Distiller – spirits sector of alcohol beverage industry has been growing and the growth is very likely to continue while uncertainties for drivers behind the demands.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Strong demands for spirits, especially for premium spirits, brought growth in both volume and values for almost all main makers.
• Because organic growth in sales (4%-10% annually) comes from increase in demand, it doesn’t need more spending on selling, help dilute overhead expenses, and thus bring higher profit rate for companies.
• Demand for brown spirits products continues to be stronger than others spirit products, thanks to consumers’ preference in premium products. And craft spirits lead this trend as it is in beer sector.

 

Causes behind the trend

• Extra increases in volume come from:
  1. Increased consumption from the existing spirits products consumers.
  2. More young people join into the pool of legal alcohol consumers.
  3. More volumes of spirits alcohol are grabbed from consumers who otherwise purchase other types of alcohol such as beers.

  As they are in beers sector we think three same fundamental drivers behind the sources mentioned above:

  1. Economy factors

  Consumers whose purchasing powers are most vulnerable to the challenging economy in the past 10 years are those who usually consume below premium alcohol products. In fact, rising real estate property price driven by quantitative easing policies should have given more confidence on purchasing more premium alcohol products such as brown spirits for consumers with higher income who are more likely to own houses and less impacted by challenging economy.

  2. Demographic changes

  Aging population, which is a natural result of longer life, working together with increasing young population, is the driver for positive prospective of spirits consumption.

  3. Consumers’ preference

  The changes in behaviors of consumers obviously have deep roots from economy and demographic or culture factors. However, its impact seems more direct and as well independent with changes in economy situation and demographic development. The major trend or the preference of main consumers is that higher quality and better taste products are preferred. Premium spirits alcohol is in advantage compared with beers in meeting needs of consumers for higher quality and better taste alcohol products.

Industry Future

• It should be reasonable to expect that the growth in spirits sector of US market will continue since most of fundamental factors behind the growth will still be working in next 5-8 years. Firstly, growing population will continue to add fuel in this sector. Secondly, as economy’s recovery speeds up and interest rate goes back to normal level, the pace of rising of real estate price will slow down. However, it is supposed to still stay at high level in medium- term.  In addition, the recovery of economy should be a positive factor in helping maintain its strong growth while it may give more help for below-premium alcohol products. At the last, while it is really difficult to predict the timing of changes in consumers’ preference and trend of their taste we did not see that this trend will not make a turn in short -term. Because the growth is expected stronger competition will also be expected. However, we believe, unlike mass-produced beers industry where entry barrier is low relatively, spirits industry has a better position for existing player to protect their shares than new enters because brand weighs more when consumers purchase premium spirits products.

General Financial Performance of Companies In the Sector

This is growing sector with about 4% -10% growth in the past several years and a positive prospective future driven by stronger demand for premium spirits, especially brown spirits, in the next 5-8 years.

For the individual company, while the revenue and cash flow fluctuates due to the fluctuation of foreign exchanges, sales growth should be expected since the whole industry is providing favorable climate for companies with strong brands in premium spirits products in this sector. And this has been supported by continuously increasing sales volume (organic, 3-5%) and rising price (2-3% annually) of typical companies in this sector in the past several years.

While volatile foreign currency and frequent acquisition activities created uncertainties for companies in terms of their profitability, the strong demand and thus continuously increasing sales has helped generally improve margins of those companies. The typical gross margin is about 63% and operating margin about 28%.  

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