Side of a whiskey barrel. Source: Jack Daniel's.
So-called "sin" stocks draw strong reactions from many investors, with some arguing that profiting from what they consider to be socially irresponsible companies is wrong. Nevertheless, many of those stocks have generated strong returns over the long run, and you'll find some of them among the vintners and distillers whose shares trade on public markets. With markets for spirits and wine enjoying constant demand regardless of overall economic conditions, vintners and distillers make compelling investments for those who are comfortable with their overall business models. Let's take a closer look at vintners and distillers and the investing opportunities they offer.
What are vintners and distillers?
Vintners make wine and distillers produce hard liquor, so together, vintners and distillers make up two-thirds of the alcohol industry. Although beer-making falls into a separate industry category, many of the companies that produce wine and spirits also have beer operations. One of the most obvious examples is Constellation Brands, which is the company behind the Robert Mondavi line of wines as well as Black Velvet whisky and Svedka vodka. In addition to its wine and spirits business, though, Constellation acquired the rights in 2013 to import a variety of beers under the Modelo brand into the U.S., including top-selling Corona.
Source: Wikimedia Commons.
A number of publicly traded companies sit atop the wine and spirits industry, including Constellation, Johnnie Walker- and Smirnoff-maker Diageo, and Brown-Forman and its Jack Daniel's brand. Pernod Ricard, which doesn't trade on any major U.S. stock exchange, is also a major producer of wine and spirits, with Absolut vodka, Chivas Regal whisky, and Perrier-Jouet champagne among its better-known brands. But just as microbreweries have become big business in the beer market, smaller privately owned wineries and distilleries around the world appeal to connoisseurs looking for special experiences they can't find from high-volume producers.
How big is the wine and spirits industry?
Vintners and distillers have huge market opportunities to capture. According to the Wine Institute, U.S. wine sales alone hit $36.3 billion in 2013 on sales of 375 million cases. Globally, researchers at MarketLine expect the worldwide wine market to bring in revenue of $318 billion by 2017, with likely rises from consumption levels of 23 billion liters in 2012.
Source: Skinnygirl.
Similarly, distillers have enjoyed solid results as well. Growth in the vodka and whiskey areas have particularly supported producers in the spirits industry, with estimates of sales of 69 million cases of vodka and 45.4 million cases of whiskey. Diageo has benefited greatly from both trends, with its top-selling Smirnoff vodka as well as two of the top five whiskey brands, giving it roughly 25% market share in both segments.
In terms of overall segment sales growth, vintners and distillers have a stronger potential market than their counterparts in the beer industry. While consumption of beer has actually been declining in recent years, demand for wine and spirits has been on the rise, and according to figures from Demeter Group, vintners and distillers went above the 50% level in terms of overall alcohol-market share in 2010.
How do vintners and distillers work?
Wine and spirits producers follow different business models depending on their size and location. Small wineries often make their wines solely from grapes grown on their own real estate. High-volume wineries, on the other hand, have to obtain at least some of their grapes from outside sources, so small vineyards that don't have the equipment or desire to make their own wines can sell their crops to wineries to help them boost their production capacity. For spirits, obtaining raw ingredients is often simpler, as whiskey and vodka production often use readily available grains like wheat and corn to drive the distillation process. Production facilities are geared toward achieving distinctive blends that produce flavors that appeal to consumers.
Vintners and distillers then have to get their products to market, with some creating their own distribution networks while others utilize existing logistics networks to further their marketing aims. For instance, Diageo complies with U.S. law by having its three-tier system of separate suppliers, distributors, and retailers, but with its international operations, the company often controls the entire route, from production to sales.
Source: Buffalo Trace Distillery.
What drives the wine and spirits industry?
For the most part, the spirits industry is driven largely by consumer demand. Many distillers are able to produce extremely high profit margins on their premium brands, as the costs of raw ingredients are relatively low, so fluctuations in commodity input costs are relatively insignificant compared to final retail price. For example, both Diageo and Brown-Forman weighed in with roughly 22% profit margins over the past 12 months, showing the way in which they've used their brand presence to create value from their products.
In the wine business, conditions are much tougher. The costs of grape farming and yields vary widely from year to year, and weather can affect not only how much a given vineyard can produce but also the quality of the wine that's produced from those grapes. According to figures compiled by Silicon Valley Bank, pre-tax profit margins in the wine industry fell below 4% in 2013 after having seen levels above 16% as recently as 2007. Ideally, vintners would be able to pass through any higher costs to consumers, but that ability depends greatly on the overall economic environment, both at the high end for premium wines and among mainstream consumers for more inexpensive wines.
For investors, the nice thing about vintners and distillers is that most customers treat wine and spirits as non-discretionary purchases, keeping demand constant even when overall economic weakness hits other parts of the consumer economy. With the rise of the consumer class in emerging-market countries around the world, the wine and spirits industry hopes that new buyers will treat their products as luxury items and boost overall demand accordingly.
