How Constellation Brands is Embracing Consumer Trends
February 08, 2021
Robert Hanson is Constellation’s executive vice president and president Wine + Spirits Division, reporting to president and CEO Bill Newlands. Hanson joined the company in June 2019. He previously served as a member of Constellation's Board of Directors from 2013-2019. Prior to assuming his position with the Wine + Spirits Division at Constellation, he was CEO at John Hardy Global Limited, the global luxury jewelry brand. Hanson spoke with WBM last month for WBM’s 2020 Outlook and Trends report but excerpts from the full conversation follow. In one of his first interviews following Constellation’s sale of wine brands priced under $11 to E & J Gallo, Hanson discussed Constellation’s overarching strategy, power brands, as well as the company’s focus on the big consumer trends of ready-to-drink convenience and betterment. He talked about Constellation’s digital strategy, premiumization, Constellation’s values, and why he joined the company in his current role.
WBM: What did you accomplish as a wine company in 2020?
Our commitment continues to be to pivot to becoming a more bold and innovative high-end wine and craft spirits company putting out the most compelling consumer experiences in the marketplace. We shifted to a smaller set of power brands to generate much more consumer engagement because the consumer is in charge now. We need to make sure we're generating consumer pull in a highly accretive way.
When COVID-19 hit, the team shifted to where the consumer was buying beverage alcohol. We put a strong emphasis on digital commerce and the off premise. We recognized the consumer was choosing to premiumize and engage with brands they know and trust. That enabled us to put out a great narrative for our power brands. We focus on about ten of our primary brands. That works particularly well. If you look at the total market in IRI channels, Meomi was up 8 percent; Kim Crawford up 8 percent, Mondavi up 2 percent; and Prisoner up 82%. These are last twelve-week numbers.
With the power brands, we focused on core varietals. We extended the Prisoner Wine Company to offer Cabernet and Chardonnay. We also extended the portfolio to include a $30 price point brand, Unshackled. Ready-to-drink is really critical at the moment:
We introduced Svedka vodka soda, a High West Ready-To-Drink Barrel Aged Cocktail and a Ruffino Wine Spritzer. Even before COVID we were focused on convenience with a strong emphasis on 375 ml offerings in wine across more premium price segments.
We introduced Kim Crawford illuminate, which is a low alcohol wine; a great quality organic Prosecco, from our Ruffino brand, and our Svedka Pure Infusions vodka offering.
We did a lot of work to pivot to where the consumer was engaging, focus on the brands that had the right narrative, and put great product innovation in them to win share, and did particularly well at the high end of our portfolio throughout 2020.
In convenience, we put a focus on three initiatives: 375 ml bottles; cans across a number of pack formats; and then Tetra, mostly on the lower end of the portfolio.
The 375s were a critical initiative because in many ways, 375s had broadly been focused on the mainstream and premium price segment. We put an emphasis early in the year, pre-COVID, on introducing 375s across our portfolio in the super-premium, ultra-premium and luxury segments and captured significant share there. We see it as an opportunity to attract new consumers to the wine category, and to allow consumers to trial rather than making an investment in the full bottle. Consumers have shifted their consumption behavior, driven by more at home consumption.
WBM: What’s your digital marketing strategy?
Perhaps the most significant shift - and this began pre-COVID as well - is our focus on the digital transformation. We already had an exceptional three tier e-commerce capability as the most active wine portfolio to play with marketplaces like Drizzly and Instacart. We made an investment in Empathy Wines in June 2020. Gary Vaynerchuk put together a high performing digitally-native platform to put Empathy on. We were interested in Empathy, but more than that, the end-to-end route-to-market Gary and his team put together - from their tech stack all the way through to how they engaged consumers.
By bringing Empathy onboard, we were able to quickly reinvent the DTC experience across a number of power brands, Prisoner Wine Company, Simi, and Double Diamond - and we introduced a new sparkling brand called Meralan along with Empathy. That was the first tier of end-to-end transformation of the consumer experience in DTC. We're doing the balance of the portfolio over the next couple of quarters.
It’s allowed our wine business to outpace the DTC category by about 25%.
We doubled down on our ambition to pivot to becoming a high-end high-quality portfolio of distinctive brands. We've had great success focusing on those power brands and introducing really innovative varietals but also addressing the consumer trends of ready-to-drink convenience and betterment; pivoted aggressively towards digital commerce and off-premise; and are now working aggressively with our distributors and our customers to help them pivot,
Pre Covid-19 only a third of people knew that you could buy online – now everyone does. This category was behind a lot of other consumer goods categories in terms of digital consumption and we're excited to be a leader in it.
Finally, the E&J Gallo transaction being completed gave us line of sight to make investments to enhance our higher-end portfolio with minority investments, for example, in Booker Vineyard of Paso Robles.
WBM With Empathy, you mentioned being interested in the system that was set up. What makes that so attractive?
