By MoneyMorning.com.au
Whether it’s cultural reflection, or a result of the booze wars between the two biggest supermarket chains, the liquor market in Australia is worth about $16.4 billion to the Aussie economy.
And the industry expands 3% each year.
That got us thinking… with that kind of growth rate, are there any companies worth investing in?
Well, when it comes to investing in our booze industry, pickings are slim. But there are a couple of potential gems out there.
Before you decide which booze firm to invest in, you need to work out which firms not to invest in.
First, we suggest ruling out most of the ASX-listed wineries. Even though Australia’s per capita beer consumption has reached a 62-year low – and wine sales are soaring – the Australian wine industry is suffering.
Thanks to the strong Aussie dollar, in 2011 Australia imported about 67.6 million litres of wine, up from 26.1 million five years ago. In fact, imported wines now account for 20% of sales.
Top French and Italian drops (once unaffordable) now feature on dining tables around Oz. In some bottle shops, French produced Moet & Chandon champagne is cheaper than the locally made Domaine Chandon sparkling wine.
But the high Aussie dollar isn’t just affecting local sales. Wine makers are suffering overseas as well. John Ellis, owner of the privately owned Hanging Rock Winery said this about the international wine market, ‘It’s not just the strength of the dollar, it’s the economic climate in Europe. We’ve basically abandoned that as a market.’
A sign of the struggling wine industry became apparent last year when Foster’s flogged off its wine business.
The ‘demerger’ of Foster’s wine and beer businesses, led to Treasury Wine Estates [ASX: TWE] initial share price offer of $3.20 a share. Surprisingly, in what’s been a gloomy market for wine companies, the stock is up 10%.
The Australian wrote at the time of the demerger: ‘The demerger document warns that every 1c increase in the value of the Australian dollar against the greenback reduces Treasury Wine Estates’ earnings before interest and tax by $4.8m.’
And the company draws almost half of its sales and profits from the US. So any decline in US sales will affect the share price.
As of Wednesday, the stock was trading at $3.52. Yet as far as wine stocks go, this is the only one that’s gained this year. All the other listed wineries are in the red.
So, that’s where you shouldn’t invest. Now where could you stick your cash?
Well, one way to get exposure to the booming booze market could be by investing in our two biggest supermarket chains.
Woolworths [ASX: WOW] liquor sales were up 5.4% for last financial year to $5.9 billion. It owns major retail distributors – including Dan Murphy’s, BWS and Woolworths liquor – and alcohol now accounts for 10% of Woollies revenue.
Then there’s Wesfarmers [ASX: WES]. It only has about $2.7 billion of the alcohol market. Which is about 1.5% of Wesfarmers revenue. But the company has a very aggressive plan to add another 181 alcohol retailers by 2016.
Wesfarmers owns the Coles Liquor, 1st Choice, Liquor Land and Vintage Cellars liquor brands. This creates the chance for it to become a big player in the alcohol sector.
But if buying shares in wineries and alcohol retailers isn’t your thing, how about this boutique brewer…
At the time of its demerger, Foster’s blamed part of its $89 million loss on the decline in the number of beer drinkers.
But ASX-listed Little World Breweries [ASX: LWB] challenges that belief.
Since 2010, its share price has risen 72%. The company specialises in the premium beer market. And overall last year, the premium beer market grew 15%.
The company has ambitious growth plans, and even better for the company, it expects an after tax profit of $5.2 million to $5.7 million this financial year. That means profit will be somewhere between 13% and 24% higher than last year.
It might be tough times for the wine industry and the big brewers. But if this small brewery is any indication, it looks like a pretty good time to be a small premium brewer.
Shae.
Editor, Money Weekend
P.S. Small company stocks are what Kris Sayce focuses on each month in Australian Small-Cap Investigator. And although he doesn’t have any brewery stocks on his buy list, there a few small-cap stocks he believes will put in big gains over the next 12 months. If you’d like a no-obligation trial of Australian Small-Cap Investigator and see Kris’ latest tips now, click here for details…
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