Drink Up: Investing in the Emerging Alcohol Market

“Too much work, and no vacation, deserves at least a small libation. So hail! my friends, and raise your glasses, work’s the curse of the drinking classes.” – Oscar Wilde

“Sinvesting” is a theme that we monitor constantly at The Lifetime Income Report. We have previously explained why tobacco in emerging economies is a steal. Today, we’re raising a glass of hooch to the next-best sin play.

From the very beginning of written history, alcohol has played a significant role. In everything from Homer’s tale of Odysseus tricking the Cyclops with wine to monks brewing beer to expand and build new monasteries, alcohol has played a role in human history.

Booze is one cultural, social and economic staple that will not go away anytime soon. Right now, Europe still has the top drinkers in the world. In the Czech Republic, legal drinkers consume a whopping 157 liters of beer per person each year. Little old Luxembourg consumed the most total alcohol including wine and liquor per person. The rest of the continent is holding its own near the top of every list we can find.

But the real story isn’t Europe. It’s emerging economies. China, for instance, consumes the most beer of any country in the world. But its per capita consumption doesn’t even squeak the Asian giant into the top 20. This number is growing, however. As China’s average median income continues to grow, so does its drinking stats. Already, we’re seeing annual volume consumption rates growing in the low double digits.

South America, however, has the best investment opportunities.

Compania Cervecerias Unidas SA (NYSE:CCU) is the leading beer and soft drink producer in Chile and Argentina. CCU is a fully scaled, vertically integrated mega distributor. Meaning, the company makes and sells its products like no other operator. It contracts, produces, markets and distributes a wide range of products, like soft drinks, wine, bottled water and even snack food. But the real moneymaker for CCU is its beer.

The company owns exclusive rights to a variety of brand names. For instance, Anheuser-Busch agreed to an exclusivity deal with CCU back in 1995. That deal, which guarantees every Budweiser bottle, can or keg that is sold in Argentina will go through CCU, was extended until 2025. Because of the Anheuser-InBev merger, the contract will need to be renegotiated by 2015. But that’s not even a drop in the bucket of what CCU has to offer shareholders.

With its origins dating back to 1850, CCU has the experience and connections in its region to capitalize on the best brands and sales outlets. Like Anheuser does here in the US, CCU controls the marketing scheme of most of its customers. Let us explain…

Take your average supermarket. In the beer aisle, you’ll probably see stacks of Budweiser and Bud Light at eye level…right in the middle of the aisle. You’ll also see Miller and Coors products around there too. Meanwhile, imports and craft beers are subjected to shelf space in the far corners and above or below the customer’s eye level. The reason for this: The big three – Anheuser-Busch, Miller and Molson Coors – are able to set up the display arrangements with retailers in advance. Of course, this is all done through distributors to comply with US law. But the Chilean and Argentinean laws on alcohol sales are even more lax, giving CCU exclusive marketing power no one else has.

On top of its powerhouse marketing efforts, CCU also controls the best brands in the business: Kunstmann, Dorada, Escudo and Cristal – by far, the most popular beers in Chile. On top of these popular domestic brands, CCU also sells through partnerships: Heineken, Paulaner and, of course, Budweiser.

These brands have helped this century-and-a-half-year-old company gain control of roughly 85% of the Chilean beer market, not including its stake in other manufacturers. CCU is working on obtaining a market share like this in Argentina. But the company has operated there since only 1995, so its fast-growing 22% is still pretty respectable.

CCU's Fast Growing Market Share

With this kind of market share, CCU sets the rules. Even though beer is one of the most stable industries in the world, especially throughout recessions, overall consumption is trending down in some major markets. We noted that Western Europe is the most hop-imbibed continent on the plant. But it may not have the top drinkers forever.

The eight largest consuming nations per capita are drinking less and less beer each year – seven of these are European.

South America is taking up the slack. According to a CCU study in 2008, Chilean beer consumption grew more than 30% between 2004-2008. In Argentina, which is already a heavier drinking nation, consumption grew 23% in that period. And as these countries continue to grow their middle classes, we could be looking at massive consumption growth trends.

While we don’t expect either nation to drink as much as Western nations do anytime soon, we can’t help ourselves from comparing them. In the US, we consume about 79 liters of beer per person each year. In Chile, that number is just 36 liters per person. And Argentina comes in at 43 liters per person. Better yet, CCU is expanding to the rest of its continent. It is squirming its way into the lucrative Brazilian and Columbian markets. CCU is also looking at some smaller surrounding markets.

These tremendous trends would be enough to make us think about investing in CCU on their own. But this is only half of the growth potential this play has to offer…

Beer currently makes up a significant portion of the company’s business. But it isn’t the only segment CCU is dominant in. In fact, nearly half of the company’s top line comes from wine, spirits and nonalcoholic beverages.

Chilean wine is already recognized as some of the best in the world. Making up just 16% of CCU’s business, you wouldn’t think it to be too important. But with the world consuming more and more wine from Chile, CCU has been able to grow its wine sales volume a massive 24% in just the last four quarters. On top of solid growth from its wine business, the company’s nonalcoholics segment has an ace up its sleeve. CCU has exclusive rights to Pepsi as well.

All in all, CCU offers a one-stop play on the growth of the South American economy. That’s a play I’m happy to take.


Jim Nelson
for The Daily Reckoning

The Daily Reckoning