The pandemic-led restrictions on the on-premise and Travel Retail channels have been taking a toll on revenues of companies in the Zacks Beverages – Alcohol industry. Also, escalated input and packaging costs along with higher advertising expenses have been headwinds.
Nonetheless, the companies stand to gain from the shifts to off-premise and e-commerce channels to make the most of increased at-home consumption occasions. Investments in product innovations to include non- or low-alcoholic beverage variations to its portfolio bode well for players like Anheuser-Busch InBev (BUD), Diageo Plc (DEO), Constellation Brands Inc. (STZ) and Brown-Forman Corporation (BF.B).
About the Industry
Companies producing, importing, exporting, marketing and selling alcoholic beverages like beer, craft beer, draft beer, ciders, wine, rum, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, ready-to-drink cocktails and malt mainly constitute the Zacks Beverages – Alcohol industry. However, some of the industry players engage in the production and sale of non-alcoholic beverages like carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and ready-to-drink teas.
The companies, mostly brewers (beer makers), sell products through a network of wholesalers as well as retailers like supermarkets, warehouse clubs, grocery stores, convenience stores, package stores, drug stores and other retail outlets. These also sell beer directly to consumers in cans and bottles at restaurants, pubs, bars and liquor stores. Additionally, some brewers operate brewpubs or taste rooms at breweries offering consumers the freshest beer.
What’s Shaping the Future of Beverages – Alcohol Industry
Shut-down of On-Premise & Travel Retail: With the closure of restaurants, bars and cinemas due to the pandemic, on-premise sales, which form the majority of revenues of beverage companies, have taken a hit. The restrictions on the on-premise channel are likely to continue to take a toll on the top line of industry players as the pandemic-led uncertainties are expected to remain concerning in the near term. While the on-premise channel has seen a partial recovery in some regions, renewed restrictions due to the second wave of the pandemic across certain countries like Europe have been hurting revenues. Moreover, travel restrictions dealt a huge blow to the Travel Retail business. While these channels are gradually opening, the trends are likely to remain soft for the next several months.
Higher Costs: Escalation in input costs and higher packaging costs due to a larger proportion of variety packs in the product mix have been major concerns for the industry. These along with higher advertising and promotional expenses as well as increased SG&A costs have been weighing on margins. Notably, companies are witnessing lower fixed cost absorption and unfavorable impacts from the portfolio and channel mix shifts, which are hurting gross margin. The channel mix shift mainly resulted from the pandemic-led restrictions in the on-premise channel, while the portfolio mix shift is attributed to the significant rise in ready-to-drink product sales. To top it all, the pandemic and its effects on the global economy are likely to elevate costs, which may hurt the margins of alcohol companies.
Shift in Trends to Off-Premise & E-commerce, At-Home Occasions: The alcohol industry has been witnessing a gradual shift in consumption trends from on-premise to off-premise. In this scenario, alcohol companies have been quickly shifting focus and resources to off-premise, including retail stores and other channels that are likely to stay in the near term. Moreover, the idea of selling/buying alcoholic drinks online with doorstep deliveries has been gaining traction. Notably, e-commerce for alcoholic beverages has expanded significantly, increasing three to seven times in volume from the prior year. Also, companies have been entering partnerships with platforms, including Drizly, Instacart and Thirstie, which are selling alcohol online and providing delivery options, to offer a better consumer experience. Moreover, increasing health consciousness among consumers has given a rise to the demand for drinks with low alcohol content. To capitalize on these trends, beverage companies have ventured out with some interesting product launches, putting the focus on the health of consumers. Molson Coors Beverage Company (TAP) is one of the alcohol biggies that have adopted the “beyond beer” approach to tap the growing demand for non-alcoholic and healthy beverages space. As part of the plan, it launched innovative non-alcoholic brands, including HUZZAH and Vizzy in the seltzer category and cannabis-infused beverages through its joint venture with HEXO Corp.
Hard Seltzer Beverage Market Gains Prominence: The alcohol companies have been scrambling for opportunities to grab a share of the lucrative hard-seltzer market, which took the alcohol-drinking American population by storm. Product innovation and increased brand launches played a crucial role in the growing penetration of hard seltzer. Further, hard seltzer is expected to continue gaining popularity, owing to its low alcohol content, preferred by millennials in developed economies like the United States, Canada and Australia. According to Grand View Research Inc., the global hard seltzer market size was $4.36 billion in 2019. Moreover, the hard seltzer market is projected to touch $14.5 billion by 2027, witnessing a CAGR of 16.2%. The hard seltzer beverage industry is dominated by the privately held White Claw and The Boston Beer Company Inc.’s (SAM) Truly brand. Per Bank of America, Truly and White Claw together held nearly 80% of the hard seltzer market share at the end of 2019. Bud Light Seltzer from Anheuser-Busch InBev, which was launched in 2020, is another prime stakeholder garnering market share in the hard seltzer category.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Beverages – Alcohol industry is a 15-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #176. This rank places it at the bottom 31% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have declined 8.6%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500
The Zacks Beverages – Alcohol industry has underperformed the S&P 500 but surpassed its sector in the past year.
