Finding companies that capable of performing well even in a recession can be a challenge for investors. Companies that sell everyday basics, like food, beverages, and cleaning products fall into this category. After all, even when times are tough, people still need to eat, drink, and clean.
And people tend to stay at home more in a poor economy to save money, so they may spend more on shopping for these things. During the pandemic, social distancing rules stay-at-home mandates have exacerbated these normal downturn responses. And supermarkets, grocery stores, and liquor stores have all been broadly classified as essential businesses.
Where does Molson Coors (NYSE:TAP), which sells beer under brands such as Coors, Miller, and Blue Moon, fit into this landscape?
Fewer happy hours
Molson Coors estimated that it derived about 23% of its sales in 2019 from the on-premise channel -- in other words, bars, restaurants other such venues. In North America, 17% of the company revenues came from on-premise sales, but in Europe, those sales accounted for 50% to 55%.
After governments first shut down those businesses and then later allowed them to reopen them with significant restrictions on occupancy, Molson Coors naturally took a sales hit. In the second quarter, GAAP revenues fell by more than 15% from $2.9 billion to $2.5 billion. For the period, off-premise sales -- through retailers like liquor stores, convenience stores, and supermarkets -- generated virtually all of the company's revenue.
Beer sales for home consumption will likely not drop off due to the recession since people tend to still drink alcohol even in tough financial periods. According to Nielsen, off-premise beer consumption increased in early May. However, that wasn't enough to offset the loss of sales due to the lack of on-premise activity.
It is tough to say when governments will be able to fully and safely lift restrictions on drinking and dining establishments, or when customers will feel safe in returning to the degree they used to patronize them. But, the lingering recession brought on by the pandemic will still likely lead to lower sales at bars and restaurants as people try to save money.
Don't count on dividends
Investors also can't rely on dividend payments the way they used to. In May, Molson Coors' board of directors announced it was suspending the payouts for this year.
One can't argue the fact that COVID-19 has put the company in a difficult situation. Still, the lack of payout right now hurts.
Getting down to business
Certainly, Molson Coors will feel the effects of the recession when it comes to the sale of its beverages through restaurants and bars. On the home consumption front, the company has been pushing existing and new drinks in the "above premium" segment of the market -- a category that includes higher-end craft and craft-like beers.
But that strategy could run into trouble as beer drinkers shift to less expensive brands in response to their tighter financial situations. However, as CEO Gavin Hattersley stated on the company's second-quarter earnings call, "In prior recessions, we've actually seen ongoing support for premium and above premium brands, at the same time as some folks have traded down." Right now, people haven't been moving to the less expensive products, but if the recession drags on, it is a distinct possibility.
Certainly, there are companies that will feel the impact of this recession more than Molson Coors. But it's definitely not immune to the economic downturn.