Recession is a time to drown your sorrows in beer
Speculation is percolating around the world that economies outside the US are at risk of recession.
One of those economies is the UK. After declining in the second half of 2023, its GDP has averaged growth of just 0.4% per quarter so far this year. The Bank of England cut interest rates last month to spark economic growth.
But that economic weakness apparently isn’t stopping British citizens from drinking alcohol. Perhaps it’s even driving them to imbibe.
In any case, British pubs now face a shortage of Guinness, one of the country’s most popular beers, amid unexpectedly strong demand for the dark brew. A social media promotion apparently has played a role in the surge of thirst. And concern about recession certainly did nothing to constrain demand.
“Alcoholic beverage consumption should be resilient even during a future economic recession,” Bill Stone, chief investment officer at Glenview Trust, wrote in Forbes when the US seemed on the verge of a downturn in 2022.
“Beer and spirits are an affordable luxury and are a small enough portion of total spending so that volume is not likely to decline significantly.”
A study of 24 countries over 53 years, published by the Journal of Wine Economics, concluded that in economic downturns “the level of average alcohol consumption persists.”
For Guinness owner Diageo (NYSE: DEO), the world’s largest distiller (beer accounts for 16% of its sales), the UK beer shortage couldn’t have come at a worse time. The winter holidays bring large crowds to pubs looking to drink up. Guinness said it has seen “exceptional consumer demand” in the UK.
The outlook for Diageo
Looking at the overall financial prospects for Diageo, which owns Smirnoff, the world’s top selling vodka, the spirits industry’s fragmentation outside of the top five players gives it acquisition possibilities, Morningstar analyst Verushka Shetty wrote in a commentary.
The company is focusing on premium products, which makes sense, she said. “We see the long-term secular trend of consumers drinking less but better gradually leading to pricing growing ahead of volume in select categories.”
Shetty assigns Diageo a wide moat, meaning she thinks it has competitive advantages that will last at least 20 years. And she thinks the stock price is close to fair value.
Carlsberg’s acquisition
Another trend in the beverage industry is a shift in consumers’ taste toward non-alcoholic drinks. That has inspired Danish brewer Carlsberg (COPENHAGEN: CARL) to agree to pay 3.3 billion pounds ($4.15 billion) for Britvic, a big UK soft drinks company. The deal has just received regulatory approval.
Still, Shetty doesn’t see sustainable competitive advantages for Carlsberg. “Stronger execution and a focus on returns on capital employed contributed to Carlsberg generating excess returns on capital over the last eight years,” she wrote.
“But we still believe the company lacks the structural competitive advantages to ensure this performance can be maintained for at least a decade.”
