At $1.5 trillion, alcoholic beverages command a massive global market. While largely dominated by the three traditional categories of wine, beer, and spirits, there is also a small but growing market for non-traditional alcohol products.
What does it mean for investors? Sean O'Reilly and Vincent Shen break down the various categories and the leading players in each. How can investors get exposure to the popularity of high growth segments, such as craft brewing in the United States, if most microbreweries are by nature small and privately owned? Tune in to find out.
A full transcript follows the video.
Sean O'Reilly: Make sure you have your photo IDs available; this is an alcoholic beverage edition of Industry Focus.
Greetings Fools, I am Sean O'Reilly with the one and only Vincent Shen. How are you today, sir?
Vincent Shen: Doing well. How are you, Sean?
O'Reilly: Not too bad. It's ridiculously cold, but I've made that comment before, so I'm not going to dwell on it!
If you're just joining us, we are here at Fool Headquarters in Alexandria, Virginia, continuing with our consumer goods edition of Industry Focus, focusing on sin stocks. We've talked about e-cigarettes, traditional cigarettes, and now we're going to talk about alcoholic beverages.
Shen: Yes, we are.
O'Reilly: You didn't have any of those in college, right?
Shen: No, none at all.
O'Reilly: None at all? Okay.
Shen: Completely straight-edge.
O'Reilly: Your mother would be proud.
The first thing I wanted to cover was how the alcoholic beverage market is structured. This obviously is a segment of the total beverage market in the United States, between juices, teas, soft drinks, coffees. The alcoholic beverages seem to make up about 20% of that total number.
Shen: Yes, that's right. Just to give you some perspective, when we talked about traditional cigarettes previously, globally it's about an $800 billion market -- sizable as it is. Alcoholic beverages on the other hand, worldwide we're talking about almost twice the size, at $1.5 trillion.
O'Reilly: This is "trillion" with a T.
Shen: With a T.
O'Reilly: Lots of alcohol.
O'Reilly: Big time. In the United States here, it's broken down obviously into wine, beer, and spirits. "Spirits" is everything else that isn't wine and beer, I guess. According to the Beverage Information Group, as of 2012 -- this is a little outdated -- 5% of total volume went to spirits, 8% to wine, and beer makes up the remaining 87% of the volume.
But with the actual dollars, it seems to be a little bit tipped in the favor of the other ones, because obviously spirits cost more than a six-pack of beer. Spirits take about 32% of the total dollar volume, wine 15%, and then beer 49%. What does it look like globally?
Shen: The numbers are pretty similar. The global market for beer is about 45%, 30% for spirits, and then a little over 20% for wine. Just to give you a sense of the dollar numbers there, it's $650 billion for beer, globally, for sales.
The thing is, what's interesting are some of the smaller categories like premixes and ciders and perries. They have very small sales, maybe about $12 billion, but they have some of the best growth. We're seeing that within the beer category as well, with craft breweries.
O'Reilly: Yes, that's actually what I wanted to talk about next, was the rise of craft breweries over the last 5-10 years. This has actually been crazy.
Shen: Yes. It's really cool seeing some of these smaller players going out there, getting into business, and putting out quality beer.
O'Reilly: I pulled this up from the Brewer's Association, that as of 2013 -- the data for 2014 isn't out yet -- there were 2822 breweries in the United States. 2768, so just under 2800, were craft breweries. 1237, so a little less than half of that, were just brew pubs; like a bar that brews their own beer -- where you can't see it, obviously.
But 1400 were microbreweries, and then 110 were regional craft breweries that obviously have got a restaurant or something, a fairly large facility; obviously not on the scale of an AB InBev (NYSE:BUD), which we'll talk about in a little bit. They ship to the state they're in, the surrounding states, and that's it.
That's a lot. Tons of little breweries that are around the United States.
Shen: Yes, of course. What's interesting is I was reading earlier that in 1980 -- not that long ago -- there were only 10 craft breweries in this country.
O'Reilly: Ten. Do you know who they were?
Shen: I do not.
O'Reilly: I actually want to know that now.
Shen: That growth over the past 40 years, to almost 3000, it's pretty incredible.
O'Reilly: Everybody was drinking Bud, back then.
Shen: Yes, apparently so! They might be fragmented and smaller, but they're growing so quickly they are accounting for about 14% of the beer market in the U.S. now, so about $14 billion in sales.
O'Reilly: That was actually what stuck out to me, was they make about 7.8% of the volume of beer that's shipped in the United States, but twice that number -- the 14% number you just mentioned -- for the dollar volume, the market, so they clearly command a premium.
Shen: Yes, of course. With that growth, people are willing to pay for that higher quality beer.
O'Reilly: For our listeners, because this is The Motley Fool and we try to invest Foolishly, is there any way to get in on this craft brewing trend? How do you define a craft brewery, and then is there a way to invest in this? Because this is a big trend we're looking at here.
Shen: Sure. Officially, the Brewer's Association will define a craft brewery as a small, independent, and traditional business.
Small; it has to produce less than 6000 barrels annually. Independent; it has to be less than 25% owned or controlled by an alcohol company that is not, itself, a craft brewer. Then traditional in that the beverages have to derive their flavors from traditional brewing ingredients and fermentation, so no flavored malt beverages.
In terms of investments, the thing is there are not that many options.
O'Reilly: You've pretty much just got Boston Beer (NYSE:SAM), and that's it.
Shen: Yes. Boston Beer and the Craft Brewers Alliance, and otherwise most of them are simply not publicly traded.
