Latest / The Dutch Investors / #52 | Bear, base & bull case for global spirits | Uncorked w/ Secret Sauce Investing

Transcript

#52 | Bear, base & bull case for global spirits | Uncorked w/ Secret Sauce Investing · The Dutch Investors

• 0:00
  SPEAKER_00: Welcome back to a brand new episode by the Dutch investors.
• 0:03
  SPEAKER_00: I'm here once again with my friend Sonny from Secret Sauce Investing.
• 0:07
  SPEAKER_00: And today we're going to talk about the global spirits industry.
• 0:11
  SPEAKER_00: What is going on?
• 0:12
  SPEAKER_00: Why the headlines are so gloomy, if there's actually an opportunity here, and uh we'll talk about companies like Giaggio, Prono Ricard, Campari, maybe a couple others.
• 0:23
  SPEAKER_00: Now, Sonny and I have been elbows deep in the research for months now, actually.
• 0:28
  SPEAKER_00: It's been a little while.
• 0:29
  SPEAKER_00: He's got a lot of experience, which will help in today's episode.
• 0:32
  SPEAKER_00: And he just launched his own whiskey brand, which is pretty exciting, I guess, Sonny.
• 0:37
  SPEAKER_00: So uh are you ready, uh Sonny?
• 0:39
  SPEAKER_01: Yeah, I think we've, as you said, we've been researching this for a few months now, so ready to get stuck in and talk about something I'm very passionate about, which is spirits and whiskey as well.
• 0:49
  SPEAKER_00: Well, let's not waste any more time and dive into the episode.
• 1:05
  SPEAKER_00: Well, Sunny, today's topic is uh it's pretty close to home ride.
• 1:09
  SPEAKER_01: It does.
• 1:10
  SPEAKER_01: So it's uh a spirits uh or the whiskey industry is something I'm very passionate about.
• 1:15
  SPEAKER_01: I've worked in it for uh about the last five years, and before that worked in the spirits industry as well.
• 1:22
  SPEAKER_01: So being from Scotland, it's something we're always very proud of is our national spirit, which is Scotch.
• 1:29
  SPEAKER_01: Uh and just recently, if if listeners are interested, I launched my own brand, which they can find at whiskeycraft.co.uk, uh, which launched at the start of July.
• 1:38
  SPEAKER_00: Pretty cool.
• 1:39
  SPEAKER_00: I haven't been able to try one of your bottles yet, but uh we'll have to we'll have to figure something out.
• 1:45
  SPEAKER_00: I I'm not really of a uh much of a whiskey drinker, but uh I do have um a little spirit with me.
• 1:51
  SPEAKER_00: Uh I think it's smearnoff, yeah.
• 1:53
  SPEAKER_00: It's not the most uh strong uh strong liquor, but um I like sweet, sweet drinks.
• 1:58
  SPEAKER_01: So you've you've just not had good whiskey yet, that's the issue.
• 2:01
  SPEAKER_01: So when I either come to the Netherlands or or start exporting to the Netherlands, we can do a bit of an online tasting at the very least.
• 2:08
  SPEAKER_00: We'll have to, we'll have to.
• 2:10
  SPEAKER_00: So perhaps we could start uh today's episode with a little bit of historical context and then just jump into the the different companies, the dynamics, and uh we're going to talk about Abu base and bear case scenarios for this industry, and uh, I think the listeners will will have a lot of takeaways after this episode.
• 2:30
  SPEAKER_00: Yeah, really looking forward to it.
• 2:32
  SPEAKER_00: Yeah, I think talking about the historical context a little bit makes sense because it does play a role in this industry.
• 2:39
  SPEAKER_00: You know, alcoholic beverages have been woven into human history for millennia.
• 2:46
  SPEAKER_00: If you think about it, beer paying workers in ancient Mesopotamia, which is modern-day Iraq, or even wine, which was the preferred drink, during the philosophical debate in Greece and Rome, and the distillation of alcohol spreading through Europe in the 15th century with the help of the printing press, and this way they could write instructions and recipes for distilling wine and beer into stronger spirits, such as brandy and early whiskey.
• 3:13
  SPEAKER_00: A couple things that I I read in the books uh during our research, and pretty fascinating if you think about it.
• 3:20
  SPEAKER_01: Absolutely.
• 3:20
  SPEAKER_01: And if we give a bit of a nod to both our homelands, uh the oldest working or uh distillery in Scotland today is the Gwenturret Distillery, which was founded in 1775, which gives you an idea of really how long you know whiskey has been a common theme in Scotland.
