Is It Time to Take a Look at This Rapidly Growing Market?

Luxury-goods sales have been more resilient than most during the past few years. So have sales of alcoholic beverages, and one of the sections of the market that has seen the fastest growth is the luxury-whiskey market. In particular, sales of Scotch whiskey have exploded during the past few years, and owners of some of the biggest Scotch brands in the world, such as Diageo  (NYSE: DEO  ) , Beam (NYSE: BEAM  ) , and Pernod Ricard (NASDAQOTH: PDRDF  ) , have all benefited from this trend.

According to data from the United Kingdom's Revenue and Customs department, the value of Scotch exports from the UK has increased 87% during the last 10 years. The bulk of these exports appear to be going to the United States, with Scotch exports growing 150% over the 10-year period. What's more, this trend appears to be set to continue, with Scotch exports up 11% year over year for the first half of 2013, and many projections suggest that Scotch sales are going to rise at an annual clip of 3% for the next decade.

Biggest is best
Diageo is easily the biggest listed beverage company in the world, with a market capitalization of $82 billion, 28,000 employees, and revenue of approximately $18.2 billion in 2012. Diageo's growth strategy over the past decade has been to acquire competitors around the globe that are established within their home markets. In addition, the company has also built up a strong beverage-distribution network, especially within its home country, the UK.

Furthermore, Diageo's acquisition strategy has led it to acquire some of the most valuable alcohol brands in the UK and around the world, with names such as Guinness, Smirnoff and Johnnie Walker filling its beverage cabinet. Diageo's ownership of Johnnie Walker puts it in a prime position to ride the increasing global demand for Scotch. Indeed, Diageo's Scotch sales have expanded 50% during the past five years alone, but the company is not content with this. No, the company is planning a £1 billion ($1.6 billion) investment over the next few years to meet rising demand for the spirit.

Across the pond
Meanwhile, Diageo's US peer Beam is also investing heavily to ride the rising demand for Scotch. Back in October, Beam announced it was going to open three new Scotch maturation warehouses at Westhorn Glasgow to boost the company's aging capacity by nearly 20%. Nonetheless, this investment actually pales in comparison to that of Diageo's, as Beam is only spending £3 million ($4.8 million) on the expansion.

Money to be made
Diageo's and Beam's management teams are right to be investing heavily to expand their Scotch production. As with any premium product, the Scotch business can be highly lucrative, as the nature of the product means that demand is relatively inelastic. This allows both Diageo and Beam to establish wide profit margins, making them both highly cash-generative companies. Diageo, for example, reported an operating margin of 30% for fiscal 2013, and Beam reported an operating margin of 24% for fiscal 2012.

Moreover, Scotch brands tend to have a strong reputation, and the brand names alone are worth a significant amount -- the Johnnie Walker brand owned by Diageo reached the height of luxury by partnering with the Vodafone McLaren Mercedes Formula 1 team back in 2005. Formula 1 racing is one of the most exclusive sports in the world.

Bigger in Europe
Pernod Ricard is three times the size of Beam but smaller than Diageo and is based out of Europe. The company has numerous premium Scotch brands in its cabinet and boosted Scotch production by 25% during 2012. Pernod is also boosting its ultra-premium Scotch production as, according to comments from the company's chairman and CEO Christian Porta, "The higher you go in terms of price, the higher the growth rate."

At present, premium Scotch brands currently only account for 27% of whiskey-industry sales and consumption volume. In comparison, in the cognac industry around 50% of sales are premium brands, so there is plenty of room for growth in the Scotch industry. Still, with sales expected to grow 3% annually for 10 years across the whole industry, the premium sector of the market has plenty of room for growth.

Foolish summary
Clearly the Scotch industry should not be ignored. Many luxury Scotch brands command a high premium, and the market growth is nothing be sniffed at. Moreover, with the three main players, all of which are listed above, planning to make heavy investments to boost output during the next few years, the industry could be worth a look for its high growth and profit margins.

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