O'Reilly: Actually, people have been noticing that the bigger players that we'll talk about here in a second have been starting to snap these up, and just letting them run on their own. I don't know if this is the future.
Let's move on to the players in this market. You've basically got these four or five huge conglomerates with market capitalizations in the hundreds of billions of dollars, then Boston Beer, and then tons of little local players that operate in one city.
Shen: Exactly, at least for the beer market. Moving over to spirits, for example, you have companies like Diageo (NYSE:DEO), and in France like Pernod Ricard.
O'Reilly: Sprinkle in a little SABMiller, Grupo Modelo ...
Shen: Exactly. Then in wine, it's similar in that it's extremely fragmented and you have some of the biggest wine players, like Constellation Brands (NYSE:STZ) and The Wine Group, but even then they maybe control single-digit market share percentages.
O'Reilly: Touching on a previous episode, Altria (NYSE:MO) actually owns Chateau Ste. Michelle wines, that you see at a lot of restaurants, so they're trying to get in on the game too but very, very fragmented.
One of the largest craft breweries that we just mentioned, Boston Beer, it's got a market cap of $4 billion. That compares to the other ones how?
Shen: In terms of the larger brewers?
O'Reilly: Yes, just market cap, share price, and all that stuff.
Shen: Sure. Boston Beer, like you said, coming at $4 billion. Anheuser-Busch is at about $180 billion, then you also have SABMiller at about $60 billion, Heineken at $40 billion, Molson Coors (NYSE:TAP) about $15 billion, so it's the big gorilla for the craft breweries, but compared to the big companies it's small beans.
O'Reilly: At AB InBev, they still make up a huge chunk. Even though Budweiser's been losing a little bit of ground to the craft brewers and that's what's been going on, they still make up a huge percentage of total beer volumes.
Shen: Yes. I think I saw earlier that, for AB InBev they are able to have about 20% market share globally, for beer.
O'Reilly: That's a lot of Budweiser. It really, really is.
Shen: Well, of course Budweiser being one of their core brands, but they also have Stella Artois, Corona, Beck's ... they definitely have a very strong product and brand portfolio.
O'Reilly: Moving on, what's been going on with the spirits category? That seems to be the higher-growth, the premium thing that's been also going on.
Shen: With some of the demographic changes, and with the economy improving overall in a lot of places all over the world, there has been a trend toward more premium liquor.
O'Reilly: How is that defined?
Shen: That's generally considered anything that's priced over $20 retail.
O'Reilly: Okay, so any vodka that I see at the store more than $20 ...
Shen: Vodka, whiskey ...
O'Reilly: Those things are growing well.
Shen: That would be considered in the premium category, and those are doing quite well, especially in Asia Pacific areas.
O'Reilly: They're starting to like their vodka and their whisky and the ...
Bringing it back around for all of our Foolish investors listening, how can we invest if we want some kind of exposure into the sin stock world of alcoholic beverages? What's your favorite company, how are these companies being valued now, all that good stuff?
Shen: If we go by category, we can knock out wine first as being a simple one, just because ...
O'Reilly: It's amazing. You really can't, if you want to. You've got Constellation, that's kind of it.
Shen: Exactly. They're mostly privately owned, so it definitely limits your options. If you move over to beer, I'm sure a lot of people want to try and cash in on the explosion of the craft breweries, but like we mentioned ...
O'Reilly: I suppose we could start one!
Shen: That's true! There's only maybe a handful of publicly traded craft breweries, Boston Beer, like we said, being the biggest.
In terms of the larger companies, depending on how you see the strength of their brand portfolio and their valuations for example, Anheuser-Busch, for the valuation, not bad but it's definitely trading at some of its highs.
O'Reilly: These things are, in my opinion, priced for perfection. They all have P/Es at best in the low 20s. Do you think the big players, like the AB InBev, they have a growth profile that warrants this kind of valuation?
Shen: Just for the industry overall, their growth rates being, for beer, around 3%. Unless they can cash in on some of the higher-growth segments it'll be difficult for them. It's like jockeying for position.
Otherwise, even with that explosion of the popularity of craft breweries, it's still a very small percentage relatively, of the overall market, so it's not going to move the needle that much.
O'Reilly: So if I made you pick a stock in the industry, which one would you go with?
Shen: Personally, I'm a Sam Adams fan. I might go with Boston Beer, even though they are definitely a little bit more richly valued.
O'Reilly: 45 times forward earnings?
Shen: I just like a lot of what they're doing in terms of some of their seasonals ...
O'Reilly: Well, and they're getting in the cider game too.
Shen: Exactly, with Angry Orchard, which is also another extremely high growth segment, and they're doing very well with the operational efficiency, transferring from each seasonal series and improving their sales that way.
O'Reilly: Very cool. It's always amazing to me. If I had to pick, I'd probably be a Diageo man. They seem to have a little more conservative P/E of around 20, but then they've got all those awesome brands, a dividend you probably can't go wrong with. It's got just under a 3% yield, I think.
Shen: Yes, the yield is something good to mention. It's just an interesting industry because a lot of these companies, the bigger ones, are international so it might be a new move for some of our listeners to branch out from U.S. companies.
O'Reilly: Very cool. Thank you for your time, Vince.
Shen: Thank you, Sean.
O'Reilly: For our listeners, just before we go, I wanted to make all of our Industry Focus listeners aware that there is a special offer to subscribe to The Motley Fool's market-beating stock Advisor newsletter. Just head over to focus.fool.com to learn more about the special offer.
That's it for Industry Focus. Thanks for listening, and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Boston Beer, Diageo (ADR), and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.