Consumers curb spending when unemployment spikes and portfolios sink to unsightly levels. This uncovers a major advantage for the spirits sector: Alcohol is an affordable luxury.
“Consumers may not be able to buy a new car or a vacation home during a recession, but they can still afford a cocktail,” says Lauren Torres an HSBC analyst.
Not all spirits companies are created equal.
Even though Brown-Forman (BF.B), the parent company of major liquor brands like Jack Daniels, Finlandia, Don Eduardo and BEAM (BEAM), home of Jim Beam, El Tesoro and Skinnygirl have weathered the 2008 financial crisis, can the companies withstand Europe’s economic tailspin?
Brown-Forman has less exposure in Europe, than it did four years ago. “Back in FY2009, Europe consisted of 28% of the company’s sales and we expect current European sales to be closer to 26%,” says analyst Vivien Azer at Citi Investment Research.
As for Beam, the outlook isn’t as bright when it comes to Europe. Azer mentions how the company is most popular in southern European countries, which are less stable, while Brown-Forman is more active in the stronger economies of Germany, France and the United Kingdom.
Regardless of Europe’s financial state, both companies are making innovation a priority, ultimately to tap into younger demographics in an attempt to revive the brand. “There is a desire for newness among consumers, contributing to what we now call the bourbon renaissance,” Azer says.
That’s explained by the bourbon industry taking notice at what vodka manufactures have been implementing for years: Flavored drinks. Beam was first to release flavored bourbon in 2009 with its Red Stag brand, infused with a black cherry taste. Brown-Forman responded last year with honey flavored bourbon, Jack Daniel’s Tennessee Honey, which has taken the industry by storm.
Looking at history, both companies have outperformed the Dow Jones Industrial Average and the S&P 500 over the past decade, as seen in this chart*:
*Beam separated from its parent company, Fortune Brands, in September 2011
Yes, the drop was rather precipitous during the financial collapse, but look at how quickly both stocks rebounded. Brown-Forman and Beam’s EPS (ttm) during the time of the downturn was 2.87 and 1.30, respectively, in April 2009 – three years later, those numbers jumped to 3.56 and 5.75.
A total bourbon renaissance? The analysts say so and the numbers seem to indicate a bright future, even with the looming fall of Europe’s economy.