• 3:36
  SPEAKER_01: And then for your homeland, the oldest working spirits producer uh is Lucas Balls, and they are they were founded in 1575 uh and to this day still produce liqueurs.
• 3:48
  SPEAKER_01: So there you go.
• 3:49
  SPEAKER_01: Quite a two interesting facts from our homelands.
• 3:51
  SPEAKER_00: Yeah, Lucas Bowls.
• 3:53
  SPEAKER_00: Uh I actually know the the the business uh a little bit.
• 3:56
  SPEAKER_00: I think they sell um the Pessoa brand and um Pisang Ambon and uh yeah, 1575.
• 4:03
  SPEAKER_00: That's that's pretty ridiculous if you think about it.
• 4:05
  SPEAKER_00: So yes, long ago.
• 4:07
  SPEAKER_01: Yeah, so just it gives you an idea of the staying power of a lot of these alcohol brands and the fact that some of them are coming up for half a century old, they're not too dissimilar to something we previously touched on with LVM VMH, a lot of these champagne brands being around half a century old and so on.
• 4:24
  SPEAKER_00: You know, after this month-long research into the industry, the the the million-dollar question is basically why do people drink alcohol and is this here to stay, or are we just in a declining industry from now on?
• 4:40
  SPEAKER_00: And it's a difficult question to answer, uh of course, otherwise, I mean, if if we knew the answer, we would be very rich, right?
• 4:49
  SPEAKER_00: But if you think about it, it's so rooted in history that you know the Lindy effect, um uh brand heritage all comes into play here, and so it makes me hesitant to think that alcohol is just going away.
• 5:02
  SPEAKER_00: I mean, wine was part of rituals, it was imported for religion.
• 5:07
  SPEAKER_00: Um, over time, wine came to signal refinement and culture.
• 5:12
  SPEAKER_00: It's why it still carries a sense of luxury today when you go to a restaurant, for example.
• 5:17
  SPEAKER_00: It also gives people a sense of community, happiness, and belonging, even.
• 5:22
  SPEAKER_00: And sometimes it's just a simple way to forget your problems and enjoy and be in the moment.
• 5:28
  SPEAKER_00: And of course, you could argue that it does more harm than good sometimes, but I think those are some of the reasons that we humans will still be drinking alcohol 100 years from now.
• 5:40
  SPEAKER_00: What do you think, Sonny?
• 5:42
  SPEAKER_01: Yeah, see, I will just uh echo that sentiment because I think that if you consider alcohol and and spirits in particular, it's they're very much a social lubricant.
• 5:51
  SPEAKER_01: They make people feel relaxed or they help people at parties or enjoy with friends.
• 5:56
  SPEAKER_01: It's very much something that's it's quite consistent with human history and it has been for hundreds of years.
• 6:03
  SPEAKER_01: But if we take that a little bit further and consider, in particular, brown spirits, the likes of whiskey and cognac, because they very much don't you know they don't spoil like beer, um, there's always this demand and this luxury aspect for them as well.
• 6:18
  SPEAKER_01: Um, something obviously we have with wine.
• 6:21
  SPEAKER_01: So one of the interesting facts that I pulled up for this podcast was the fact that the oldest bottle of spirits ever sold was a bottle of uh McAllen 1926, which sold for 27.2 million at Sotheby's in November 2023.
• 6:37
  SPEAKER_01: So it just shows you the fact that spirits in general, um, in particular whiskey and cognac can offer real demand and possibly even you know some form of investment for you know these high-end buyers.
• 6:50
  SPEAKER_00: So Sonny, we're talking about the spirits and alcoholic beverages industry today.
• 6:55
  SPEAKER_00: Diaggio is down 52% from all-time highs, Pinot Ricard down 54%, Campari is down 56%, Brown Foreman down 56%, and I can keep going on for a while.
• 7:08
  SPEAKER_00: So what is happening?
• 7:09
  SPEAKER_00: What's going on here?
• 7:10
  SPEAKER_01: So I think we'll get into this properly in the sort of the bull and especially the bear case, but in very much a short answer, there is obviously quite a considerably challenging macro climate just now.
• 7:21
  SPEAKER_01: We came out of COVID and there was this spike across the pandemic because people had more disposable income, they had less to spend it on, so they tended to drink more at home despite the hospitality, the bars and so on sector suffering.
