preferred premium wine brands, complemented by the premium spirits, and imported beers. The company should continue investing in the fast-growing premium product categories and geographic markets so as to capitalize on its scale and size in the marketplace. In this section, it discusses the environmental analysis of the company that entails identifying the internal and external elements that can affect the organization’s performance. The analysis entails the SWOT analysis and Porter’s Five Forces.

Competitive industry

Constellation Brand is a highly competitive industry and the dollar amount, and unit volume of the sales of the company can be negatively affected by numerous factors (Constellation 2015). The factors include the company’s inability to maintain or increase prices, new entrants in the market and a general decline in beverage alcohol consumption. There is also the factor involving the decision of consumers or wholesalers purchasing the competitor’s products rather than Constellation Brand. Purchasing, pricing, financing, promotion decisions, operation, and advertising can also affect the unit volume and the dollar amount of sale. The company can also experience a higher than expected selling, the administrative, and general expenses if it finds it necessary to increase the number of personnel to maintain its competitive position.

The beverage industry tends to be highly competitive, and Constellation Brand tends to compete for price, quality, recognition, brand, and distribution strength (Constellation Brands, 2015). The company’s beverage alcohol products usually compete with other non-alcoholic and alcoholic beverages for consumer purchases and also as shelf space in retail stores, wholesaler attention, and restaurant presence. There are numerous multinational distributors and producers of beverage alcohol products that Constellation Brand compete with.

When looking at the alcoholic beverage industry, its influence is from the global economy and the emphasis on the overall health of the consumer. The health of the consumer is vital as Constellation continues to move from a value-oriented product to a premium product. Also, the industry has been consolidating with the focus on maximizing synergies and economies of scope and scale and large multinational companies strategically acquiring others that fit into their business model. The industry normally competes for off-premise and on-premise sales (Constellation Brands, 2015). The off-premise includes retailers, and on-premise sales include restaurants and bars.

The strength of the overall global economy tends to have a direct impact on the health of alcoholic beverage industry. Mostly for Constellation as the company is shifting to a premium priced product portfolio. Some for the factors such as consumer confidence, unemployment, and disposable income directly tie to the overall consumer health. Companies need to focus on product innovation and new packaging so as to protect and increase market share.

Macros factors

The companies in the alcoholic beverage industry are increasing their presence International with the focus on the emerging markets. The limited growth opportunities existing in the US market are because of the slow population growth although in the developing countries such as Brazil, Africa, Asia, China, and India, the population growth projected to be enormous moving forward. Experts claim that over 80% of the world’s population expected to reside in the developing nations by 2050 (Greenfield & Bourdin 2013). The population growth will spur economic growth and the market for alcoholic beverage will increase exponentially in the countries. So as to tap into the growth opportunities in these emerging markets the US alcoholic beverage companies are greatly expanding their operations internationally. Companies are succeeding in this through acquiring companies in the emerging markets. The acquisitions are a vital way for success in the industry as the growth method enables companies to diversify their product offering and market exposure. It also allows improve distribution channels, increases revenue, save cost, and strengthens the company’s competitive advantage.

The economic conditions of a nation heavily impact the amount of alcohol condiment. During a recession, the disposable income decline, that shifts the demand for alcohol from the premium products to lower-priced products (Greenfield & Bourdin 2013). The shift in demand to the lower-priced brands force the alcohol companies to either decrease the prices of their products or to supply more lower-priced brands during poor economic climate.  The past few years saw an increase in demand for lower-priced alcohol brands because of recession. Most companies responded through increasing prices of sub-premium brands so as to narrow the price gap between the premium and sub-premium brands.  The strategy led to consumers trading back up to the premium brands and benefited sales of the premium alcohol.

The recession impacted the price of spirits and wine to a lesser degree than beer since the buyers of spirit and wine tend to be better off financially and less affected by the increasing levels of unemployment. As the economy is improving and disposable income in the US increased, the demand for premium beer, wine, and spirit will increase. In this way, firms can be able to charge higher prices for products. Experts project that the demand for spirits and wine will outpace the demand for beer. Most of this is because of the demographics that heavily impact the demand for alcoholic beverages. Because of the extensive marketing strategies by wine and spirit companies, increase in innovation and health benefits of drinking spirit and wine over beer, there is an opportunity for companies.

