2023-05-11 16:57:50 ET
Summary
- The beer industry is classified as a Consumer Staple, suggesting that it could be a safe haven in economically troubling times.
- This article studies this assertion from several perspectives, starting from the growth potential of the industry to the pricing power of beer companies, and to the beyond-beer alternatives.
- The top two beer companies in the U.S., BUD and TAP, are discussed to see if any of them are investments that will appeal to investors of different stripes.
Introduction: The beer industry
As part of my exploration into industries that are resilient in difficult times, I studied the beer industry.
Beer is not a new product. It has been brewed and consumed for several millenniums. Today, it is a drink that you can easily find in supermarkets, petrol stations, bars, and even online.
Beer also happens to be classified as a Consumer Staple , one of the few categories that hold up well during recessionary periods .
Investopedia has this to say about Consumer Staples:
Consumer staples are considered to be non-cyclical, meaning that they are always in demand , year-round, no matter how well the economy is-or is not-performing.
Being "always in demand" sounds really good to conservative investors who are looking for stability amidst turmoil and uncertainty. Stability however is not a panacea for poor market performance, just like volatility is not necessarily something to frown upon.
My readers are likely familiar with the type of stocks I like: companies with high total return possibilities . In my own words, if a company is operating in an industry with growth potential and can generate capital appreciation, all while providing me with a steady stream of income , I will be inclined to part with my money to own shares in this company provided the company is selling at a price that justifies risk-and-reward .
This article looks at the beer industry from a few angles.
Firstly , is the beer industry growing in global sales volume ? In other words, do I expect it to keep growing? If it is then the companies that make up the industry can keep growing.
Secondly , is the beer industry growing in global sales revenue ? This is important if the answer to the first question is no. If the sales volume is decreasing but revenue is increasing, it means the beer companies are able to make up for the declining sales by increasing unit prices.
Thirdly , if the above is true, it will mean that beer companies have pricing power; they can keep raising prices and consumers will keep buying. The caveat will be this: Are the price increases keeping pace with inflation or is it falling behind?
Fourthly , is the beer industry diversifying to sell other beverages, and are those alternatives doing better than beer? In other words, if the sales volume and revenue from beer are stagnating, are the alternatives in the beyond-beer category providing the growth that can propel these companies to new highs?
Fifthly , in the context of the answers garnered from the research above, which beer company is the best positioned to succeed?
Lastly, if there is one company that stands out after being put through the paces, is it priced right? Valuation matters and it matters a lot.
Let's get to work.
Has the beer industry been growing in sales volume?
Based on the global (not just US) sales figures by volume, there has been hardly any sales volume growth for the last 10 years (see Graph 1 below). Even after considering the unfortunate effects on the out-of-home sale of beer on the retail side due to the COVID-induced global lockdown and disregarding the decline in sales from 2020 onwards and only examining the volume of beer sold in the years before 2020, the "growth" from 192.67 billion liters of beer sold in 2014 to 196.04 billion liters in 2019 represents an increase of just 3.37 billion liters or a 1.75% increase over five years .
Graph 1: Statista Global Beer Sales in Volume (billion liters)
That kind of "growth" figure is unimpressive, to say the least.
Commentary from the beverage can producer Ball Corporation (NYSE: BALL ) is also corroborating this narrative of a decline in sales volume. BALL's CEO Dan Fisher said this at the Q1 2023 earnings call,
With near-term macroeconomic conditions continuing to pressure consumer demand, Ball's year-to-date global beverage can volumes were down 1.4% in the first quarter , in line with our expectations... We started 2023 with a conservative view on annual global beverage shipment trends, and we maintained that conservative second-half weighted view .
However, let's keep an open mind. Perhaps the beer industry behaves like the tobacco industry; tobacco companies can continue to hike prices every year to increase revenue and earnings per share even though sales volume is not.
Has the beer industry been growing in sales revenue?
