THE beverages sector is one in which many investors have taken solace during the recession given the characteristics of stable earnings growth, high overseas exposure and income attractions.
The sector can be broken down into the spirits industry and the brewing industry. Historically, global spirits sales have been less correlated to GDP, making spirit sales more resilient in times of economic downturn.
Beer sales on the other hand are more sensitive to GDP and volumes tend to over-shoot in good years and under-shoot in poor years.
In light of this, as the outlook for the global economy improves, it would seem likely that beer sales could recover more quickly. Over the past decade the beverage industry has consolidated with the top four brewers accounting for just under half of global beer volumes and the vast majority of the industry’s profit. This compares with around 20% in 2000.
Consolidation enables the brewers to increase their pricing power. At 42%, beer is the largest global alcoholic beverage category as measured by litres of pure alcohol and, within that, approximately half of all beer sold across the globe is sold by just four brewers: Anheuser Busch InBev, SABMiller, Heineken and Carlsberg.
As you might expect, beer trends differ considerably in the developed and developing world. Over the past five years, developing world beer volumes have achieved a growth rate of 6.8% compared with a decline of 3.4% in the developed world.
Emerging market beer trends are characterised by high volumes as consumers shift from informal, unregulated and often illegal forms of alcohol to aspirational, branded and safer (ie produced in sanitary conditions) beer.
It is estimated that emerging markets account for around 63% of global beer volumes. Given the rising personal wealth in developing markets, these markets may offer the most attractive long term growth particularly China, South East Asia, Africa and Latin America.
One notable trend within the beer industry is the move towards premium beer. Prior to the global recession the trend was accelerating as consumers became increasingly brand conscious.
In beer, this trend is played out in the local premium segment rather than the global premium segment due to the high costs of shipping beer and the importance of local brands. Local premium brands provide brewers with the largest margins as they combine local raw materials and production with premium prices.
As economies improve, the trend towards premium will most likely resume as consumers become more willing to pay for authentic, more image-oriented brands that reflect their socio economic and lifestyle aspirations.
One such example is “Snow”, a brand of bottled beer produced by SABMiller’s joint venture in China. It is positioned for the premium sector of the market.
The two dominant players in the UK beverage sector are Diageo and SABMiller. Diageo operates in the premium drinks market and is principally spirits focused with scotch and spirits representing approximately half of company sales.
SABMiller on the other hand is the second largest brewer in the world by volume with emerging markets representing over 85% of earnings.