Over the last 20 years, the MSCI European Beverages Index has increased four times. This compares favourably with the MSCI Europe Index which rose 1.5 times over the same period.1 There have been a few blips, namely the global financial crisis, the China gifting crackdown and the Covid-19 pandemic, but share prices have been strong across the board. How often can you say that about an entire sector? After a period of recovery, it is worth reminding ourselves about the long-term attractions of this sector.
It’s all in the brand
Never have consumers been so discerning and demanding. In an age where every town has its own gin and every celebrity their own tequila, why does this group of long-established companies continue to perform well? The secret is their unwavering laser focus on brands: growing, nurturing, investing, acquiring and, even at times, divesting. Having just one blockbuster brand can be a risk, so having a stable of strong brands allows flexibility through consumer cycles. This is articulated so clearly by Pernod. Its strategy breaks each brand down by market as a ‘star’, ‘bastion’ or ‘growth relay’, which has a direct impact on the level of investment. This gives beverage companies the ability to remain relevant across the decades, something that other sub-sectors within consumer goods find so much harder to do. There is also a lot of value in the intellectual property that sits within premium brands, such as Martell, Jameson and Johnnie Walker. This is difficult to value, but remains potentially attractive should these companies ever fall on hard times.
Brand strength in dark spirits (such as whisky and cognac) is understandable given the time taken for the liquid to mature – a unique feature in consumer goods. Indeed, it can often take 10 years of working capital to produce the first batch. Limited access to Scottish barley and French eaux de vie further heighten the barriers to entry. However, this in itself isn’t sufficient to explain the entire sector’s resilience to competition, because the brand equity of non-aged liqueur Campari or tequila Don Julio is arguably just as strong.
Nurturing and protecting the brand
The most important thing is to nurture brands, as Heineken has done for its namesake brand over more than 40 years
The most important thing is to nurture brands, as Heineken has done for its namesake brand over more than 40 years. You can also take time to grow unknown brands into household names, like Campari has done with Aperol, even if it’s at the expense of short-term margins. Indeed, the Heineken brand grew more than 8% in 2019, despite already being among the largest premium beer brands in the world.2
Premium brands are a powerful force across the sector. For European companies, their entry-level offerings are mostly already in the premium category, which gives them power to raise prices ahead of inflation. This is an important feature as we move into a more inflationary environment. However, premium brands require high levels of investment in advertising over the long term, which essentially sacrifices today’s profits for tomorrow’s sales. In order to do this in a disciplined manner, you need a long-term outlook. Family or foundation involvement in Pernod, Remy, Campari, Heineken and Carlsberg provide a unique multi-generational time horizon. This is almost impossible to replicate in a fully free-floating shareholder base. Pernod, for example, has refused to follow the current trend of flavoured whisky with Jameson. Instead, it prefers to lose potential short-term volume rather than damage the brand long term. Similarly, Pernod has also put an explicit cap on the production of premium gin Monkey 47. Elsewhere, Remy can create significantly higher returns on capital if it allows its cognac to age for 40 rather than two years. The 40-year bottles sell as Louis XIII (€3,500 per bottle), rather than as VS (€115 per bottle), but that also involves dampening current profits.
Diversifying the brand
Family and foundation involvement also allows companies to be able to self-disrupt more effectively, as we can see from zero-alcohol beer. The three largest European brewers have boldly led the world on a trend that could have been extremely damaging to their brands and businesses. What is beer without alcohol? Surely non-alcoholic beer would cannibalise their existing business? While there has been some cannibalisation, it has been fairly limited and has come at higher margins. Non-alcoholic beer has created a more sustainable core, alcohol-based business and opened up new drinking opportunities with the likes of Budweiser Prohibition and Heineken 0.0. It has also allowed them to advertise at international football and Formula 1, where returns on advertising are at their highest. Heineken took a significant risk by using its namesake brand, and did so before it was clear that this trend wouldn’t damage the alcohol-based brand. The ability to look beyond quarterly consensus expectations and create a culture of truly long-term thinking should serve these companies in the decades to come.
These are global businesses that reach into almost every market in the world. They are big enough to span the planet and yet consumers also feel affinity to the craft brands that they offer. Most of their peers either remain mostly region-specific in their distribution or with large chunks of their portfolio aimed at the more commoditised mainstream segments. In our view, this makes the European listed players so unique as standalone companies but also as a collective.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Capital at risk.
1Bloomberg June 2021
2Heineken full-year results February 2020