A Tipsy Market Ride
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Intro |
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Looks like the economy is on the rocks, but Americans are still buying alcohol like it's going out of style. In both good and bad times, Americans have spent a staggering 1% of their annual income on alcohol. |
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The adult beverage industry is not only recession-proof, it's also thriving like a drunk college student at a frat party. The total volume of alcoholic beverages consumed worldwide grew by about 3% in 2021, proving that even in tough times, people still need their liquid courage. |
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The boozy business is bubbling with companies that raise a glass to paying out consistent dividends. Not only do they pay out regularly, but they also seem to have a knack for increasing them. And when it comes to stock performance, these companies are always ready to raise a glass to success, even when the rest of the market is drowning its sorrows. |
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In fact, experts have discovered that stocks in the "sin industries" of alcohol, tobacco, and gambling often end up being the life of the party when it comes to returns. A study found that between 1996 and 2016, sin stocks returned a whopping 11.5% per year while the S&P 500 only returned an average of 7.8% annually. |
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Sure, maybe sin and high-dividend stocks aren’t the sexiest investments. But they’ve provided consistent returns and might be a safe choice if you want to add stability to your portfolio. |
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History |
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It's hard to imagine a time when alcohol wasn't flowing like water at American parties, but just a century ago, Prohibition was the sobering reality. Prohibition refers to the period in the United States from 1920 to 1933 when the sale, manufacture, and transportation of alcohol were banned. |
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Prohibition is remembered for being the ultimate party pooper - it sparked a rise in drunkenness, eliminated jobs, created a black market for booze, and triggered a plethora of unintended economic consequences. |
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After Prohibition was lifted in 1933, the alcohol industry finally emerged from the shadows and into the arms of the federal government, specifically the Bureau of Alcohol, Tobacco, and Firearms (ATF). The industry underwent a significant makeover, with big-name corporate producers taking center stage and advertising becoming totally legal. It was no longer a secret society, but a mainstream industry. Cheers to that! |
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In the groovy 60s and funky 70s, the alcohol industry was in a state of flux as wine and other fancy-pants beverages started to become all the rage. As American taste buds evolved, a select few companies cashed in by gobbling up their smaller competitors. |
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In came Constellation Brands, for example, as the company decided in the 1980s to branch out from just being a one-trick pony by buying up breweries and distilleries. Constellation snagged up Corona and Svedka vodka, but they weren't done yet. In the 1990s, they continued to dominate the beer and spirits market with acquisitions of big names like Modelo, Black Velvet Canadian whisky, and High West whiskey. |
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While Constellation was busy acquiring other companies, their competitor Anheuser-Busch was busy revolutionizing the game. Not only did they follow suit with similar acquisitions, but they also introduced the world to the Budweiser Clydesdales - majestic horses that not only pulled in customers but also became the ultimate symbol of the brand. But they weren't content with just being top dog in the beer industry, they diversified into other industries like entertainment and tourism, owning properties like SeaWorld and Busch Gardens. |
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Universe |
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Even as the alcohol industry evolves, the same handful of major players continues to stick around. Some say the heavily-regulated nature of the industry stifles innovation, and others blame the few big mergers back in the day for why the same major players dominate the industry. |
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The major players in the industry manage vast collections of drink brands. For example, Constellation Brands ($STZ) are the proud custodians of Modelo and Corona, two of America's most beloved brews (sitting at #2 and #5 on the popularity charts). But Constellation Brands also owns Svedka (the #3 vodka in the United States) as well as an expansive wine portfolio. |
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Anheuser-Busch, on the other hand, is the king of frat party coolers, from owning Budweiser, Bud Light, Natural Light, and Stella. While many players in the alcohol space aren’t afraid to self-cannibalize and launch products that may compete with their others, it’s worked for Constellation Brands. |
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The alcohol industry has undergone a major shake-up in recent years as canned cocktails and hard seltzers have taken the throne from traditional beers. White Claw was one of the first major players (owned by the Canadian company Mark Anthony Group). |
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But it seemed like every alcohol company tried to jump on the hard seltzer bandwagon. Hard seltzer sales began to fizzle, and canned cocktails evolved into a $2 billion industry as of December 2022. |
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Some thought the rise of canned cocktails and hard seltzer could finally give the big boys a run for their money and break their stranglehold on the industry for years. But given how oversaturated the adult beverage industry became, it seemed like the top dogs (Anheuser-Busch, Constellation Brands, Molson Coors, etc.) were best positioned to thrive. |
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Anheuser-Busch bought Cutwater Spirits in 2019, and now it's one of the fastest-growing canned cocktail brands. Constellation Brands launched Corona seltzers to compete with White Claws and cut a deal with Coca-Cola to produce canned cocktails under the Fresca brand. |
