Interactive Buyside Weekly Thoughts for Market Realist
The spirits industry is an interesting one because it can relate to pretty much everyone in America and most people all over the world. So what have been the main drivers of spirits growth in the past, where will future growth come from, and how can you invest in the industry?
The global spirits industry is a $210+ billion industry made up of seven primary categories (~95% of demand), with whiskey being the most popular. A snapshot of the global breakdown by category consumed is as follows:
Focusing on the U.S. in particular, the spirits category has grown at a 5.5% CAGR since 1999. The U.S. industry accounts for ~10% of the global market and, as detailed below, spirits have taken impressive share away from beer within the overall “beverage alcohol” market.
Supplier Gross Revenue ($BN)
Market Share
Year
Beer
Spirits
Wine
Total
Beer
Spirits
Wine
1999
$21.20
$10.66
$6.00
$37.86
56.0%
28.2%
15.8%
2000
22.60
11.70
6.41
40.71
55.5%
28.7%
15.7%
2001
23.80
12.22
6.63
42.65
55.8%
28.7%
15.5%
2002
24.10
13.17
7.04
44.31
54.4%
29.7%
15.9%
2003
24.87
13.87
7.50
46.24
53.8%
30.0%
16.2%
2004
25.62
15.12
7.90
48.64
52.7%
31.1%
16.2%
2005
25.62
16.00
8.30
49.92
51.3%
32.1%
16.6%
2006
26.34
17.20
8.62
52.15
50.5%
33.0%
16.5%
2007
27.49
18.20
9.24
54.93
50.1%
33.1%
16.8%
2008
28.46
18.72
9.38
56.56
50.3%
33.1%
16.6%
2009
28.82
18.74
9.48
57.04
50.5%
32.9%
16.6%
2010
28.64
19.16
9.76
57.56
49.8%
33.3%
16.9%
2011
29.24
20.36
10.19
59.79
48.9%
34.1%
17.0%
2012
$30.32
$21.29
$10.53
$62.13
48.8%
34.3%
16.9%
13-yr CAGR
2.8%
5.5%
4.4%
3.9%
Source: DISCUS Estimates & Adams/BIG Wine Handbook, Distilled Spirits Council
When we compare spirits to beer and wine, the 5.5% annual average growth rate seen is almost double beer’s 2.8% CAGR. Spirits didn’t even see a dip in sales during the 2008–2009 downturn, nor have they ever lost share over the past 13 years.
Global market
When looking across the world, we see that global spirits consumption has been growing impressively across all continents. Asia Pacific is leading the group, with double-digit growth, and the Americas are trending consistently in the 5.5% CAGR range. The projected growth over the next few years is clearly conservative, as we expect spirits growth in emerging markets to widely outpace the 2%-to-3% growth Vinexpo is predicting.
Global Spirits Consumption by Geographical Region ($BN)
Year
Asia Pacific
Americas
Europe
Other
2005
$41.1
$41.1
$44.7
$16.6
2010
$85.3
$53.3
$50.8
$20.8
5-yr CAGR
15.7%
5.3%
2.6%
4.7%
2014E
$94.4
$58.4
$55.7
$22.8
Est 4-yr CAGR
2.3%
2.3%
2.3%
2.3%
Source: Vinexpo
This global growth has clearly benefited U.S. producers of spirits. U.S. spirits exports hit record highs in 2012, and the growth across the board over the past ten years for global customers has been astounding.
Country
2002 Value (Jan–Nov)
2012 Value (Jan–Nov)
% Growth
Canada
$62.9
$196.2
212%
Australia
$51.3
$152.6
197%
UK
$78.3
$144.0
84%
Germany
$61.6
$109.6
78%
France
$30.0
$108.7
262%
Japan
$66.1
$84.9
28%
Netherlands
$11.5
$63.2
450%
Spain
$22.8
$58.0
154%
Mexico
$16.2
$74.5
358%
Italy
$18.2
$25.1
38%
Note: $ in millions of USD Source: U.S. Department of Commerce
Reasons for growth
The drivers of this growth at home and abroad have been a mixed bag. Besides the fact that most human beings simply enjoy the feeling that alcohol gives us, select reasons for this spirits growth include:
Expansion of the middle class in emerging markets increasing consumer base for spirits
“Premiumization” of select spirits products continuing to captivate consumers
Consumer tax increases on spirits products avoided for the most part
American whiskey! Driving third year of record exports (68% of total U.S. spirits exports)
Growth driven by product innovations, specifically flavored spirits and ready-to-drink cocktails
27% of spirits volume sold in U.S. is now “flavored”
Spirits outlook
Most management teams of alcohol companies are in agreement that the U.S. spirits market should grow at 3% annual rate on the volume front, with anywhere from 1% to 3% of additional growth momentum on top of that due to price and product mix gains. European growth for the most part is expected to be flat, as consumers are cash-strapped due to the economic struggles across the pond. Emerging markets continue to be the bright spot for most management teams, as the consumer base continues to expand and penetration rates of premium spirits abroad is still very low. All in all, the Distilled Spirits Council expects global spirits industry revenue to grow at a 5% annual clip through 2015.
Where to invest
There are six main public spirits players (three in the U.S., three in Europe). The comp group has historically traded in the 10x-to-15x-forward-EBITDA range, as high barriers to entry and high margin/cash flowing business models warrant a premium multiple. Comps below:
Stock
% of 52-
Enterprise
EV/ EBITDA
EBITDA Margin
Company
Price
Wk High
Value (MM)
2013E
2014E
2013E
2014E
Brown-Forman
$71.22
98.9%
$15,383
16.5x
15.0x
24.6%
25.3%
Beam
$67.20
98.6%
$12,908
15.6x
14.6x
31.4%
31.8%
Constellation Brands
$49.90
99.1%
$12,239
8.9x
7.5x
27.8%
27.6%
Diageo PLC
£19.87
93.9%
£56,812
14.5x
13.4x
34.1%
34.2%
Pernod-Ricard SA
€92.60
91.5%
€32,087
13.0x
12.0x
28.3%
28.8%
Remy Cointreau SA
€87.80
86.5%
€4,466
16.6x
14.5x
22.5%
23.5%
In terms of investment strategy, the above names (in tandem with the overall market) have for the most part been on a tier. They’re at the top end of their historical valuation ranges, and most are earning record margins. To their defense though, industry dynamics are still attractive and spirits players have some helpful tailwinds going for them. I’d wait for a broader market pullback before jumping into these names (ignoring any company-specific catalysts that might drive certain names higher). Over the next year or so, I could see further M&A activity within the space, as this has historically been a pretty active deal-oriented industry. Winchester Capital gives a decent overview (pg 4–5) on spirits market M&A trends.
The Market Realist Take
The global spirits industry is poised for further growth in 2013. Preference for flavored spirits is especially on the rise. According to the Chicago-based Technomic’s recently released “2013 Spirits Trends in Adult Beverage (TAB),” flavor innovation helped propel the spirits industry to hit a milestone in 2012 and is fostering continued growth in 2013. As discussed above, emerging markets have helped to drive significant growth, as rising standards of living in countries like China and India have fostered demand for premium brands. However, the industry’s growth depends on the health of the economy. Global brands in emerging markets have seen slowing sales in some of these markets due to weak consumer sentiment following high inflation and economic slowdown. Diageo (DEO), Constellation Brands (STZ), Beam (BEAM), Anheiser Busch (BUD), and Molson Coors (TAP) are top brands of interest in this sector.