While the stocks in the industry have collectively gained 6.7%, the Zacks S&P 500 composite has rallied 30.4% and the Zacks Consumer Staples sector has grown 3.8%.
One-Year Price Performance
Beverages – Alcohol Industry’s Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 14.63X compared with the S&P 500’s 22.32X and the sector’s 18.17X.
Over the last five years, the industry traded as high as 27.51X, as low as 14.63X and at the median of 23.68X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Alcohol Beverages Stocks to Keep a Close Eye on
None of the stocks in the Zacks Beverages – Alcohol universe currently sport a Zacks Rank #1 (Strong Buy) but we have one stock with a Zacks Rank #2 (Buy). We also highlighted three stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at the companies.
Diageo Plc: The largest alcoholic beverage company, based in London, has been leaving no stone unturned to adapt to the shift in sales trends by reallocating resources to online channels to compensate for the closure of the on-trade channels. It has been using consumer insights and marketing effectiveness equipment to make prudent investments in the areas of innovation, e-commerce and new opportunities like at-home occasions, including wanting to enjoy bar-quality drinks at home. The efforts to quickly respond to increased off-trade channel demand and changes in consumer occasions as well as investments in new opportunities have helped the company return to organic sales growth in the first half of fiscal 2021.
The company has inspired consumers with cocktail recipes, new serves and ways to enjoy its brands with food. It also rapidly responded to the increased demand for home delivery. In the United States and Latin America, it reached customers with new “cocktail to go” programs. In East Africa, the company explored new ways to get products delivered to consumers’ homes through partnerships with motorbike delivery companies, known as boda-bodas. The Zacks Rank #2 company has rallied 11.1% in the past year. The Zacks Consensus Estimate for its current-year earnings has moved north by 2% in the past 30 days.
Price and Consensus: DEO
Anheuser-Busch InBev.: The global brewing company has a Zacks Rank #3 at present. The company, with more than 500 iconic brands, has been investing in new capabilities for several years to better connect with customers and consumers by leveraging technology such as B2B sales and other e-commerce platforms. Going forward, the company remains keen on making the most of investments in its portfolio over the years as well as rapidly growing its digital platform, including BEES and Ze Delivery. Further, it is on track with its premiumization strategy focused on growing the premium and super-premium brand portfolio. It is also poised to gain from revenue growth across its global markets, particularly North America and China.
The Leuven, Belgium-based company’s leading position in the majority of its markets and a strong global footprint lend the advantage of economies of scale and growing its multi-country brands globally. Its strategy is based on efforts to develop a brand portfolio that caters to extensive consumer needs within the market, in terms of the price range, flavor profiles and brand meaning. The Zacks Consensus Estimate for 2021 earnings have moved down 4.3% in the past seven days. The stock has risen 6.5% in the past year.
Price and Consensus: BUD
Constellation Brands Inc: The consensus estimate for fiscal 2021 EPS for the Victor, NY-based company, which is the third-largest beer company and a leading, high-end wine company in the United States, has been unchanged in the past 30 days. Constellation Brands’ constant focus on brand building and initiatives to include new products bode well. It is anticipated to have benefited from growth in the hard seltzer category as it recently launched the Corona hard seltzer.
Also, it has been benefiting from consumers’ shift to e-commerce for buying alcoholic beverages. The digital business has been gaining share through platforms like Instacart, Drizly and other retailer online sites as consumers look for the convenience offered by these channels, which is likely to continue. The company has an expected long-term earnings growth rate of 7.4%. The stock has gained 18.2% in the past year. It currently carries a Zacks Rank #3.
Price and Consensus: STZ
Brown-Forman Corporation: The stock of this Louisville, KY-based leading alcoholic beverages company has risen 12.8% in the past year. The company is capitalizing on the shift in consumption to at-home occasions, with increased investments in the off-premise and e-premise channels as well as accelerated growth in spirits and ready-to-drink (RTD) cocktails. The on-premise shutdown has boosted the sale of spirits in the off-premise and convenience formats, which is likely to continue. Moreover, there has been an increase in the demand for the company’s RTD cocktails during the pandemic. This has led to increased sales for its Jack Daniels RTDs globally as well as the tequila-based New Mix RTDs in Mexico. The accelerated demand trends are likely to be key growth drivers for the company in the coming months.
Also, the company is poised to gain from strong volumetric gains for premium bourbons, including Woodford Reserve and Old Forester, as well as underlying sales growth for Herradura and el Jimador in the United States. The company’s consensus estimate for fiscal 2021 EPS has been unchanged in the past 30 days. It currently carries a Zacks Rank #3.
Price and Consensus: BF.B
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