When we face difficult times, we drink to forget; when times are good, we drink to celebrate. Alcohol consumption is a growing part of our life.
According to the World Health Organization, the adult population drank the equivalent of 6.1 litres of pure alcohol per person in 2005. Sadly, we couldn’t find more recent statistics, but the earnings of the global sectors seem to indicate that consumption is increasing. The WHO numbers support my allegation of growth in consumption as their study shows that over a five-year period, for every individual who reduced his alcohol consumption, nearly 15 people increased it.
We have a strong conviction that the trends in earnings growth will continue for the years to come and here are 10 reasons why you should load on the sectors.
The global population is expending rapidly, for every death, we have two births and therefore, the number of consumers continues to expand.
WHO research indicates that the population’s wealth directly affects consumption, the wealthiest nations consuming 10.55 litres of alcohol per year when the poor ones only drink 2.97 litres. As the middle class expands, in particular in the BRIC countries, consumption per capita is expected to expand as well.
Alcohol is now socially accepted in most countries outside of Islamic regions. When was the last time you went to diner without bringing a bottle of wine to your host? Those trends take generations to form and more generations to fade away. Beer, wine and spirits are now at the centre of any gathering, from birthdays to funerals. Sport events, religious celebrations or art performance all translate into “let’s drink to that”.
Governments derive an important source of revenue from taxation on alcohol sales. We should note that the long-term effect of important alcohol consumption may prove to be more costly in healthcare services than the taxes generated. However, in a tax-craving society, where levels of sovereign debts have passed $50 trillion, don’t expect governments to drop short-term income for the long-term wellbeing of the population. I expect taxes on alcoholic beverages to continue to increase but I don’t expect any type of push to reduce consumption.
Except for a short period in 2008, most, if not all, alcohol-related corporations outperformed the S&P500 during the last five years. It is not difficult to understand consumption increases in good and difficult times, therefore, we should expect the sector to do better in bear or bull markets.
Alcohol stocks present a growth opportunity as consumption increases. However, we also consider alcohol equity as a defensive play within the portfolio, the reason being that they are much more a consumer staple than a consumer. How many times would the average family choose beer over bread when money is scarce?
The entire sector is in a major consolidation mode. Diageo (DEO) acquisitions of Mrey Icki in Turkey and United Spirits in India over the last two years or the recent interest from AB Inbev (BUD) to acquire Groupo Modelo (GPMCF) are examples of how dynamic the sector is becoming. Our view is that large and well-established corporations will continue to capture emerging countries’ market share through acquisition over the next five years. This will be supportive of prices. All of those acquisitions will translate into important economies of scale that will positively impact the bottom line.
The difference between alcohol stocks provide an opportunity for a tactical allocation. In difficult times, move capital toward the cheaper brands such as AB Inbev (BUD) and in times of prosperity, favour higher-end products, such as Diageo (DEO) or Boston Beer Co. (SAM).
Research tends to demonstrate that a daily moderate consumption of alcohol increases the quality and the duration of life. Alcohol is an addictive substance and consumption increases should translate to even more consumption in the future.
My goal here is not to persuade anybody to hit the bar for a drink or two tonight. We need to remember that alcohol is responsible for 4 per cent of deaths worldwide. It has destroyed many lives and alcoholism has now reached epidemic proportions in countries such as Russia.
My point is that, like it or not, alcohol consumption is increasing worldwide. This trend should accelerate as emerging markets increase their population and their discretionary spending. As an investor, you can participate in this growth.
We would recommend buying Companhia de Bebidas das Americas (ABV) on a pull back. ABV presents a P/E ratio slightly higher than its competitors, easily justifiable by its future growth prospect. Remember that Brazil has the fifth largest population in the world and will welcome the World Cup and the Olympic games in the coming years. We also like ABV parent company, Anheuser-Busch InBev (BUD), and the premium beer producer Boston Beer Co (SAM).
Disclosure: Clover’s clients are long ABV, BUD and SAM.