Only a small teaspoon of the world’s companies are listed on the Helsinki Stock Exchange, and as a result, certain sectors are completely missing from the list or are poorly represented. Both Olvi and Anora operate mainly in the North European markets, where they attempt to offset secular volume decline with pricing. Both companies have also grown into quite the elephants in the china shop, and there is very little market left to conquer. Fortunately, more interesting companies can be found elsewhere in the world.
The purpose of this thread is to discuss producers of spirits in particular (the Spirits category) and the current news and developments in the industry. The intention is not to talk about the wine and beer markets, whose growth prospects, market dynamics, and structures differ significantly from the spirits market. Naturally, the industry also evokes a lot of emotion, but there is already a separate thread for the ethics of investing, so let’s keep that outside of this discussion. I was inspired to open this thread by similar threads on serial acquirers, the gaming industry, and the semiconductor industry, all of which have fared well on the forum. So, hopefully, there will be interest in this industry’s thread too, even though there has been surprisingly little talk about the companies in this category on the forum relative to their quality and quantity.
The spirits market is massive, and its growth over the last decade has been driven by the rise of people into the consumer class in developing countries and the so-called “Drink Less, But Better” trend in developed countries. This trend has driven the premiumization of the alcohol market, which has directly benefited the pricing-power-rich spirits category. Future volume growth is expected particularly from the rise of populations in Africa and India as consumers. China, on the other hand, has been a difficult market for Western spirits, as it is dominated by baijiu with a 98-99% market share, which has strong traditions as part of Chinese culture.
The largest listed companies in the sector include Diageo, Pernod Ricard, Campari, Brown-Forman, and Remy Cointreau. Local giants Kweichow Moutai and Becle, whose activist investor is trying to get the company to list on a larger exchange, are listed on smaller exchanges. Additionally, there are many unlisted family-owned companies in the industry, the largest and grandest of which is Bacardi. Beam Suntory and the joint venture between LVMH and Diageo, which owns Hennessy among others, are also significant players in the field. Typically, the large companies in the industry generate high margins year after year, but returns on capital remain more modest due to the capital tied up in large inventories. What makes the industry particularly interesting is the scale of potential competitive advantages. A company can seek competitive advantage through brands, economies of scale, high-quality distribution networks, manufacturing products in restricted production areas and designations (e.g., cognac, tequila, and Scotch whisky), and historical inventories.
There is also a lot of M&A activity in the industry, the most recent example being Campari’s acquisition of Courvoisier (one of the 4 dominant cognac firms). In addition to M&A news, companies in the sector have been plagued last year and this year by customers’ desire to draw down inventory levels, which has temporarily turned corporate revenues downward. Furthermore, China has been stirring up a small-scale trade war against the EU by using cognac as a weapon. During the Trump era, there was also a schism between the USA and the EU where whiskey was caught in the crossfire. On top of trade wars, potential regulatory changes and the effects of climate change on restricted growing areas, plus normal harvest fluctuations, mean it shouldn’t be boring following this sector in the coming years.
