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Drink Stocks Fall As Sales Volumes Dry Up

Posted: Feb 17, 2009 13:50 PM by Eugene Bukoveczky

Tickers in this Article: TAP, DEO, SAM, OTC:AHBIF.

It has always been conventional wisdom that the brewers and distillers tended to be fairly recession resistant. Maybe the logic behind this view is that the rougher things get, the more folks will be in need of a drink, or two.

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Liquor Sales Trend Down
But recent results from Diageo (NYSE:DEO), the world's largest purveyor of spirits, and brewer Molson Coors (NYSE:TAP) seem to be casting doubt on the wisdom of this convention. Both of these companies have seen recent sales weakness and now expect volumes sold to head lower as cash-strapped consumers cut back on purchases of their favorite tipple.

Recently the U.S.-listed ADRs of U.K.-based Diageo traded down by 5% when the company announced it was cutting its growth forecast for this year's profit to a 4-6% range, down from a prior 7-9% range. Analysts took note that the company's organic volume growth had recently suffered a 2% decline compared with earlier 1% growth expectations. Sales growth has decelerated sharply in recent months, especially in European markets. (To learn more about ADRs and how they work, check out our ADR Basics Tutorial.)

Sud Sales Also Go Flat As Competition Heats Up
Closer to home, brewer Molson Coors saw its shares dip 8% after it reported lower-than-expected quarterly profits. Q4 income from continuing operations tumbled 49 percent to $90.7 million or 49 cents per share, compared with $176.2 million, or 96 cents per share, a year earlier. Sales of the company's brands, which include Coors Light and Molson Canadian, shrank by 4.2% during the quarter. U.K. volumes for Molson's shrank by a surprising 9% as many hard-pressed Brits chose to pass on their traditional pub pint in response to deteriorating economic conditions.

Premium brand brewer Boston Beer (NYSE:SAM) is also expected to see volumes shrink this year, but it recently earned an upgraded recommendation from "sell" to "neutral" from broker Goldman Sachs on the view that craft beer brewers can still gain share in an overall flat-to-down beer market.

In contrast, independent research provider Argus recently cut Molson's rating from "buy" to "hold" due to its assessment of weak volume growth and increased competition. Last November's acquisition of Anheuser-Busch by Belgian brewing giant AB Inbev (OTC:AHBIF) to create the world's largest brewer no doubt figured into Argus' assessment of the new competitive challenge facing Molson's.

Beer Market Tapped Out?
So is all this just a pause that refreshes, or will drinkers now fully embrace a new, more permanent degree of economically induced temperance? Looking at a dramatic rise in global beer consumption over the last three years (up 14%), it's reasonable to expect consumption to drop after such a rapid run-up. The consensus view is that global consumption will be flat to lower this year.

The Bottom Line
Alcohol isn't a recession-proof product. Faced with lower incomes, people will cut back. Lack of volume growth will keep this group in check for the foreseeable future.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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