I. Sector Landscape and Outlook

Consumers are demanding alcoholic beverages which are specific to their lifestyle choices, such as the desire for exercise or weight loss.  Curious consumers are seeking new flavours and experiences to the likes of having hybrid drinks which include mixing two different alcoholic beverages to create a more enjoyable and exciting experience. The alcoholic beverages space which comes under sin sector represents an innovative and dynamic environment for growth, primarily because of an increase in the level of disposable income and premiumization trend.

British alcoholic beverages market consists of several large players that are manufacturing and marketing various types of alcoholic beverages to serve a wide range of customers base scattered around the world. The key players that are active in the market include Carlsberg A/S, Diageo PLC, Suntory Holdings Ltd., Anheuser-Busch InBev SA/NV and Stock Spirit Group Plc.

As per WHO, UK per capita alcohol consumption had slightly shrunk from 12.3 litres in 2010 to 11.4 litre in 2016; however, it is still relatively higher than the European Union average per capita consumption. The UK has a population strength of 66.7 million, and approximately 82% of the population is above 15 years. The minimum age required to drink beer, spirit, and wine in the UK is 18. The UK accounted for ~17% of Europe’s total alcoholic beverages market. The UK Alcoholic Beverages industry was valued at US$ 44.8 billion in 2018. According to a recent market research report, the UK alcoholic drinks industry is estimated to grow with a Compounded Average Growth Rate (CAGR) of 3.1% between 2019-2025 to become a US$ 55.5 billion industry by 2025. However, the estimated growth in the UK market is lower than the global growth estimates. The global alcoholic beverages market was valued at US$ 1,272.85 billion in 2017 and is projected to grow at a CAGR of 5.6% by 2025.
 

 
Let’s take a look at the Global Alcoholic Beverages Market Classification:

Product Type: Beer, Wine and Spirit

Packaging: Plastic bottles, Glass bottles, and Tins

Distribution Channel: Modern Trade, Convenience Stores, Specialty Stores, Online Retailers, Hotels/Restaurants/Bars, Commercial Stores

Fig 3: Key Players


Source: Thomson Reuters, Data represents FY18 numbers
 
Let’s go through the factors which are expected to drive the industry in the near to medium term.

1. Increasing demand for premium alcoholic beverages: Especially in developed geographies, premium range spirits brands are in higher demand as compared to lower-priced value brands which have more to do with a level of lifestyle and luxury associated with them. The presence of some of the best brands in the market such as Jackson, Jack Daniels, Smirnoff, Malibu, Blossom Hill and Absolut has increased the popularity of premium vodka, whiskey, beers, cognac and wine. The shift of trend for premium brands across different product categories will continue to act as a crucial growth catalyst for the sector in the next few years.   

2. Higher pricing of premium products : With the surge in demand for premium alcoholic beverages, the higher prices of premium or super-premium products will act as a future growth catalyst for the industry, and it will lead to an expansion in margins and profitability of the company.
 

3. Increase in disposable income of customers:  Sales of alcoholic drinks are primarily determined by the availability of disposable income in the hands of the purchaser. An increase in spending power of middle-class people will drive sales for alcoholic beverages companies. Also, according to the United Nations (UN), the number of middle-income consumers has surged in recent years. This category of consumers typically has a higher inclination toward a better lifestyle, with an increased spending on discretionary products. This factor is also estimated to drive the growth of the global alcoholic beverages market.

4. Increasing innovation and Brand building will remain a growth factor for industry: The competition in the ‘Rum’ segment is intensifying. In order to gain an advantage over their peers, manufacturers of rum focus on innovation and strive to launch new products in the premium category. These factors are expected to considerably affect the overall growth of the rum market. Moreover, key players are also focusing on developing new and premium rum offerings to sustain their position in this competitive segment.

5. The beer segment is likely to grow with the highest pace: The beer market is anticipated to witness a significant growth especially in Asia-Pacific countries, because of several factors like upsurge among female consumers and social acceptance of beer as a refreshment drink in parties and family functions.Further, beer is one of the most largely consumed alcoholic beverages across the globe. Also, cultural changes and penetration of western culture in the developing countries have influenced the consumer behaviour. Inclination toward alcoholic beverages and changes in the social lifestyle of the working class along with the growth in disposable income is going to boost demand in the near to medium term. 
 

COVID-19 pandemic posing short-term challenges - but online sales have picked up

The outbreak of COVID-19 has led the governments of many countries to take social distancing measures in order to curb the impact of the novel virus. This put off many activities, including restaurants, bars and pubs which is weighing on the industry. Also, the lockdown announced by many countries to execute social distancing measures is likely to impact the performance of these alcoholic beverages companies in the first half of 2020; however, countries where the online distribution of alcoholic beverages are permitted, have witnessed a spike in online sales of alcoholic drinks, according to market research company Nelsen, monthly online alcohol sales were up 22% for the week ending March 28, 2020.

Outlook

Despite short-term challenges which have emerged because of the unprecedented spread of COVID-19, we believe long-term growth is completely intact for the industry. A majority of UK-based alcoholic beverages companies have globally diversified revenue base and catering to the markets where the disposable income are expected to increase in the near to medium term. Further, in the UK and other developed market companies are expected to benefit from the growing demand for premium alcoholic beverages, and new product launches. Premium range spirits brands are in higher demand as compared to lower-priced value brands owing to the lifestyle and luxury associated with them.     
      
We also believe that online sales is going to be the driver going forward and will contribute significantly as compared to other conventional methods of distribution; however, there are many markets where online sales are still not permitted, especially in Asian countries, but we believe restriction to lift up there as well in future.

Further, shares of alcoholic beverages companies hit hard because of locked down and social measured exercised across the globe, but there is stealth demand, and once people allowed to move out of their home, the demand will return too. This provides an opportunity for investors to buy stocks at discounted price and valuation because growth catalyst pertinent to this particular sector is intact as compared to other industries where the government has to extend immense support in order to bring them back to the game.
 
II. Investment Theme and Stocks under Discussion (STCK, CCR, DGE and FEVR)

After gauging through the industry dynamics, let’s take a detailed view of the companies in the operating in the sector in terms of their performance and outlook. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF). 
 
 
Fig 4: Relative performance of the sector under discussion against FTSE ALL Share Index (1 Year)