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Spirits' Strength Should Lift Brown-Forman and Diageo

By James Brumley – Apr 16, 2020 at 8:57AM

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The coronavirus outbreak may have millions stuck at home, and even out of work, but they're not likely to give up their favorite alcoholic beverage.

Fans and followers of the adult beverage industry are undoubtedly aware of the impact hard seltzers have made. For the first time in 25 years, 2019's wine sales in the United States fell, while data from the Beverage Information Group says beer extended what's become a six-year downtrend.

The driving force of that deterioration has been widely chalked up to the rapid growth of the aforementioned hard seltzers. Led by brands like market-leading White Claw and Truly, owned by Boston Beer (SAM -5.62%), Nielsen estimates sales of the carbonated, low-carb alternative drink roughly tripled last year. Financial analysts from Jefferies and UBS are both looking for more double-digit growth in hard seltzer sales for the foreseeable future.

What's largely been omitted from the discussions to date, however, is that sales of spirits like bourbon, whiskey, and rum continue to chug ahead, unfazed by the disruption that's affected most other corners of the booze market.

Spirits lifted

The Distilled Spirits Council of the United States, or DISCUS, crunched the numbers. It reported in February that revenue generated by its distillers grew 5.3% last year, driven by a 3.3% increase in total volumes sold. DISCUS added that spirits took at least some of the market share from wine and beer that had been attributed to hard seltzers.

Bottle of bourbon, whiskey being poured into a glass with ice.

Image source: Getty Images.

It wasn't much, to be fair. Its total share of the alcohol industry's net U.S. revenue improved roughly 50 basis points to 37.8%.

Still, given the circumstances -- a relatively bitter tariff war that's crimped exports -- a 10th consecutive year of market share growth isn't too bad at all.

It's an obscured undertow that could seemingly be a tough one for investors to plug into. The liquor market is flooded with brands, and it's difficult to even simply know which labels are part of a publicly traded entity and which are privately held. But, as it turns out, a wide swath of these names is owned by a fairly small handful of companies that don't mind a little intra-company competition. Chief among them are Brown-Forman (BF.A -0.71%) (BF.B -0.70%) and Diageo (DEO -0.07%).

Brown-Forman and Diageo built to last

Diageo may be the name behind Guinness, but the bulk of its business is driven by booze brands like Tanqueray gin, Johnnie Walker scotch, and Smirnoff vodka, just to name a few. And, while Europe and North America are its breadwinners, the company's got respectable exposure to the Asia/Pacific region and Africa. Even Latin America and the Caribbean region account for about 10% of its top line. In the same vein, its production facilities are geographically diversified, sidestepping some of the tariff headaches that have plagued other companies.

Brown-Forman, on the other hand, is about as American as they come. It's also not quite as much of a pure play on spirits as Diageo is. While it's the parent to labels like Jack Daniels and Woodford Reserve whiskey and Finlandia Vodka, it's the owner of wine names Korbel and Sonoma-Cutrer as well. It's also most definitely been adversely affected by tariffs imposed on its exports to several other countries.

Still, whatever headwind tariffs have been creating, Brown-Forman is plowing through them. Through the first nine months of the current fiscal year that will end this month, sales were up 3%. Premium bourbon sales provided most of that growth. Conversely, it was weakness in non-branded and bulk sales of spirits that's kept growth fairly tempered this year (another idea DISCUS mentioned). That is, the demand for premium brands continues to swell. Brown-Forman has plenty of them.

Mostly unfazed by the coronavirus

The obvious 800-pound gorilla in the room is the global outbreak of the coronavirus, which has shuttered most bars and restaurants as the world tries to quell the epidemic. It's a highly encouraged (and often mandated) move that would seemingly turn the spirits spigots off.

Except, it really hasn't. While both Brown-Forman and Diageo would clearly rather see all sales venues fully utilized, consumers have proven resilient, opting for at-home options when they can't order a drink away from home. Nielsen reported that during the third week of March -- when the COVID-19 panic was most frenzied in the United States -- overall sales of hard liquor were up 55%. Online sales of alcohol were up a stunning 243% for the timeframe, and while wine sales dominate the online alcohol market, it was spirits sales that saw the most relative growth that week, with a 75% improvement.

That growth pace isn't expected to persist, but it's still anecdotal evidence of alcohol's marketability in an otherwise uncertain environment. The data also underscores the fact that spirits are the only sliver of the alcohol market not struggling just to hold onto market share.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer and Jefferies Financial Group Inc. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.

Stocks Mentioned

Brown-Forman Stock Quote
$73.50 (-0.70%) $0.52
Diageo Plc Stock Quote
Diageo Plc
$188.33 (-0.07%) $0.14
Brown-Forman Corporation Stock Quote
Brown-Forman Corporation
$73.14 (-0.71%) $0.52
Boston Beer Stock Quote
Boston Beer
$358.35 (-5.62%) $-21.35

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