• 7:35
  SPEAKER_01: So there was a lot of investment by the spirit manufacturers and producers to support this demand.
• 7:42
  SPEAKER_01: But obviously, as sort of 2022 and so on eased and the pandemic, you know, people tended to return to work.
• 7:48
  SPEAKER_01: Yeah.
• 7:48
  SPEAKER_01: What we found is there was this upfront investment by a lot of the spirits producers, but there was no longer the demand.
• 7:55
  SPEAKER_01: Um, and as we've got into quite a challenging macro climate, we've also obviously seen the tariffs being imposed by the US, who's obviously the biggest consumer for a lot of these brands.
• 8:07
  SPEAKER_01: It means it's been challenging for a lot of the producers who uh effectively have invested to meet high demand that hasn't materialized as we've entered 2024 and 2025.
• 8:18
  SPEAKER_01: And then just to add to that, the Asian, and particularly the Chinese consumer, who was driving a lot of premium and luxury growth for these spirits, has largely fallen away or disappeared.
• 8:29
  SPEAKER_00: Yeah, so let's give some context to the to the listeners about what kind of companies are there, uh, a couple names, and uh perhaps uh just to give some context around the company, how much revenue perhaps they generate if uh if we can find it real quick.
• 8:44
  SPEAKER_00: You know, what I didn't know before doing research was uh I know a couple companies we'll mention, Diageo, of course, uh which you own and our analyst and our analyst Matthijs owns, uh Perno Ricard, of course, uh with uh the brands uh absolute vodka, Jameson, Havana Club.
• 9:04
  SPEAKER_00: Uh Diagio, like I mentioned, what I just what I'm drinking right now, Smirnov, but also Johnny Walker and Guinness.
• 9:11
  SPEAKER_00: But I didn't realize that the Asian market was so big, so I found this company called Mao Thai, uh I think that's how you pronounce it, generate almost 25 billion in revenue, US dollars.
• 9:24
  SPEAKER_00: And they sell this national Chinese drink called Baijo, and it's one of the most valuable brands, and it's an incredibly large company.
• 9:34
  SPEAKER_00: I didn't uh roughly$300 billion market cap, so it's 10 times larger than Prono Ricard.
• 9:41
  SPEAKER_01: Yeah, it's pretty wild uh that something out there that even people like you and I who do a lot of this research and investing almost weren't even aware of this.
• 9:49
  SPEAKER_01: Um as I've just pointed out before the podcast, I I brought a bottle of Mao Tai along to show you that um Yeah, so cool.
• 9:56
  SPEAKER_01: This is what it looks like, but it doesn't necessarily get sold here or or any any place I'm particularly aware of in the UK, and I don't think you'll be aware of too much of it being sold in in the Netherlands.
• 10:08
  SPEAKER_01: So it's really, really interesting and fascinating, and obviously what's maybe inspired this podcast is I did release a piece um looking at these public spirit companies, and I have included uh Mautai as well.
• 10:21
  SPEAKER_01: However, it's not particularly a company I'd be I feel too confident either investing in or talking about too much because it's just something it's it's so intrinsic to China, but obviously globally it's not it's not sold uh far and wide.
• 10:34
  SPEAKER_00: I think you gotta I think you gotta be a native or just live there to to to really know its importance or strength and it's a bit out of our circle of confidence, maybe.
• 10:44
  SPEAKER_01: Yeah, so if you want, I'll just run through some of these companies that are in existence, and this is this comes from my piece uh on public spirit companies.
• 10:53
  SPEAKER_00: So Yeah, please do, yeah.
• 10:54
  SPEAKER_01: Diagio, based here in the UK, um we're quite familiar with it in Scotland because they own so many of the whiskey distilleries, and even if I drive 45 minutes an hour north, it is the case that you know I can can um find so many of these distilleries, don't have to drive too far whatsoever.
• 11:11
  SPEAKER_01: When I published my piece, they had a market cap of about 42 billion, and that's in in pounds, with uh their spirits being worth or the spirits division being worth about 22 billion, so almost just about half their market cap because they do have about 19% of sales that's made up from the likes of Guinness and Wine and so on.
• 11:29
  SPEAKER_01: So if we just focus in on the spirits division, um you're about four-fifths of their revenue.
• 11:35
  SPEAKER_01: Um, if we then come down, we've got the likes of Campari, who are based in Italy.