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Last year Diageo (parent company of Smirnoff and Guinness) invested $110 million into a read-to-drink plant in Chicago. And Molson Coors has spun off its own hard seltzer products and even announced a new zero-proof canned cocktail last week. |
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In the 1970s and 1980s, companies like Anheuser-Busch and Constellation Brands were ahead of the game, anticipating the shift in American tastes from beer to wine and spirits. They cashed in big time by buying up wine and spirit companies, and it looks like history is repeating itself as we're seeing the same savvy business moves being made today. |
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Constellation Brands ($STZ) |
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Constellation Brands is one of the largest players in the industry, and the company has turned diversification into its secret weapon. While some of their competitors may only have their eyes on one aspect of the biz (Anheuser-Busch is the king of beer, and Brown-Forman reigns supreme in the liquor game), Constellation wants to do it all. |
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And, so far, it’s been working. Constellation Brands holds its own in the beer sector, with Corona and Modelo reigning as some of the most popular in the United States. But not only does Constellation hold a top spot as the #2 wine supplier in the US, but they also have a firm grip on the vodka market, owning the #3 brand, Svedka. And with Coca-Cola's recognizable name behind them, Constellation's canned cocktails are sure to soar to new heights in the crowded adult beverage market. |
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Long-term, Constellation Brands is poised for success. That said, the company invested $4 billion in the cannabis company Canopy Growth in 2018, and its stock hasn’t quite recovered since. While the deal didn’t go as planned, Constellation is combining its cannabis assets into single entity which should deliver shareholder value in the short and long term. At the same time, the company retains its position should the cannabis industry grow as it’s expected to. And who knows, maybe Constellation will offer some CBD-flavored hard seltzers down the road. |
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Constellation Brands’ net beer sales soared 15% in 2022, while the company experienced a 12% growth in total sales. This growth is exciting for an industry that is accustomed to ‘slow-and-steady’ growth. |
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And Constellation’s hands in beer, wine, liquor, and canned cocktails positions the company to whether any new fads or trends in the industry. Constellation can lean on its other segments if, for example, beer goes out of style. And Constellation has the capital necessary to deploy should another acquisition be necessary. |
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Bulls |
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When the economy goes south, it may feel like the end of the world, but fear not, my thirsty friends! The alcohol industry is like a phoenix rising from the ashes - sure, they may take a hit, but they always come back stronger, and faster, than you can say "happy hour." |
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It's no shocker that the alcohol industry remains steady as a rock, whether the market's a bear or a bull. After all, we all know the old adage, "when life gives you lemons, make a vodka lemonade." Whether you're feeling blue, toasting to a promotion, or just being a polite dinner guest, alcohol always finds a way to make an appearance. So, cheers to the always reliable alcohol industry! |
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The cost of getting tipsy soars every year, with beer, wine, and spirit prices increasing by a sobering average 5-7% annually. But don't worry, the brewers, bottlers, and distributors are still feeling the buzz from their profit. |
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Alcohol has a relatively universal appeal with Americans. Americans who earn $70,000 or more, spend an average of $850 on booze annually. The party isn't just for the well-off, even the less affluent had a good time with the percentage of annual income spent on alcohol hovering around 1%. |
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Bears |
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While alcohol companies have traditionally been stable investments, some investors worry about the future of the industry, given the heavily-regulated nature coupled with an institutional focus on ESG. |
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Changes in consumer preferences: Consumer preferences for different types of alcohol can change quickly, which can impact the profitability of certain companies. For example, if a company's main product is a type of beer that falls out of favor, it could struggle to stay afloat. |
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Conclusion/Recommendation |
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The alcohol industry is in a unique position. While alcohol consumption is reaching new heights of popularity, the industry is being shaken up by the emergence of trendy newcomers like hard seltzer and canned cocktails. |
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History repeats itself, and the adult beverage industry is no exception. In the 1970s and 1980s, we saw a rise in the popularity of wine and spirits, but it was the bigwigs of the beer industry who were sipping on success as they gobbled up any competition in their path. |
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The big dogs of the industry will continue to reign supreme as the market grows. Investors can't resist a tasty dividend stock, and the companies that have already claimed their spot in the industry are more likely to be serving up generous portions. The top players also have the upper hand when it comes to navigating the treacherous waters of regulations - newbies are spending a fortune trying to navigate the FDA, while the established players have already paid their dues (and potentially even developed decade-long relationships with regulators). |
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The adult beverage industry is a good way for some investors to grow their wealth through steady growth and consistent dividends. Given the industry’s unique dividend appeal to investors coupled with stringent regulations, major players like Constellation Brands and Anheuser-Busch are the safest bets for success. |
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