Drinks companies stay up amid the downturn

What a year! Few bade farewell to 2020 with any regrets, especially investors in the London stock market which lost 14.3% of its value, its biggest plunge in more than a decade. And that was despite the now expected December ‘Santa surge’ as investors seek optimism from the impending new year.

Sectors across the board from hospitality to retail, from engineering to oil all suffered mightily. How did the drinks industry fare?

Any formal classification of a drinks sector disappeared many years ago in the wake of the big brewers first swallowing each other and then falling into foreign ownership. The Big Six of Bass, Allied, Grand Met (Watney, Mann and Truman), Whitbread, Scottish & Newcastle and Courage have long gone.

Consolidation of wines and spirits into a few big players in the 1990s and early 2000s saw the demise of Grand Met, Allied Lyons and Seagram so that that today companies such as Diageo (which had previously incorporated the old Distillers and Guinness, who themselves merged in the 1980s) fall into the Consumer category.

However, the drinks business has initiated its own grouping of international wines and spirits producers whose shares are easily available on the London market. It comprises Diageo, Pernod Ricard, LVMH (which owns Moët Hennessy), Rémy Cointreau, Davide Campari Milano, America’s Constellation Brands and Brown Forman and Treasury Wines Estates from Down Under.

Assume you had invested £1,000 in each of these companies on New Year’s Eve 2019. Despite the appearance of Covid-19 in the Far East, by the end of January your combined investment would have been showing a modest profit.

There was concern about the effects of coronavirus by early February when both Diageo and Pernod Ricard tempered their forecasts for the year when they published their annual results, but the outlook remained cautiously positive.

By mid March a pandemic had been declared, drinks producers said they had no idea what the rest of the year held in terms of trading and profits and the bloodbath began. Investors rushed to sell as the West headed for lockdown, on-licensed premises and restaurants were forced to close their doors and travel retail virtually ceased to exist.

Our cumulative investment of £8,000 in the eight global groups on December 31 had crashed in value to just over £5,300 as together our ‘drinks sector’ lost a third of its value. 

Rémy Cointreau (the biggest player in the key Cognac market in China) saw its shares almost halved in value, as did Constellation. Diageo was down by 29%, Campari and Brown Forman by 32%, Pernod Ricard and LVMH by almost 25%. Worst hit was Treasury, the biggest exporter of wines to China, whose shares lost  55% of their value.

Chief executives were quick to point out that their businesses were flexible, that they would adapt swiftly to the changing conditions and that as global businesses their product ranges were comprehensive and widespread.

Consumers too gave substantial backing to the adage that alcohol producers were good ‘defensive’ stocks to hold. Whatever, people continue to drink, but during a crisis perhaps cheaper products in altered locations.

The huge swing to ‘off’ consumption, especially in North America, meant that by mid year trading statements were hinting that the direst forecasts had been avoided with sales figures and loss projections looking more calamitous than cataclysmic.

In the third quarter (June to September) Brown Forman even reported a modest improvement in sales compared with the same period in 2019.

Then came Lockdown Two but while none of our eight companies was willing to issue a forecast about business over Christmas and the New Year, it was becoming evident that investors were less despondent about the drinks giants than they were about many other global sectors.

Don’t forget the background of significant headwinds other than coronavirus.

Treasury was the dealt the hammer blow of punitive tariffs on Australian wine exports to China; the US slapped duties on EU alcohol exports in part of the tit-for-tat retaliation over subsidies to Airbus and Boeing; LVMH was facing a mother of a legal battle in Delaware over the price it offered initially for Tiffany; and the Brexit negotiations seemed to be dragging on into infinity.

The latter two crises have been resolved but the penalty tariffs remain in place. The cavalry is riding over the ridge, however, for the world economy in the form of vaccines. They were behind the December shot in the arm for the beleaguered London stock market.

So how did the db composite group of global producers fare? The hero from zero was Rémy Cointreau, whose shares rose in the 12 months by 46%. LVMH, with Tiffany under its belt, put on 23.5% while Campari was 16.5% ahead after the switch of legal domicile to the Netherlands. Across the Atlantic Brown Forman gained 16.5% in the year and Constellation 15%.

Pernod Ricard ended the year flat, while the losers were Treasury, whose shares crashed by  36% in value, and Diageo, which shed 6.5%.

Cumulatively, our £8,000 investment produced a positive overall increase in share values of 12.65% to just over £9,000, without the benefit of dividend payments, which continued in various shapes and forms.

Very few professional fund managers will have matched that result. Maybe they should reintroduce a drinks sector.