• 11:41
  SPEAKER_01: Their two big brands are Campari and Aperal Spritz.
• 11:45
  SPEAKER_01: And I know somebody like yourself is maybe not massively into their alcohol.
• 11:50
  SPEAKER_01: Um I'm sure you've seen this massive rise and boom of Aperil over the last couple of years.
• 11:56
  SPEAKER_01: Um, so that's that's really been the driver for Campari who come in at around uh market cap, sort of just shy of 7 billion.
• 12:05
  SPEAKER_01: Um, and then if we come down, we also obviously talked about LVMH previously.
• 12:10
  SPEAKER_01: LVMH isn't the easiest to talk about because they um also uh they've got their champagne included in their spirits and wine division, so it's not easy to dissect how much of their revenue comes from spirits, but just sort of indicatively, uh, we had that number um is at about 5.9 billion euros, but obviously that does include the champagne as well.
• 12:32
  SPEAKER_01: However, LVMH is obviously behind the likes of as the name would suggest, Hennessey, and then here in Scotland they have the likes of Glen Marangi and Arbeg distilleries, and then if we come on to Perno Ricard, based in France, their market cap is about half of the Agios, but that's in euros, so they're about 22 billion.
• 12:51
  SPEAKER_01: Um, and with that they have the likes of Ballantyne's and Havara Club.
• 12:57
  SPEAKER_01: Um just a couple as well, sort of uh off the beaten track that'll jump back into the European ones in a second.
• 13:02
  SPEAKER_01: But we've also got Beckel, the company behind Jose Cuervo, who are the biggest tequila producer in the world.
• 13:08
  SPEAKER_01: They're based in Mexico, so they're a bit trickier to invest in because they are listed on the Mexican stock exchange.
• 13:15
  SPEAKER_01: Um, but these guys are I think they're about 4.4 billion uh US dollars for their market cap.
• 13:22
  SPEAKER_01: And then if we come a little bit further down, we've got Brown Foreman based in the US.
• 13:26
  SPEAKER_01: Probably the most recognizable spirit is is Jack Daniels sitting at about uh 13 billion uh US dollars, and lastly, probably the smallest of the bunch, we've got uh Contro, who are based in France, so they've got Remy Cognac, and then they've also got Contro the Liqueur, um, and they're again sort of coming in as say about just two and a half billion euros for the market caps of the smallest of the bunch.
• 13:53
  SPEAKER_00: Yeah, that's that's a great overview.
• 13:55
  SPEAKER_00: Before we can maybe go to our bear basin bull case for the for the industry, which I'm I'm very interested to hear your thoughts on uh on what you think and uh and how you think about each different scenario.
• 14:07
  SPEAKER_00: A couple industry dynamics I found I thought were probably worth sharing, and I'm curious to hear your thoughts whether you agree with them or not.
• 14:17
  SPEAKER_00: So, from the things I found and read in several books, is that local tastes matter a lot.
• 14:24
  SPEAKER_00: You can't just sell every single spirit in in every country, the the local taste uh differs a lot.
• 14:31
  SPEAKER_00: Uh just look at the most sold spirit by volume baiou, and we don't even drink that in Europe and North America, so it's very local to especially China.
• 14:43
  SPEAKER_00: Another important industry dynamic is that regulation, it's one of the most heavily regulated industries in the in the world, uh, maybe together with gambling and uh tobacco, and I think this is also one of the largest risks, which we'll probably get to later.
• 15:01
  SPEAKER_00: Another interesting thing I read is that these companies don't sell direct to the consumer, so they sell to a distributor, which means that tracking your stock and your inventory is a lot more difficult, which is one of the reasons we're seeing this over-supply or under-supply dynamic very often.
• 15:24
  SPEAKER_00: And lastly, it's a very consolidated industry.
• 15:27
  SPEAKER_00: I don't there isn't there are a lot of like single brands coming up.
• 15:31
  SPEAKER_00: Uh, think about the Conor McGregor brand coming up or uh a celebrity coming up with a with a new spirit or a new brand, but they almost always get acquired by these larger companies, incorporate them into the uh holding structure or into the into the company and uh distribution network.
• 15:50
  SPEAKER_00: And that's why we see like what is it, four to five large companies dominating most of the western world and a couple in Asia, right?
• 15:58
  SPEAKER_01: Absolutely.
• 15:59
  SPEAKER_01: We've seen a lot of um MA action when it came to particularly celebrity-linked spirit brands, probably kicked off with Casamigos for George Clooney.