Earlier, we saw that the volume of beer sales has basically plateaued. If the beer companies managed to raise prices despite selling the same amount of beer, their revenue would increase. Unfortunately, the data below does not suggest this to be the case for the beer industry as a whole. In fact, while the volume of beer sold globally increased slightly from 2014 to 2019 (refer to Graph 1 above), the global revenue collected through these sales actually fell slightly in the same time period from $646.15 billion in 2014 to $638.87 billion in 2019 (refer to Graph 2 below ).
Graph 2: Global Sales of Alcoholic and Non-Alcoholic Beer from 2014 to 2022
To be able to keep revenue from declining along with declining volume sales, the beer companies must have been raising prices on their products. Does this mean that all is fine since the price increase should address the falling sales volume? In other words...
Do beer companies have pricing power?
The short answer is no. It is clear from Graph 3 below that after adjusting for inflation, the price of a 16-oz beer has averaged around $1.42 for thirty years. Imagine that: after 30 years, the price per unit of alcoholic beer still has yet to return to the 1992-high of $1.48 for a 16-oz beer.
Graph 3: Author's Compilation of Beers Inflation Adjusted Price from 1990 to 2020
Perhaps the current inflationary period will give cause for greater price increases that will boost profitability . Beer companies do increase prices, sometimes several times a year.
CEO Gavin Hattersley of Molson Coors (TAP) shared the following in the Q1 2023 earnings call ,
The strong net pricing growth included benefits from higher than typical U.S. and Canada pricing in 2022. As a reminder, in the U.S. in 2022, we took two pricing increases , a spring and a fall, each averaging approximately 5%. The spring increase was taken in January and the beginning of February, which was earlier in the first quarter than usual and the fall increased began in September 2022.
When the cost of production increases, that gives management a legitimate reason to raise prices even more and maybe more frequently.
But 60 years' worth of data (see Graph 4 below; data sourced from Stacker ) tells me that the inflation-adjusted price for a 16-oz beer actually fell during the 60-year period , even during the high-single-digit to double-digit inflation period from 1974 to 1982.
Graph 4: Author's compilation of data from 1960 to 2020 on the inflation-adjusted price of 16-oz beer
This does not look like a business that has pricing power despite its ability to increase prices yearly. Earlier, I drew a possible parallel between the tobacco business and the beer industry. Both are experiencing declining sales volume and both have been able to raise prices. There is a distinct difference, however.
Graph 5: Tobacco versus Beer Data from the U.S. Bureau of Labor Statistics
As you can see/infer from the producer price index for both the tobacco and beer industry in Graph 5 above, the price increases for the tobacco industry (blue line) far outpace that of the beer industry (green line).
Further evidence suggests that price increases in beer are less than inflation. The Official Data Foundation , which uses data from the U.S. Bureau of Labor Statistics, states:
Beer , ale, and other malt beverages at home experienced an average inflation rate of 2.76% per year . This rate of change indicates significant inflation. In other words, beer, ale, and other malt beverages at home costing $20 in the year 1952 would cost $137.80 in 2023 for an equivalent purchase. Compared to the overall inflation rate of 3.48% during this same period, inflation for beer , ale, and other malt beverages at home was lower .
Finally, the CEO of BUD Michel Doukeris openly acknowledged that beer prices are lagging behind global inflation .
Therefore, I believe that all the price increases the beer companies are pushing out to their consumers are accomplishing two things: maintaining margins and slowing the decline in revenue amidst the rising costs of doing business , especially in the last five years. More on this in the Risk section.
Yes, beer companies can increase prices but they have to be careful about it. Raise it too much and your consumers may change to another brand. Raise it too fast and your competitors will be able to price their beers just below yours if they want to steal your market share.
Is the beer industry diversifying?
As an industry, global sales volume has plateaued . There are forecasts to suggest it will grow to levels exceeding that of previous highs by 2025 but I am not holding my breath.
As an industry, global sales volume has stagnated , even declined slightly.
As an industry, although beer companies have been able to raise prices, price increases have lagged behind inflation, suggesting that these companies do not have real pricing power .
Management at the major beer companies knows the above situation better than I do. And that is why they have been looking for growth catalysts in other products. Many of these categories are fast-growing, like non-alcoholic beer, and hard seltzer.