There is a prediction that younger generation will demand an increasing amount of wine and spirit and decrease amount of beer. A study by Gallup found that in 2010, 32% of the US drinkers preferred wine. By 2012, the number grew to 35%. The preference of the beer decreased the most among the age bracket of 18-34 (Greenfield & Bourdin 2013). The trend among younger generations is essential as these consumers are expected to grow over 40 % of the US drinking population by 2022. As the demand for spirits and wine rise and the demand for the premium brands increase over the lower-priced brands, a company like Constellation should consider focusing production growth on the premium wines and spirits and also to higher-priced brews.

Porters Five Forces

Constellation brand tends to be an industry leader in the North American market. So as to remain competitive, the company uses a large amount of financial leverage. The porters five forces is a framework that tend to analyze the level of competition within an industry and the business strategy development. The concept behind this theory is that there are five forces that determine the attractiveness and the competitive intensity of a market. The forces include the supplier power, buyer power, barriers to entry, threat of substitute, and degree of rivalry.

Supplier power

In the winery, the main supply decision lies with the key product ingredients that include juice and grapes. Wineries have several options that include purchasing grapes, purchasing juice, or owning the vineyard. If a winery requires a specific grape variety for a particular wine, the winery will need concern about the demand and supply of that particular product. As the supply become short, the winery will find that suppliers have increasing bargaining power (Constellation Brands, 2015). Because of the supplier power, large scale wine producers like constellation have integrated backward, and they have their vineyards. Hence, the large-scale wine producer attempt to control operations right from production to distribution; thus, reducing the supplier’s bargaining power.

Bottling is Constellation’s second-largest cost of goods sold. The bottler’s of the company concentrated and its supplier of glass for bottling even more limited. The increase in the cost of glass bottling will have a significant impact on the company’s gross margin. While there is a substitute for glass bottling, there is no substitute for the inputs of beer, wine, and distilled spirits. The increase in prices of the input commodities will lead to a drop in the gross margin if not accomplished by the price increase in goods sold.

Barriers to entry

The level of competition in the alcohol industry is very high. The threat of entry influenced by factors such as distribution channels, capital investment requirements, and the economies of scale. The economies of scale factor tend to gain popularity as competition has been increasing in the last decade. The economies of scale allow for vertical integration in the industry. Thus, by making the large companies even larger, the vertical integration has a major effect in decreasing entries in the wine industry.

Buyer power

The federal law normally regulates the process in which the beer reaches the end user. The brewers cannot sell directly to consumers or retailers, as they must use the wholesaler. So, while the consumer can have minimal control over the price, the wholesaler tends to have some control on all the segments of the industry. The power reduces the overall profitability of the brewer. The power of the buyer depends on the size of the producers. Because Constellation Brands have a considerably large scale of production and also a significant market share, the company can control their retail operations (Constellation Brands, 2015). Accordingly, Constellation can substantially reduce the bargaining power of consumers.

Threat of substitutes

There is an overabundance of a substitute to beers and wines as there are thousands of brands internationally. As a result, the competition tends to be high, but constellation’s dominant position in the alcoholic beverage market with the well-known brands reduces the threat of substitutes to Constellation brand bottom-line. Beer can be a substitute for wine and wine can be a substitute for the spirit. However, when analyzing threat of substitute, it is best to focus on the threat of substitute in each alcohol category (Constellation Brands, 2015).

In the category of wine and spirit, there is a high substitute for wine. The wine producers compete aggressively for the market share and the bigger the winery, the better the chance of survival. Constellation own many and some of the best wineries; hence, there are few substitutes at the multinational level to wines not in the Constellation wine portfolio. Constellation is well positioned in the industry because it has offered the beer, spirits, and wine. Wine is becoming an attractive industry because of its capability to satisfy the needs of consumers just as well as spirits and beer and considered as a healthier choice. Thus, Constellation tends to have a significant position in the market holding over 200 alcoholic brands.

Degree of rivalry

Some of the competitors of Constellation brand include Heineken, Pernod Ricard, Diageo, Kendall-Jackson, Foster’s Group, C&C Group, Michelle Wine Estates, Bacardi, WJ Deutsch, etc. The alcoholic beverage industry tends to be a great illustration of the magnitude of brands over time. Companies are creating alternative line extensions. The main rationale for rationalization of brands relates to cost efficiency because maintaining small brands involve high production costs and also stocking and marketing (Constellation Brands, 2015). Although competition is very still, Constellation Brands tend to have a first mover advantage in the alcohol market. Most of the wine in the Constellation Wines portfolio tends to have brand recognition, and the company established some of the premier wines globally. The wines include Franciscan Oakville Estate, Wild Horse, Robert Mondavi Brands, and Simi Toasted Head. The spirits include Black Velvet and Svedka Vodka brands, and the beers include Corona Light, Coronita, and Corona Extra (Constellation Brands, 2015). Constellation does not need to worry about losing the market share because of new brands entering the market. However, the differentiation of the existing brands tends to be a continual threat to the company’s market share.