• 16:09
  SPEAKER_01: We've seen um the likes of Connor McGregor, as you've just touched on, proper number 12 was acquired.
• 16:15
  SPEAKER_01: We also saw Aviation Gin, who was backed by Ryan Reynolds, was also acquired.
• 16:20
  SPEAKER_01: And interestingly, maybe not so much here in the UK, but certainly more in the US.
• 16:25
  SPEAKER_01: I know the likes of um I think it was Kendall Jenner, and then also Dwayne Johnson have both launched kilo brands that if those continue the growth trajectory they're on, then certainly could be the case that they are acquired by DiAgio or Perno or Brown Foreman.
• 16:43
  SPEAKER_01: Um but it's interesting because these um operators, because what I mean, I suppose back to your original point of not selling direct to the consumer, they ultimately have to be good at two facets of their business.
• 16:56
  SPEAKER_01: One is distribution, because they are ultimately distributors and distributing to sort of are selling B2B, and then marketing, they have to innovate with their marketing and they have to maintain that engagement with the end consumer despite obviously not selling to them.
• 17:11
  SPEAKER_01: Um but a lot of this allows for quite significant gross margin and operating margins for these spirits companies.
• 17:19
  SPEAKER_01: Um, and you know, just as a sort of final point there as well, something we have seen in recent years is we've seen the likes of spirits taking market share from beer and wine who may you know necessarily haven't innovated as well as the spirits companies.
• 17:35
  SPEAKER_01: Um maybe something we can talk about a bit later, but yeah, with with these guys arguably should be maybe a lot higher valued than than the artists now.
• 17:44
  SPEAKER_00: Well, maybe we'll get to that.
• 17:45
  SPEAKER_00: Uh I do have some opinions on that as well.
• 17:48
  SPEAKER_00: I think it's one of the industries where you can't really expect a lot of growth.
• 17:52
  SPEAKER_00: I think it's highly tied to yeah, GDP and just overall growth of a country.
• 17:58
  SPEAKER_00: But I also think the only way to grow for these companies is to focus more on the emerging markets, India, uh, Latin America, maybe Africa.
• 18:10
  SPEAKER_00: I think that's where the growth will have to come from.
• 18:13
  SPEAKER_00: But uh, I think we'll we'll get to that in the bare base and bulk case for the industry.
• 18:18
  SPEAKER_00: So, Sunny, do you have anything uh before we uh we head on to the BBB cases?
• 18:26
  SPEAKER_01: Just give us a sort of very brief overview of you know the the growth and just touching on that because it's you're pretty um spot on to mention that sort of ties in with with GDP because it really does, you know, over the past five years or so, we've seen DiAgio growing at just over five percent, Perno have just been under that, Brown Foreman have have been the weakest with um about 3.4%, and Campari they've they've just been uh over 10%, and then with the likes of Remy Quantro has has actually been they've been slightly negative.
• 18:57
  SPEAKER_01: So what we have seen with Campari, I think sort of bucking the trend, as we've already mentioned, it probably is being driven by Aperol.
• 19:05
  SPEAKER_01: And I don't know um if you're familiar, but obviously we did we did sort of talk about the Negroni prior to this podcast, which obviously one of the key components to a Negroni is certainly uh Campari.
• 19:16
  SPEAKER_01: Is that uh revenue growth including acquisitions or organic?
• 19:20
  SPEAKER_01: I think that is just organic, but we'll need to double check that.
• 19:23
  SPEAKER_01: Okay, perfect.
• 19:24
  SPEAKER_01: Yeah, that is or that's just to confirm that's just uh organic, the revenue trend.
• 19:28
  SPEAKER_01: Okay.
• 19:29
  SPEAKER_00: If you had to make an educated guess right now, Sonny, do you think the current slowing sales, the negative free cash flow cycles, the bloated inventories are structural or temporary, if you had to make in a guess?
• 19:41
  SPEAKER_01: I think there's an element of cyclicality to them.
• 19:44
  SPEAKER_01: I think they will start to steady out.
• 19:47
  SPEAKER_01: I don't think they're necessarily going to be permanent.
• 19:49
  SPEAKER_01: Um I think these are more temporary.
• 19:51
  SPEAKER_01: I think it's the case that the spirits industry is driven by demand, and what we'll see, and I experience this almost on a on a daily, if not sort of weekly or monthly basis, is you see um distilleries tending to shut off production because there's not they've not got the demand to meet that production.
