At the end of September I discussed Diageo's (NYSE:DEO) negotiations to buy Indian billionaire Dr. Vijay Mallya's 28% interest in United Spirits, India's largest distiller. Since then a deal has been consummated; the world's largest liquor company will acquire 53.4% of United Spirits sometime in January. Businessweek published an article on Nov. 21 highlighting Beam's (NYSE:BEAM) expansion efforts into Russia. The BRIC continues to be fertile ground for liquor companies. As a result, companies such as Diageo remain attractive investments. I'll discuss why.
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Each BRIC country has its own interesting subtleties. For instance, in Russia, overall spirits consumption is expected to drop 10% annually through 2016, due to reduced vodka consumption and the government's emphasis on health and wellness. In 2011, the average Russian drank 15 liters of alcohol, three liters less than in 2009. Yet it's still one of the hardest-drinking countries in the world with a market size of 1.5 billion liters annually. At present, 80% of the consumption is vodka-related with a half-liter of the best-selling Green Mark brand fetching $5.43 compared to $53 for a 700ml bottle of Jim Beam. Whiskey currently accounts for less than 1% of the Russian market, providing all sorts of opportunity for Beam, which has 25% market share, and Brown-Forman (NYSE:BF.A, BF.B), which has a commanding 72%, thanks to its Jack Daniels brand. Russians, especially the wealthy, are bored with vodka and switching to other spirits. Whiskey, cognac, rum and tequila are expected to grow 46%, 20%, 16% and 8% respectively in each of the next five years. Diageo might be focusing its attention on India at the moment but Russia won't be too far away. Vodka's loss is everyone else's gain.
Brazil's spirits market over the next four years is projected to grow between 4%-5% in terms of dollar value, with some offsetting declines in volume tempering expectations slightly. With both the World Cup in 2014 and the Olympics in 2016 taking place in Brazil, however, the demand for premium spirits is going to be significant. Most importantly, that's where the money is. Also interesting: half of Brazil's population of 191 million is under the age of 29, providing the liquor companies with the perfect demographic for building life-long customers. In May, Diageo acquired Ypioca, a leading premium cachaca brand (like rum) in Brazil for $453 million. The acquisition doubles its business in Brazil, improves its distribution in the country and helps it keep ahead of Pernod Ricard (OTC:PDRDY) in terms of market share. Both companies will do well here through 2016.
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Although China's per capita liquor consumption is far less than Russia or Brazil, it still managed to consume 995 million 9-liter cases in 2010. In contrast, the average drinker in the United States consumes almost double the amount on an annual basis, yet the total consumption of spirits in 2011 in the U.S. was 197 million 9-liter cases. I think that tells you all you need to know about the importance of China in the global spirits business. Overall, China's spirits business is expected to grow 5% on a volume basis in each of the next five years. With 20 million new drinkers reaching the age of majority each year, the global players are licking their chops. In 2011, China imported 500,000 kiloliters of alcohol worth $2.4 billion, of which $656 million was spirits. Morgan Stanley (NYSE:MS) expects that to double by 2015. Imports of all kinds of alcohol including spirits represent less than 6% of the overall market. It's no wonder the big companies are going after emerging markets.
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India is the teetotaler of the bunch. The per capita consumption is about half that of China and one-sixth that of Russia. Like China, however, it has a lot of potential. Over 50% of its population has yet to reach the legal drinking age and consumption is growing by 30% annually. Although imports represent just 3.1 million cases at the moment, that's sure to rise as young Indians with money to spend gravitate to the global brands that carry more prestige than the domestic ones. Brown spirits such as whiskey and brandy are rising in popularity around the globe. All four of the BRIC countries are among the 10 fastest-growing imported spirits markets, all leaning toward whiskey and brandy. Ultimately, I think India is going to be the biggest surprise of the four countries. Diageo really put its stamp on emerging markets with its United Spirits purchase.
If you own shares in a liquor company and it generates a significant amount of revenue from the spirits business, you'll want to know what it's doing in these four countries. If they're not a player in at least two of those markets, preferably more, I'd find an alternative. The winners in the liquor business over the next decade will be companies such as Diageo and Beam which take market share in the BRIC and other emerging markets.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.