In a research note yesterday, William Pecoriello of Morgan Stanley expressed concern that Constellation may eventually have to take a price increase due to a looming grape shortage and economic declines.
Among other short-term concerns, Morgan Stanley believes the U.S. wine business will likely slow with the economy and ultimately hurt STZ.
"The concern is that a US wine shortage leads to margin contraction and profit disappointment. We believe that a shortage in US wine is coming, with the income statement impact hitting in calendar 2010 / 2011. Our biggest concern is that STZ will be unable to pass on price increases due to a lack of brand loyalty in wine. We are also concerned with the impact of passing on higher prices. Our consumer research points to roughly 50% of wine drinkers altering their consumption in reaction to a price increase (trading down or reducing consumption)."
Wine & Spirits Daily