It came down to the question, do build it ourselves or buy it? Having been associated with digital transformations and other categories, there is a reality that building it requires a dramatic elevation of skills and experiences from what are typically wholesale tenured executives. By buying the platform, we were able to immediately provide a proof of concept of how a digitally-native brand goes to market. Gary and his team put together an end-to-end business model built off of a tech stack that was rooted in Shopify as the organizing method.
WBM: What’s a tech stack?
When you run a direct-to-consumer ecommerce platform, you own the consumer relationship. That’s underpinned by technology and analytics. The tech stack refers to the process of reaching out and acquiring consumers. Think about how you market on Facebook or Instagram, or how you market through Drizzly’s platform or Instacart’s platform. Once the consumer engages, you have to engage with them through technology. Shopify is the platform most great consumer-focused ecommerce businesses run on. It’s the DTC enterprise cloud technology platform that powers all aspects of consumer engagement. Shopify is already integrated with the leading consumer engagement platforms out there.
Gary and the team invested in great customer service platforms like Gorgias. We put that into a system that enables us to consolidate information so we can report with an analytics platform called Looker to understand who's consuming, how much they're consuming, what they're consuming, why they're consuming, and the flow of their consumption. It’s enabling us to be smarter not only for our own DTC businesses, but for our three-tier ecommerce businesses with distributors and wholesalers.
We're having great discussions about what we're learning and can apply that to our wholesale business. That’s gives us a very different collaborative partnership with our retailers because they see us as a category leader in digital commerce. People are recognizing you can buy wine online and that it gives you access to super high quality, highly narrative brands that otherwise you maybe wouldn't have experienced as easily if you were shopping in regular channels of distribution.
WBM: What’s next now that the Gallo Transaction is over.
It has opened up the aperture for further enhancements to the portfolio so we're putting in place a scalable operating model that can be applied to future acquisitions or minority investments in the higher-end wine portfolio.
To use Booker from Paso Robles as an example: We've been focused on Paso Robles because it's emerging with a distinctive position with incredible higher-end wines coming up out of there. Eric Jensen is a disruptive, sustainably-focused wine maker. He has tiers of brands from Booker Estate between $85 and $125 a bottle, through to My Favorite Neighbor, at $50 to $80. Then he's got an opening price point brand called Harvey & Harriet.
We’re making investments in brands like Booker but now that we built the operating model, we have our eye on expanding our portfolio within the ultra-premium and luxury categories because the premium trend continues to accelerate. It will continue to. The evidence says the consumer marketplace is probably going to bifurcate to the lower-end, and then the more-premium end of the market.
WBM: Do you scale Booker?
We will carefully scale Booker. Booker is a relatively small portfolio, mostly with a DTC component. We intend to keep that predominantly DTC, let's say, 85 percent DTC. The balance would be very high end, on- and off premise as the on premise comes back post Covid 19.
Eric has the opportunity to put an amazing bottle of wine from Paso Robles on more American tables by having Harvey and Harriet at $50 to $80. That's still a luxury bottle for an average consumer, but then introducing the $30 wine with Hardy and Harriet.
By segmenting and working with him to help segment the portfolio, we think he has incredibly high growth in front of him across DTC three tier e commerce being on an off premise. Over time, obviously, we'd love to acquire that business.
The Prisoner was a single red SKU. We've started down that path of introducing a Cabernet and Chardonnay, our highest growth, new introductions. We'll be introducing Pinot Noir next. As I mentioned, we took The Prisoner and extended it to a $30 brand called Unshackled. It's endorsed by The Prisoner Wine Company but a completely separate brand.
We're looking at Saldo, which used to be a DTC skew within Prisoner, a Zinfandel. Many consumers see it as a separate brand so we're standing it up as a separate brand.
You'll see a really strong commitment to distinctive brands with high-quality varietal offerings, with high growth rates, in the higher end of the marketplace. Those are two examples are examples of how we intend to double down post the closure of the Gallo transaction.
WBM: What about Schrader? There were comments at the time, that Constellation bought the brand for the customer list.
Fred and Carol and Thomas Rivers Brown make an incredible wine in Schrader, pulling amazing wine off of the Tokalon vineyard. They’ve been able to maintain the elevation of the Schrader brand vintage after vintage and they're focusing on a very small but very-engaged consumer base. The question for us becomes, ‘how do you maintain that level of quality and exclusivity?’
WBM: If the average wine club customer is in for perhaps 18 months, how do you deal with that?
Some people cycle out of the club. We call that churn. With a very high-end brand, you see a very low churn rate because it’s difficult to get on the list. In a typical DTC brand, you would see a churn rate of around 40% annually. The question becomes, “how do you lower that churn rate as best as you can by consistently surprising and delighting your consumer?” Then you've got to be bringing people in so you're acquiring new consumers who have a proclivity to want to engage with the brand on a DTC basis.
That's what's exciting about the digital commerce initiatives. The data is helping us understand how consumers are behaving as we're attracting new consumers to the wine category, then leveraging that information to run our general market business.
