The market for spirits has been growing in the US over the past 13 years, taking 5.5% market share away from beer within the overall beverage category. While in 1999 spirits made 28.2% of the market, by last year this number was up to 34.3%.

This growth in popularity has been even further highlighted in recent years by both a loosening of the liquor laws across the States and an increasing trend toward "premiumization."

According to the Beverage Information Group's Liquor Handbook 2013, distilled spirits consumption rose 3.5% to over 200 million cases last year with all categories except for Gin (which was down 0.1%) and Prepared Cocktails (down 3.3%) posting increases.

Better yet, retail dollar sales grew at an even faster rate, with on-premise sales growing 5.9% to reach $37.3 billion in 2012. This is the15th straight year of consumption increases for the sector and with a few tricks up its sleeves yet, it doesn't show any signs of slowing down soon.

This was good news for major spirits companies, with market-leader Diageo plc (NYSE:DEO) posting a 5% sales increase in the US in the last fiscal year and French giant Pernod Ricard SA (NASDAQOTH:PDRDY) seeing 8% growth over the same period. While US-based company Beam (UNKNOWN:BEAM.DL) saw a 7% increase in its last fiscal year 2012.

Premiumization and Flavor Innovation
Even in a slow economy, there has been a consumer shift toward higher-end spirits such as single malt Scotch, Cognac, imported Vodka and Irish whiskey. In 2012, the prestige brand segment (priced above $84 per 75cl bottle in the United States) grew by 9% and ultra- Premium brands (between $42 and $84 dollars a bottle) rose 10%. This added considerable value to many company's top lines.

Last year to June 2013, sales from Diageo's Scotch and Irish Whiskeys were all up with Johnnie Walker (the world's highest selling Scotch Whiskey) sales up 7%, and other popular brands Windsor, J&B and Bushmill's up 20%, 12% and 11% respectively.  According to their annual report, Diageo's "12 strategic brands" delivered 4% growth and a 5% increase in price/mix, making up approximately two-thirds of the group's net sales.

Similarly, French spirits´ giant Pernod Ricard  is also succeeding in its strategy of "premiumization," with powerhouse brands ABSOLUT and Chivas both up 5% in value, and popular brands Jameson and Glenlivet up a whopping 17% and 22% respectively. Premium brands now represent 75% of the group's net sales. While Beam continues to ride the growth of its famous American bourbons, Jim Beam (up 10%) and Maker's Mark up 15 % in 2012.

Flavor and sugar-free innovations have also contributed to grow across the sector, attracting a growing market of younger, female and diet-conscious consumers.

Diageo launched 180 new products across 30 markets in the year, driving a net sales growth of GBP 671 million (around USD 1 billion at today's rate).   Beam worked on flavor innovation with new brands like Devil's Cut, Jim Beam Honey, Lime Splash and Maker's 46. While Pernod's approach is to continue expanding its female markets by concentrating on brands that already appeal to women such as ABSOLUT, Malibu and smoother-tasting whiskies such as Jameson.

Expansion into emerging markets
Spirits are also seeing growth in emerging markets due to a growing middle class and higher standards of living in many developing countries. Last fiscal year, emerging markets made up 42% of Diageo's business and saw net sales growth of 11% (down from 15% the year before.)

While growth in China has slowed since 2011, it remains strong and both Diageo and Pernod have signaled their interest in expanding markets in Africa in the years to come. Africa, Eastern Europe and Turkey is already Diageo's second largest region, making up 20% of Diageo's sales, while Pernod is following hot on its tail reporting growth of 12% in Africa and the middle East and opening six affiliates across Africa In the last fiscal year.  

High barriers to entry
Strong brand preference, economies of scale and marketing spend are all high barriers to entry for the spirit sectors, which is good news for the top five players-Diageo (with market cap of $82 billion), Pernod Ricard (over $32 billion), Bacardi (privately owned), Brown-Forman Corporation (NYSE: BF-B) (over 15 billion) and Beam (11.2 billion). 

In fact the market is increasingly consolidating, with the top ten companies increasing their market share to 26% in 2011 and experts even calling Beam a takeover target.

Powerhouse brand names such as Diageo's Johnnie Walker, and Smirnoff, Pernod Ricard's ABSOLUT and Chivas, Beam's Jim Beam and Maker's Mark and Brown and Forman's Jack Daniels and Southern Comfort all benefit from a loyal following, heritage and consistent marketing. This is underlined by the fact all major US networks and many cable networks now allow spirits advertising in the US.

This means despite the growth for craft brands, they are mostly unable to compete on brand awareness. While the major players also benefit from larger economies of scale, efficient distribution networks and the ability to employ aggressive acquisition strategies to purchase new brands that look promising.

Foolish takeout
While all major spirits groups are poised to benefit from rising consumption, leading companies Diageo and Pernod Ricard are two of the most promising investments at this time.

This is due not only to their domination in the growing premium, flavor innovation and emerging markets, but also their current reasonable value. The P/E ratio for both companies sits at around 20, right on par with the NYSE average and well in front of the current P/E ratio for both Brown Forman (over 26) and Beam (over 28).

That said, with the continuing popularity of spirits and particularly dark spirits across the US, both Beam with its all American bourbon brands and Brown Forman with its iconic Maker's Mark and Southern Comfort, certainly remain companies to consider over the long-term. Rumor's of Beam's suspected acquisition seem to have already been priced in to the current stock price.