"Creating craft brands is a skill set that most big companies don’t have" - Interview, Bernstein analyst Trevor Stirling
Trevor Stirling has been an analyst at Bernstein since 2004
Sanford Bernstein analyst Trevor Stirling is no stranger to the drinks industry. Having spent the late '90s as strategic planning director for Guinness Ireland, he then took on the role of packaged trade director at the company. He followed that by starting his own private-client wine merchant. In 2004, Stirling became an analyst at Bernstein, where he covers the major European brewing and spirits companies. Here, he talks to just-drinks about the role of an analyst, and how he sees the future of the drinks industry shaping up.
just-drinks: What does an analyst do?
Trevor Stirling: Our clients are large investment companies and they may be considering making an investment in a drinks company. The people making those decisions can choose from 10,000 to 20,000 different companies, even their internal experts might be covering 200 different consumer companies on a global basis. They don't have the individual expertise. So, we'll talk to them about whether we think something is a good or a bad investment and what we think is happening to the profit dynamics at a company and, therefore, whether we think it's undervalued or overvalued.
j-d: What is your definition of a successful company?
TS: If I was looking to invest my own money, I'd be looking for a ten-year horizon. But, investors have different time horizons - you might be a hedge fund and the time horizon is a month, or you might have some family-controlled investment and the time horizon is five years. You've got to frame recommendations as to how the investor thinks.
j-d: How does the analyst community see the drinks industry in terms of investability, compared to other industries?
TS: If you look at the long-term perspective, it's a great industry to invest in, with very strong underlying volume growth in emerging markets and consumers in developed markets trading up in a way that is unique to the sector.
Consumers' emotional involvement in drinks brands is much greater than in other consumer goods categories. Finally, the penetration of private label is much lower than in many other categories.
j-d: Organic versus inorganic growth - which is the most effective and sustainable?
TS: They both have their role. Organic growth is always good, as long as you're not paying too much for it in terms of A&P. Inorganic growth only makes sense either if you have real synergies or you can run the target company much better.
j-d: How come when all analysts get the same numbers from the same results, some recommend different ratings?
TS: It's partly down to how deep you dig into the numbers. If you looked at Diageo's numbers a year ago, the US was doing incredibly well, but it was being driven primarily by Crown Royal. Now, you dig underneath that and then you see it was the apple flavour that was driving all the growth to the brand. You have to make up your mind on whether that's going to continue or not. If I didn't dig into the data and I didn't have the experience, I might make a different conclusion and say 'hey, everything's going well for Diageo'.
j-d: Are there any spirits companies at the moment that are active in M&A and looking to be on the world stage?
TS: It's probably too late. So much of the consolidation has happened. Campari is very active, but it's still a relatively small company in the grand scheme of things. The intriguing question is: What will the large Chinese baijiu companies do? By profits and by market capitalisation, Moutai is the second largest spirits company in the world. So far, they have displayed no interest at all in expanding outside of China. But, if it decided to become active in the same way that some of the Japanese brewers have, what could it do with its cash flow? If Moutai becomes active, that would shake things up in the spirits world.
j-d: How much can you predict when it comes to headwinds in emerging markets?
TS: I'd say 75% of it is the economy. If you see oil prices or commodity prices starting to fall, you know that's going to hit emerging market economies; you know that's going to hit GDP growth and currency's going to fall. But, there are things that nobody can foretell - politically-driven things such as the clampdown in China on extravagant consumption.
j-d: Is it better for companies to create craft brands or buy craft brands?
TS: I would say buy. Creating craft brands is a skill set that most big companies don't have - it's an entrepreneurial mindset. Also, if you look at craft consumers, there is a proportion for whom the 'localness' and ownership is really important. But, for 90% of craft consumers, they just want something that tastes good. We've seen that with Goose Island in the US - when Anheuser-Busch InBev bought it, there were some consumers who said they were never drinking it again - but that brand has trebled in five years. I see no reason why that success can't be repeated elsewhere.
j-d: What about incubator funds, such as Diageo's Distill Ventures?
TS: It seems to be a sensible approach to take. It's like a toe in the water. We don't know yet the commercial results - it's a relatively small bet in the grand scheme of things.
j-d: What impact do you believe the craft segment has had on the wider beer category?
TS: The beer world has become much more dynamic over the last ten years and the biggest single factor behind that has been the rise of craft. In the US, it looks as if craft's going to plateau at around 12% to 13% market share. Craft beer was growing in the low-teens and now it's growing in the low single-digits: That's happened in about 18 months. There's a limit to how many brands a retailer can stock and how many brands a consumer will have in their portfolio. I think we are just about there in the US.
Now that AB InBev and MillerCoors are getting behind craft, there is likely to be another leg of modest growth left for craft beer in the US, driven by the 'mega craft' brands. Equally, some of the older craft brands are perhaps looking a bit tired. In terms of Boston Beer and Sam Adams, it's going to be much harder for them to generate growth. So, maybe that counterbalances.
j-d: Will craft spirits ever become as big as craft beer?
TS: Craft spirits are going to grow and succeed but I don't think they will ever become as big as craft beer. If you look at craft beer growth in the US, it took place at a time when there were four large brands, all with a similar taste. The ads were all similar; there was little choice.
Arguably, craft beer would never have become as big under independent ownership if Anheuser-Busch had not more or less ignored the sector or tried to strangle it at birth. If AB InBev had embraced craft beer, we might've seen a very different world, where AB InBev-owned brands are worth 50% of craft beer as well as 50% of mainstream beer.
In terms of spirits, it's already very fragmented in terms of categories and sub-categories. The choice is much greater. Those four large beer brands didn't have authentic stories to tell, where there are authentic stories in sectors like Scotch or brands like Jameson. You can go to the distillery and see the heritage. The other factor is that, in brown spirits, the capital required is much greater, so there's a larger barrier to entry.
Finally, the big companies are on top of craft spirits.
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