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Hello, my name is Eric Laidlow and I’m a consumer analyst here at Gabelli Funds
Today, I wanted to spend a couple minutes reviewing recent results for alcoholic beverage companies given the range of issues we see at play in the industry, including nagging macro concerns in developing markets
These markets have recently seen a modest decline in consumer demand, but this has not been universal; beer and spirits volumes have held up well.
Most recent data from Remy Cointreau and Pernod Ricard have shown a seasonal impact from an earlier Chinese New Year, though underlying fundamentals remain solid, pointing to continued growth in the region. Remy reported double-digit growth in Asia, and Pernod growth of over 20% in China during its fiscal third quarter. Both companies have recently increased prices of their popular cognac brands, which should improve profitability going forward.
While there are always risks consumption could slow, over the long-term we expect the industry to remain attractive given its high margins, low capital requirements, strong free cash generation, and operating leverage. When combined with pricing power as we've seen in cognac, this produces strong returns on capital.
Additionally, many spirits like Remy Martin and Martell cognac require years of aging before they can be sold, which creates barriers to entry.
Looking at the spirits market overall, we expect it to remain a stable, growing business, with volume growth averaging 1.5% over the last decade, reaching 2.4 billion cases in 2017. Consumer's willingness to trade up to premium spirits has increased spending nearly 5% a year over the same period, growing the market to nearly $550 billion.
We continue to believe that industry characteristics will remain attractive, allowing companies to generate revenue and earnings growth in the mid- to high-single-digits over the coming years.
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