Graph 6 below shows a totally different revenue growth scenario from the sales of non-alcoholic beer. Apart from the slight decline in 2020, by 2022 the sales revenue for that year has already exceeded all previous highs. According to the research by Statista, this market is expected to grow annually by 7.56% till 2027, which if extrapolated, will double from $32.22 billion in 2022 to $64.39 billion in less than 10 years.
Graph 6: Statista Global Revenue of Non-alcoholic beer
However, to put that in context, even at $64.39 billion, that is still around 10% of the total sales revenue of $638 billion in 2019.
Graph 7 shows more amazing growth in the hard seltzer category. If the expected growth rate of 16.92% holds for the next nine years, this market would have quadrupled from $15.7 billion in 2022 to $64 billion in 2029.
Graph 7: Statista Global Revenue of Hard Seltzer
Once again, to put that in context, even at $64 billion, that is still just 10% of the total sales revenue of $638 billion in 2019.
Of course, put together, these two fast-growing segments will make up around 20% of the 2019 sales revenue, which is great - if the growth happens . A big if .
When I listened to the conference calls of the major beer companies, I could sense management's excitement talking about all the double-digit growth.
CEO of BUD Michel Doukeris said,
In South America, our business in Brazil delivered double-digit top and bottom line growth, with 235 basis points of margin expansion. Our beer volumes grew by 0.9%, with stable market share despite lapping a strong comparable. Our premium and super-premium brands led our growth, delivering a volume increase in the mid-30s .
In South Africa, we delivered record-high volumes for the first quarter and grew revenue by high single digits .
CEO of TAP Gavin Hattersley said,
Turning to EMEA and APAC. Net sales revenue increased 16.1% and underlying pretax income increased 27.6%. Positive net pricing included the rollover benefits from increases taken in 2022. Favorable sales mix on continued premiumization fueled by the strength of brands like Madrí and positive geographic mix drove net sales per hectoliter growth of 15.1% .
However, everything said must be put in context.
The largest alcoholic beer markets are the Americas, Asia, Europe, Eastern Asia, North America, and Europe. None of these have recovered fully from the effects of the pandemic. Each of these markets is still reporting sales revenue that is below that of 2019 (see table below).
On the contrary, huge growth is being reported in the non-alcoholic category in most geographical regions in the world. And in the major markets mentioned earlier, the growth in sales from 2019 to 2022 was in the double digits.
Author's compilation of data sourced from Statista
And as always, the caution that I need to state is the revenue contribution from the non-alcoholic segment is only in the mid-single digit percentage of the total alcoholic and non-alcoholic sales in 2022 . In other words, investors in this industry should not look to these growth areas as catalysts that can boost the bottom line significantly in the near term. They do provide hope to address the decline in the alcoholic beer category but consumer taste can change rapidly so investors should be careful not to rely on the non-alcoholic beer segment.
Which beer company is the best positioned to succeed?
Usually, if an industry that I am studying does not show much growth potential and the products sold do not seem to command pricing power, I will usually move on to the next idea. However, as one wise man often reminds us,
This is a market of stocks, not a stock market.
Keeping an open mind. Below are seven beer companies arranged in terms of market capitalization.
Seeking Alpha Beer Industry Comparison
For a $10,000 investment in each of these stocks over a 10-year period, only Boston Beer Company (NYSE: SAM ), Heineken NV ( OTCQX:HEINY ), Carlsberg A/S ( OTCPK:CABGY ) and Molson Coors Beverage Company had price appreciation. Investments in Anheuser-Busch InBev ( BUD ), United Breweries Company, and Ambev SA (NYSE: ABEV ) would have lost money.
As BUD and TAP are the two companies with the largest market share in the US with operations in other geographical regions, I will be comparing these two companies.
The performance and valuation of BUD
BUD is an A- credit-rated company with 51.42% in long-term-debt-to-capital-ratio and is paying a dividend at a yield of 0.99%. It is the market leader in the U.S. and globally. The company took on a lot of debt in 2016 but it has been steadily reducing that, down from $122.7 billion in 2016 to $80 billion in 2022. However, those are the only positives I can say about the company.
Fast Graph
BUD has been a poor performer over the past 15 years, underperforming the benchmark SPY by more than 600 basis points.
