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Will 2023 be remembered as an annus horribilis for drinks?

21 December 2023 By Ron Emler

Investors in drinks sector companies will not look back on 2023 with much affection, though shares look likely to recover in 2024, says Ron Emler.

Following the recovery boom in 2022 on the back of much of the world lifting Covid restrictions and consumers engaging on a spree of “revenge hospitality”, producers were hit by slowing global growth, rising inflation and public resistance to price rises.

Each of the major international groups had its problems, but if the analysts have got it right, 2024 will see many of their share prices recover lost ground as spending and consumption patterns return to the more stable growth rates seen before the pandemic broke in late 2019.

It has been a painful year for Diageo, not least because of the sudden death of the much-respected Sir Ivan Menezes on the eve of his retirement.

The biggest premium alcohol company’s shares have shed more than 20% this year as the key American market’s growth rate hit the brakes.

Worse for new chief executive Debra Crew was having to issue a sudden profits warning in November as sales in the South American and Caribbean area slumped by 11% due to overstocking by wholesalers and retailers.

Markets expect Diageo to report profits at least 2% lower for its July to December half year compared with 2022 but analysts expect Crew to right the ship fairly quickly.

On the assumption that she does so, the consensus view is that Diageo’s shares could recover much lost ground and put on about 20% in 2024.

Russian trade

Much the same perspective applies to Pernod Ricard.

The French company bore the brunt of ill-informed criticism about continuing to trade with Russia, lost its business licence in the Delhi region of India until charges of breeching competition rules (which it strongly denies) are resolved and did less well than it hoped for in China as the economy there failed to rebound with the vigour predicted.

As a result, Pernod Ricard shares are almost 15% below their value at this time last year.

But they are also predicted to recover much of that lost ground in the next 12 months.

Demand for Cognac in the US took a pounding in 2023 and so Rémy Cointreau saw its shares lose a third of their value because America accounts for half its global volumes.

In the latest six months Rémy suffered a 22.2% fall in organic sales compared with the same six months in 2022. Current operating profit was down 43%.

The slow China recovery in China, where Rémy Cointreau leads the market for imported spirits, was a further dampener.

While it works through excess stocks the next six months are unlikely to be much better but the company believes recovery will take place in the second half of 2004, and analysts are looking for the shares to pick up, perhaps by 10%, in the latter part of the year.

Steady slide

After an initial post-Christmas splurge, by spring investors in LVMH were sitting on record share values but as the realisation set in that the Chinese were not spending as predicted and that fears of recession were gaining strength, they have steadily slipped back to where they were a year ago.

The Moët Hennessy division suffered from the Americans turning their backs on Cognac and now there are fears that the whole group may be facing a dull year, despite being a leading supporter of the Paris Olympics.

Given that the Chinese now represent more than a quarter of the global market for luxury goods, analysts are not expecting LVMH shares to advance by much more than 10%.

Constellation Brands gained traction as its Mexican premium beers continued their relentless drive into US popularity.

Modelo Especial became the nation’s best seller earlier than expected after AB InBev scored a spectacular own goal with its marketing of Bud Light (AB’s shares have now recovered the ground they lost in the aftermath).

Constellation’s shares rose by about 5% during the year and to most eyes are the safest bet to continue their upward march, especially as the company has untangled itself from its disappointing foray into craft beer and is steadily distancing itself from the disastrous US$4 billion investment in Canopy Growth.

Jack Daniel’s owner Brown-Forman decided not to chase margins by excessive price rises and over the year has seen its shares decrease in value by about 10% as US demand for spirits switches back to cheaper beers.

On the one hand there are high hopes that the partnership with Coca-Cola for the Jack and Coke RTD will generate a new source of profit. In addition, worries that the EU would slap a 50% tariff on American spirits from 1 January appear to have eased following a deal between the bloc and Washington that extends the suspension until March 2025.

Davide Campari Milano was hit by a European summer of climatic extremes, which impacted sales of its aperitifs, notably Aperol.

Nevertheless, despite the announcement that dynamic chief executive Bob Kunze-Concewitz is stepping down in the spring, at the end of November Campari’s shareholders were enjoying a 5% rise in value over the year.

That went into reverse when he announced the US$1.2 billion takeover of Courvoisier Cognac from Beam Suntory.

While the takeover has been widely applauded for is long-term potential, there are fears that Campari may be paying top dollar and the shares have lost the ground they had made since Christmas.

Australian outlook

Down Under, investors are mooting a potential 25% increase in Treasury Wine Estate’s value over the next 12 months, which would bring it back to just above where it started 2023.

Chief Executive Tim Ford’s recovery plan has been well received and one calculation suggests that the shares are almost 50% undervalued on a longer-term view.

The purchase of Daou Vineyards in California and 750 hectares in Marlborough strengthen its global portfolio and it is achieving its goals in consolidating new Far Eastern markets, especially for Penfolds.

Talks between Canberra and Beijing on removing or reducing China’s punitive tariffs on Australian wine are said to be advancing and Treasury is all set for a reopening of what was its biggest export market.

But it expects that will be gradual.

Meanwhile, rival Accolade continues to wrestle with its debt mountain and US private equity group Carlyle is said to be seeking an exit.

Market rumours suggest that potential lenders are demanding a debt-for-equity swap which would effectively transfer ownership to them.