SWOT analysis

SWOT analysis is a tool that helps business in evaluation and discovery phase of strategic planning.

Strength

The strong financial position is a major strength of the company. With the significantly more assets than liabilities, Constellation is in a great position of acquiring whatever brand the company perceives as advantageous to growing Constellation’s portfolio of alcoholic beverages (Constellation Brands, 2015). The ability of the company to consistently generate cash flow from the operating activities is significant strength. The cash flow will enable Constellation to invest in its brand and people, make a capital investment, and from time to time make a strategic acquisition that will enhance the stockholder value and repurchase shares of the common stock. The strong liquidity position of the company is essential because the primary method the Constellation increases its market share are through the acquisition of new brands. Thus, Constellation tends to have the financial resources necessary to expand its marketing efforts in the future.

Constellation brand also has a strength about strong brand recognition. Most of the company’s products recognized leaders in their respective geographic markets and categories. The strong market position makes the company a supplier of choice to most of its customers who include retailers, wholesale distributors, and governmental alcohol beverage control agencies.

Weakness

A major weakness for the company is the high dependence on the single geographic segment. Although the company normally markets its products in several countries including Canada, the UK, Australia, and the US, it is highly dependent on North America for its revenue. The company tends to generate about 96.27% of its total revenue from North America, and most of its facilities are in North America (Constellation Brands, 2015). The over independence on the North America increases the business risk of the company through exposing it to geopolitical and economic risks associated with the region. The over independence also acts as a hindrance to international growth plans of the company. Another weakness for the company is the weakening solvency position. Constellation’s solvency position weakened in the financial year 2013. The debt to equity ratio for 2013 was 0.89 compared to 0.31 in 2012. It is possible to attribute the increase in debt to equity ratio of the total debt to the company in 2013 by 95.54% in comparison with 2012. The weakening solvency position indicates the utilization of higher financial leverage and the comparatively weaker equity position.

Opportunities

An opportunity that exist and the company should benefit from is the increasing consumption of wine in the US. The US wine market is continuing to grow amidst the slow economic recovery. The US is the fourth largest producer of wine, and it did surpass Italy and France regarding the volume of table wine consumed (Canadean Company Reports, 2013). The consumption volume of wine is increasing, and Constellation brand is bound to benefit from this change. There are many factors including the availability of wine at all price levels, the increasing preference for wine among early adults, and the benefits gained by moderate wine consumption. As the premium products are gaining popularity, Constellation Brand will find itself making very profitable position due to the large market share they have. The industry trend indicates that the global wine consumer prefers the premium wine brands, and they are willing to pay extra money so as to obtain them. 

Threats

A key threat for Constellation Brand is the intense competition. The company is operating in a highly competitive market. Because of the increase in completion, few of the leading companies in the segment are implementing pricing strategies and discounting measures. Additionally, any action that competitors take to sustain the competitive edge can impact the operational performance of the company. In January 2012, Beam Inc, which is a competitor of Constellation, entered the Irish whiskey market with the acquisition of Kilbeggan brand (Canadean Company Reports, 2013). In June 2012, it also acquired Calico Jack and Pinnacle Vodka rum brands from the White Rock Distilleries. Beam has been announcing its plan to expand in the Irish whiskey business with more acquisition. The increased competition in the alcoholic beverage market can impact the operating margin of Constellation Brand.

There is also the threat of the rising cost of raw materials. The cost of raw materials have been rising in the past few years, and there is also expected to continue rising. It is essential because irrespective of whether the price variations are from direct purchase of grapes or through fluctuations yields in winery vineyards, it affects the economic cost per bottle. The experts in the alcoholic beverage industry predict that the continued rise in raw materials will result in an increase in the cost of production for breweries and wineries anywhere from 10 to 20%.

Conclusion

Understanding the business environment of a company is necessary when making a strategic plan.  Based on the environmental analysis of Constellation Brand, competition tends to be a major threat to the company, and it is necessary for the company to consider the merger and acquisition strategy and expand into different countries so as to remain competitive in the market.

Reference

Canadean Company Reports (2013). Constellation Brands, Inc: Consumer Packaged Goods Canadean

Constellation (2015). Constellation Brands. 

Constellation Brands (2015). Constellation Brands, Inc. 

Greenfield, D & Bourdin, C (2013). Constellation Brands. The University of Oregon. 

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in graduate paper writing service if you need a similar paper you can place your order from custom research paper writing service.