BUD would have disappointed growth investors seeking price appreciation.
It would have disappointed dividend growth investors seeking dividend growth.
It would certainly have disappointed income investors since BUD cut the dividends more than once.
And to rub it in, SPY paid out more dividends than BUD in this 15-year period.
In addition, BUD does not appear to be a shareholder-friendly company. It has been diluting shareholders, increasing the basic shares outstanding from 999 million in 2008 to 6 billion shares by 2022.
The only justification for investing in BUD is if it were trading at a deep discount.
BUD has historically traded at a P/E north of 22 so at the current multiple of 19.26, it would appear that BUD is trading at a slight discount. I modeled a scenario where the company trades down to a P/E of 15 by 2025, and if the analysts' projections for the adjusted operating earnings hold, the stock could break even. But if BUD can continue to trade at its current P/E of around 19.5 which is below its last 5-year historical P/E of 26.39, it can potentially return 13.28%.
I will not trust these forecasts as the company has managed to miss almost every 1-year and 2-year earnings forecast in the last seven years , and those were double-digit misses that went up to 32%, 44%, 57%, and even 63% . That is worrisome.
Seeing how often (and badly) BUD has missed the earnings forecasts in the past seven years, I modeled a scenario where BUD misses the forecast by 30% in 2024 and the adjusted operating earnings fall to $2.60 per share. And let's say analysts project a healthy recovery in 2025 of 20% to get to $3.12 per share, and BUD misses that by just 10%, and the earnings per share fall to $2.81. Using these conservative figures, and assuming for some outlandish reason the market decides to give BUD a P/E multiple higher than what it is trading now, the investment will only break even (before accounting for dividends).
In my opinion, an investment in BUD at the current valuation has limited upside and a lot more downside.
The performance and valuation of TAP
TAP is also an investment-grade company with a credit rating of BBB- which is obviously lower than BUD's A- credit rating. TAP has a smaller long-term debt-to-capital ratio than BUD at 32.39% so that is one point in its favor.
It has the second largest market share in the U.S. and globally TAP has 5% of the market share . Its total debt shot up from $2.9 billion to $12.1 billion in 2016 with the acquisition of MillerCoors but it has since reduced that by almost half to $6.7 billion by the end of 2022.
However, an investment in TAP would not have been something one would crow about.
Over a 20-year period, the SPY outperformed TAP by more than 300 basis points, generating more dividends and growth.
TAP seems to be more shareholder-friendly than BUD. It cut dividends only once - in 2020, which is understandable - and has since increased that payout although that is still far below the 2019 level. The average dividend growth prior to the cut in 2020 was a respectable 10.43% and management is committed to placing this as a priority. In the Q1 2023 earnings call, CFO Tracey Joubert said,
And we return cash to our shareholders with a quarterly cash dividend of $0.41 per share. The dividend represents an increase of 8% from the fourth quarter 2022 level. It is our second increase since we reinstated the dividend in 2021 and it aligns with our intention to sustainably increase the dividend.
However, that commitment to a shareholder-friendly dividend policy does not automatically make TAP a buy. Even after discounting the dividend cut in 2020, TAP still underperformed SPY from 2002 to 2019. Yes, it eked out a slightly larger dividend payout than SPY, but the investment as a whole would have underperformed SPY by more than 3.6%.
Similar to BUD, TAP had also embarked on a path to grow by acquisition, and diluting shareholders to raise capital has been an inevitable part of that approach. The number of basic shares outstanding increased from 72.3 million in 2002 to 216.9 million in 2022, which is not too bad when compared to BUD's 6-fold increase in shares in a shorter time period.
Based on the above, TAP is clearly not suitable for growth-oriented investors. Dividend growth and income investors may consider giving TAP a second chance since it did that part reasonably well prior to the pandemic, though I would not since as an investment it did underperform the SPY.
Valuation-wise, TAP seems overpriced. Its P/E ((TTM)) is 14.81 while its past 5-year average P/E is just 11.78. In a generous scenario where TAP generates adjusted operating earnings that the analysts had forecast and the stock continues to trade at the current P/E of 14.8 (which is above the past 5-year average), the stock will only return 5.05% with dividends reinvested. If TAP were to trade back to its 5-year average P/E, it could represent a 15% drop in price.