WBM: What’s your outlook for 2021?
We believe the consumer trends in ready-to-drink, convenience, betterment, and digital commerce will continue. Premiumization will continue. We're seeing that not only in wine but in spirits.
WBM: How much of the premiumization is a result of trading down from restaurants because of Covid?
That’s to be determined. If you look at the total category growth, it's, shifted dramatically because of what's happening with on premise. Clearly people are consuming premium quality wines at home versus out in restaurants or bars. We think that that will sort itself out as we return to the post-COVID on premise as it evolves into the model it will become.
What is absolutely clear is that when consumers fundamentally shift their behavior - especially for a longer period of time - they don't just go back to where it was before. There’s a new way of behaving. We believe there will be a differently constructed but dynamic on-premise experience, albeit a different one. The digital platforms of a lot of our customers will be better integrated with brick and mortar store strategies. We think consumers are going to be more conscious about what they enjoy at home and what they enjoy out on premise.
We expect premiumization to continue to drive more premium at home consumption across the board. Then it's a matter of how we innovate within that. I mentioned this before, but ready-to-drink: we're going to double down on ready-to-drink efforts, including wine-based ready-to-drink.
WBM: Why are the low alcohol wines a thing now? There were wine brands that tried that in the past.
We're dealing with a consumer shift towards the understanding of the importance of betterment in their total lifestyle, and sustainability.
Look at the significant trend towards meat alternatives within the meat category. Look at Impossible Burger or Beyond Meat. A couple of years ago, they were getting laughed out of the conversation. Look at the level of market share they've gained, how they're being distributed. The pressure they put on traditional meat brands and on-premise distributors is significant. People are recognizing they're making conscious choices. If they can get a really high quality burger that happens to be plant based, why not? You don't have to do it all the time, you mix it into your behavior pattern. The same is true now in the wine and the beverage category where it's less about a trend and more about a choice a consumer is making to live life more consciously. We see opportunities that are sustainable here and intend to play aggressively to win share in this market.
WBM: What’s your expectation for sales next year?
We're committed to growing in the two to four percent range. That would suggest that we’ll be growing about a point above the market, which is our goal. We expect growth a bit above the category. It’s a question of having the agility to pivot as the market shifts again. We know it will look different this fall.
WBM: How did you connect with Constellation? You were already on the board before taking this position.
On the board I was often in the dialogue about: how to shift the wine business from being push-price driven to being more consumer-focused; thinking about brand building and understanding the three-tier distribution system creates some complexity; and understanding that the consumer will ultimately make a shift towards omni-channel and digitally enabled commerce.
In the end, my colleagues on the board and Rob and Richard (Sands) and Bill (Newlands) said, “Hey, do you want to put your money where your mouth is?”
There was a recognition that something needed to change in our wine business, that we needed to choose a lane. I was aligned with Bill and Rob in their effort to focus on the high end, was part approving the Gallo transaction, and wanted to join the team because I saw the ambition for the portfolio, the potential for the portfolio, and the desire to win and really change the way we competed.
I happen also to be from Sonoma County and grew up close to the Simi winery in the Alexander Valley. It was coming full circle for me.
Constellation’s values attracted me to the company: The commitment to the greatest brands with the highest quality wines, having winemakers like Thomas Rivers Brown and Andy Erickson, Geneviève Janssens and Nova Cadamatre and Christy Whitman at The Prisoner and Melissa Stackhouse at Simi - female winemakers in a dramatically male-dominated industry. Broadly speaking, the commitment to be a source of economic opportunity for our shareholders and employees and customers and distributors, but also a force for positive change in the world.
In this year in particular, given everything we've been through, helping our communities and our industry through COVID, through the economic impact of that, and making significant investments in the on promise, making significant investments in addressing the social injustice that exists in the world in general, but in wine specifically. We have a recently appointed Chief Diversity Officer and Mike McGrew happens to be one of the most senior black males in the bev-alc industry. Bill (Newlands) is a signatory on CEO Action for Diversity & Inclusion™.
We have an extensive group of business resource groups. We recently partnered with Bryan Stevenson from the Equal Justice Initiative. Putting our money where our mouth is: one of the hardest aspects of helping the black and brown community is they need capital. We made a commitment to minority investments in female run businesses, but also minority run businesses with an emphasis on black and Hispanic entrepreneurs in beverage alcohol.
For three years in a row we’ve received a 100 percent perfect score on the corporate Equality Index for LGBTQ equality. I have a responsibility to lead in a way that creates economic opportunity, but to do so in a way that creates positive change for everybody. We can have differences in beliefs, that's okay, but we should be all aligning around equal opportunity, lawfulness, justice, those basic principles that drive our society.
There's a lot of specifics, backed with investing $100 million over the next ten years in women-backed businesses and minority businesses. Capital is what entrepreneurs and female and minority entrepreneurs need. There's the right work that we do because it's the right work to do and then there's backing it with action to make it real. WBM