Global drinks groups forge through inflationary storms

Amid inflationary pressure, shoppers are said to be switching to economy and own-label lines from brands, however there is no evidence of that trend in the drinks sector. db looks at the global drinks groups forging ahead through the inflationary storm.

Tesco’s  retail operating profits fell by 10% in the six months to the end of August while sales across the whole group (excluding its fuel business) increased by more than 3%. Volumes up but margins down and customers  are “watching every penny”, the company says.

Shoppers, it said, were switching to economy and own-label lines from branded products and consequently its full-year earnings would be at the low end of its previous estimates.

Yet there is no evidence of that trend in the drinks sector.

Despite all acknowledging that they would be robust in taking price increases to combat the rising cost of materials and wages, the global drinks groups are forging ahead through the inflationary storms.

Pernod Ricard UK is pumping extra investment into key brands in the run up to Christmas in the expectation of a bumper autumn based on the extra fillip from the soccer World Cup, while both Diageo and Constellation Brands report healthy trading growth.

Diageo told its shareholders at their annual meeting that it had made “a good start” to the financial year that started in July , “with organic net sales growth across all regions”.

Chief executive Ivan Menezes said: “We remain well-positioned to deliver our medium-term guidance ….. of organic net sales growth consistently in the range of 5% to 7% and organic operating profit growth sustainably in the range of 6% to 9%.”

As both Menezes and Alexandre Ricard, his counterpart at Pernod Ricard, have said on numerous occasions, the trend to trading up in wines and spirits will continue because even in hard times consumers will want to console themselves with small luxuries while having to cut back on more expensive items.

It was a theme echoed by Bill Newlands, Constellation Brands’ chief executive, when announcing his latest results.

Far from facing consumer resistance he said, “The buy rates that we’ve seen have been increasing,” despite inflation in the US heading for 8%.

“Consumer-led premiumization trends continue across beverage alcohol, ” Newlands said, “giving further confidence in the resilience of premiumization as a fundamental driver of demand for our brands.

In the second quarter of its financial year Constellation’s net sales were up 12% compared with 2021. Beer sales, which account for 80% of the group’s business, grew by 15%, while wine and spirits sales edged up by 1%.

“Our beer business,” Newlands told analysts, “posted depletion growth of nearly 9%  [that’s 9 million extra cases in the quarter], our wine portfolio gained share and outperformed the entire category in tracked channels while our craft spirits brands outperformed the higher end segment of the spirits category.

“Kim Crawford, Robert Mondavi Private Selection, Meiomi, and Ruffino and our largest fine wine brand, The Prisoner, all delivered solid depletion growth. In our craft spirits portfolio, High West, Casa Noble, and Mi Campo all achieved strong double-digit depletion growth,” he said.

Comparable earnings, adjusted for one-off items, climbed 33% year-on-year to $3.17 per share. However, on an unadjusted basis, the company made a net loss of $1.15 billion or $6.30 per share, compared to a net profit of $1.5 million or $0.01 per share a year ago.

Much of that was due to continued write-downs on the $4 billion-plus investment in Canadian cannabis producer Canopy Growth, where Constellation has taken a further $1.1 billion impairment on its controlling stake.

Newlands remains optimistic about Canopy, which recently sold its Canadian retail outlets to become solely a producer and wholesaler. But much of Constellation’s bet depends on whether the US Congress eases federal restrictions on the sale and possession of cannabis products.

Nevertheless, Constellation is in buoyant mood. Not only is it ahead of schedule to return $5 billion of cash to shareholders by the end of its financial year but it has also increased its  guidance.

Finance chief Garth Hankinson said: “Given the strong performance of our beer business, we are now targeting full year fiscal ’23 net sales growth of 8% to 10% and operating income growth of 3% to 5% for that business.”

However, he expects no more than a flat performance from the wines division, which Constellation has further trimmed by selling more lower-margin brands to The Wine Group in a move aimed at reshaping it toward the high end of the market.

The deal includes Cooper & Thief, Crafters Union, The Dreaming Tree, Monkey Bay, 7 Moons, and Charles Smith Wines.

Strong cash flow means that Constellation continues to seek niche acquisitions to further strengthen its spirits portfolio but rumours of a mega-merger with energy drink group Monster seem to be fading.

Constellation, however, is about to spend $1.5 billion on compensating the controlling Sands family in return for them ending the group’s two-tier share structure, a proposal that is being put to the vote on 8 November.

If it passes, as seems highly likely, Constellation will become more attractive to investors, despite the Sands remaining the biggest single holders.

Even so, analysts are bullish, joining Newlands, Menezes and Ricard in expecting consumers to keep trading up despite the global uncertainties and rising inflation.