In my opinion, an investment in TAP at the current valuation has very limited upside and a lot more downside.
Risks from cost escalation
The cost of production for beer is an important factor that impacts profitability, and aluminum is a big part of that. According to the Beer Institute , " aluminum is the single largest input cost in American beer manufacturing ". As seen in Graph 8 below, the prices of canned beer rose in tandem with the prices of aluminum sheets, plates, and foil.
In the recent two years, due to various issues like supply chain constraints, tariffs , and the rising cost of labor, the cost of aluminum sheets, plates, and foil increased dramatically, and that put a dent in the profitability of beer companies. It is therefore a good thing for beer companies that the price of aluminum has come down in the last few months (see Graph 9 below).
Yet, even the lower prices in 2023 are still higher than most years before 2021, which will clearly dampen profitability and margins even further.
And there is no telling if prices of aluminum will go up again in the near term. China produces almost 60% of the world's aluminum. If demand for aluminum spikes in China, aluminum prices may rise again. A combination of depressed inventories and increasing demand points to an increase in prices for aluminum sheets that are used to make beverage cans.
CRU, Alcoa Analysis
Conclusion
There are certainly bright spots in the beer industry that are capturing the attention of investors. Beverage options in the beyond-beer category are driving the "growth story", with impressive double-digit growth in most geographical regions. Non-alcoholic beers, hard seltzer, and ready-to-drink products are promising areas that will, in time, serve to replace the revenue from the declining alcoholic beer category.
According to Statista ,
Ready-to-drink (RTD) spirits were the biggest single-category sellers in the distilled spirits industry in 2021. Worldwide, over 700 million 9-liter cases of ready-to-drink (RTD) spirits were sold.
And this excerpt from a Forbes article makes it clear where the growth in this industry is coming from,
There's no slowing down the ready-to-drink (RTD) category. A new report from the IWSR, a global leader in beverage alcohol data and analysis, notes that the category value will increase by an additional $11.6 billion over the next five years .
The category's massive growth is charged by consumer demand for more premium RTD products - in the category, value growth is outpacing volume growth by 8% vs 5%. This is largely driven by new entries of spirits-based offerings and well-known premium brand extensions. Flying Embers, Diddy's Ciroc extension, William Grant's bottled cocktails - all highly appealing alternatives to standard hard seltzers.
Volume-wise, the category is expected to grow by 24% over the last five years.
No matter how fast-growing these categories are, they still form a very small percentage of the total revenue of the companies in the beer industry, and it will take considerable time before the growth in these areas can make a significant difference to the bottom line.
And there are many cost variables such as the price of aluminum that are outside the control of the companies, and if these prices were to remain elevated, margins and profitability will certainly be adversely impacted.
To end, let's review the six questions that I posed at the start of this article, and answer them.
Firstly , is the beer industry growing in global sales volume? No .
Secondly , is the beer industry growing in global sales revenue? No .
Thirdly , do beer companies have pricing power? No .
Fourthly , is the beer industry diversifying to sell other beverages? Yes .
And are the alternatives in the beyond-beer category providing the growth needed to propel these companies to new heights? Eventually but still far from it .
Fifthly , in the context of the answers garnered from the research above, TAP seems to place more emphasis on the fast-growing beyond-beer categories, evident from the higher frequency that category was mentioned in its earnings calls compared to BUD's. It is also more shareholder-friendly than BUD.
Lastly, is there one company that stands out and is it priced right? No .
The beer industry and the two companies I researched do not have the characteristics that I look for in companies. Both companies are operating in an industry with stagnated sales and volume growth. Both companies have underperformed the SPY. Both slashed dividends , so there goes the total return (price appreciation and steady dividend income) that I like to see in the businesses that I invest in. And at their current valuations and forward growth expectations, I do not see a favorable risk/reward scenario for either company.
For further details see:
Should Investors Consider The Beer Industry? Spotlight On Anheuser-Busch And Molson Coors