Constellation Brands, the company behind popular beer brands Modelo and Corona, saw its stock drop 3.5% on Tuesday following announcements of proposed tariffs by former President Donald Trump. If implemented, the 25% tariff on Mexican imports could significantly impact the company, which relies entirely on Mexico for its beer production. With beer accounting for 86% of its sales in the first half of the fiscal year, the proposed measure poses a considerable challenge to the brewing giant.
Financial Impact of Proposed Tariffs
The proposed tariffs would increase Constellation Brands’ cost of goods sold by approximately 16%. To address these higher costs, the company may need to raise beer prices. This strategy could be viable, given Constellation’s pricing power in the market. Last year, Modelo Especial became the bestselling beer in the United States, overtaking Bud Light. However, with inflation concerns already weighing on consumers, price increases might test customer loyalty.
Tuesday’s stock decline adds to Constellation’s challenges in 2024, with its shares already down over 3% this year. Despite these setbacks, the company maintains a substantial market capitalization of $42 billion.
Constraints on Production Changes
Shifting production out of Mexico to mitigate tariffs is not an option for Constellation. An antitrust settlement from 2013 requires the company to manufacture its beer brands in facilities owned by AB InBev, the original owner of Grupo Modelo. This agreement stems from a Department of Justice ruling that allowed AB InBev to sell Modelo’s U.S. business to Constellation under specific conditions.
Over the years, Constellation has heavily invested in its Mexican operations, spending billions of dollars to expand production capacity. This further ties the company’s operations to the region, leaving few alternatives to navigate the tariff challenge.
Historical and Broader Market Context
Trump has previously proposed tariffs on Mexican imports, including a similar plan during his presidency that ultimately went unimplemented. In 2020, however, he signed a new trade agreement with Mexico and Canada, complicating the potential for significant tariff adjustments. Whether these new proposals will materialize remains uncertain.
The market impact of Trump’s latest tariff announcement extended beyond Constellation Brands. Automakers like General Motors and Stellantis also saw stock declines on Tuesday as fears of broader trade restrictions surfaced. Trump’s post on his social media platform highlighted plans for additional tariffs on goods from China and Canada, further unsettling investors.
Outlook for Constellation Brands
As the situation unfolds, Constellation Brands must prepare to navigate the potential cost increases and market disruptions these proposed tariffs may cause. The company’s reliance on Mexican production and its focus on beer sales leave it vulnerable to trade policy shifts.
For now, investors and industry analysts will closely monitor developments, as the outcome could reshape Constellation’s business strategy and its role in the U.S. beer market.
