Here’s how much Modelo and Corona beer prices will have to rise to cover Trump tariff tab

The stock dropped 3.3% to close Tuesday at $233.60. It inched upward in premarket trades Wednesday.

“We estimate Constellation would need a 12% beer price increase to fully offset a 25% increase in beer [costs of goods sold], i.e. keep gross profit dollars flat,” Kirk wrote in a note to clients.

He pointed out, however, that three factor merited consideration.

First, the last time Trump proposed tariffs on Mexico in 2019, they never actually happened, as the threat was enough to open trade negotiations between the countries.

Roth MKM analyst Bill Kirk believes beer is a product with low price elasticity, meaning changes in price have little impact on consumer demand.

“We believe Texas officials will be strongly against proposed tariffs on Mexico,” Kirk wrote, given that Mexico is the state’s, and the U.S.’s, largest trading partner.

He said it’s also unclear whether new tariffs would violate a trade agreement that was signed into law in 2020, when Trump was president.

Having vowed to cancel the North American Free Trade Agreement, or Nafta, which was signed into law in 1993 by President Bill Clinton, Trump’s U.S.-Mexico-Canada Agreement was widely viewed as a rebranding that made only cosmetic or incremental changes. (He had called Nafta a “nightmare.”)

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Second, Kirk said Constellation could be exempted from tariffs.

As part of a settlement that the U.S. Justice Department reached with Anheuser-Busch InBev S.A. and Grupo Modelo in April 2013 — which led to the sale of Modelo’s U.S. business to Constellation — the DOJ requires Constellation to produce its brands exclusively where Anheuser-Busch produced them, effectively all in Mexico.

“We believe it would be illogical to force a tariff on the same U.S. company— largest U.S. brewer — [for which] you obligate the location of production,” Kirk wrote.

Besides that, as the top U.S. beer brewer, it’s important for an estimated total of 2.37 million jobs — including in agriculture, distribution and retail — that Constellation remains competitive.

Modelo in mid-2023 became the top-selling beer brand in the U.S., as a boycott inspired by right-wing influencers took a toll on sales of AB InBev’s Bud Light.

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Also see (October 2024):Bud Light sales will be ‘permanently’ lower. Citi says buy Anheuser-Busch InBev anyway

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And, third, Kirk believes Constellation would try to pass as much of the higher costs as possible on to the consumer, as precedent suggests.

He noted that in 1991 beer prices rose by more than 12% on an absolute basis with the doubling of the federal excise tax on alcohol, but beer volumes were down only 1.6% that year.

Basically, Kirk believes beer is a product with low price elasticity, meaning changes in price have little impact on consumer demand. Therefore, raising prices may not have too much of an impact on Constellation’s results.

Kirk reiterated the buy rating he’s had on Constellation’s stock for the past 18 months. He kept his price target at $298, which implies about a 28% upside from current levels.

The stock has slipped 3.4% to date in 2024, while the Consumer Staples Select Sector SPDR ETF has climbed 13.6% and the market-benchmark S&P 500 index has rallied 26.2%.

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