• 20:10
  SPEAKER_01: However, just like if we take the most basic rules of supply and demand, as soon as that distillery restricts their production, they're ultimately restricting supply.
• 20:20
  SPEAKER_01: But you've got to remember something like whiskey takes three years to age.
• 20:24
  SPEAKER_01: So we're not seeing an instant turnaround when it comes to comes to that supply.
• 20:30
  SPEAKER_01: Um, so three years down the line, there's not going to be that that same pull-through of that spirit from that distillery.
• 20:36
  SPEAKER_01: So what we could find is yes, I think it is temporary, but this may take two or three more years until the dust settles and we start to see sort of a return to growth.
• 20:50
  SPEAKER_00: Okay.
• 20:50
  SPEAKER_00: Well, Sonny, take me um through your bear base and bull case for the industry.
• 20:55
  SPEAKER_00: Maybe just uh start with uh the best case scenario first, if you don't mind.
• 21:01
  SPEAKER_01: Yeah, so I I think what we're seeing is we're seeing GDP growth, or we're seeing the best case to um describe it as single-digit growth.
• 21:09
  SPEAKER_01: Um, I think with a lot of these companies, what they'd be aiming for is a return to high single-digit growth or even double-digit growth.
• 21:18
  SPEAKER_01: Um, I think when it comes to the the bull case of these guys and you know what what does you know the best case scenario look like for them, they've got to first of all re-engage Gen Z, which I think is a whole different, you know, we'll come on to that because I think we need to talk about that by itself.
• 21:36
  SPEAKER_01: Um there's also been this push towards premiumization.
• 21:39
  SPEAKER_01: Again, it's it was very much driven by um the pandemic and demand there.
• 21:44
  SPEAKER_01: What we saw was there was this shift to premiumization for customers, but once that has been ultimately fulfilled across sort of 2022, 2023, and there's been a bit of a cliff edge, this demand has fallen away.
• 21:58
  SPEAKER_01: So actually, we've seen In the last year in 2024, there was um an increase in volume, but actually overall there was a slight decline in value.
• 22:07
  SPEAKER_01: So it demonstrated I think that was with US spirit sales.
• 22:11
  SPEAKER_01: Um we did it demonstrated that actually customers were buying cheaper, but they were still drinking.
• 22:16
  SPEAKER_01: Um so I think there's possibly a return to premiumization as well.
• 22:21
  SPEAKER_01: Um I don't I don't know what that looks like overall, but certainly with that what premium spirits will do is it will also drive up gross margins and ultimately drive up operating margins.
• 22:31
  SPEAKER_01: To your point, um emerging markets and creating growth opportunities, there's obviously a growing global middle class and uh you know the likes of Asia, India, Latin America.
• 22:42
  SPEAKER_01: This parallels a lot of our previous conversation with with LVMH, but these come these countries are obviously you know creating a new middle class, a new rich class as well.
• 22:54
  SPEAKER_01: Um and what we're finding if it's something that I wasn't even aware of until until I conducted the research for for my write-up, but is that India actually has four of the top-selling whiskeys in the world, um, and the likes of Johnny Walker, which is DiAgio's best-selling product, sort of flagship product very much for their spirits, is that is the fifth best-selling whiskey brand in the world, which if you'd asked me before I'd written this, I would have had no doubt inside it's probably Johnny Walker.
• 23:23
  SPEAKER_01: Um, but it just shows you how far behind the likes of you know these Indian-produced whiskies the likes of Johnny Walker is.
• 23:31
  SPEAKER_01: But I have, again, with doing the research, found that obviously these Indian-produced whiskies tend to be cheaper than their imported counterparts.
• 23:39
  SPEAKER_01: So as you get that um growing middle class in the likes of in countries like India, I have no doubt that they'll be drawn more towards the sort of premium end of Johnny Walker, which I'm not sure if you're familiar with, but has a range sort of from Johnny Walker red right through to sort of Johnny Walker blue at the premium end, so actually can cater to um a lot of different segments of the market.
• 24:01
  SPEAKER_01: Um and then lastly, I think it's it's tricky just now with categories of innovation, but I think the alcohol sector has done better than both the beer and wine market, which may be reflective of the fact that they've managed to pull out a lot of the uh a lot of that market share.
• 24:18
  SPEAKER_01: So we're definitely starting to see uh shift towards people consuming but consuming with health in mind.
• 24:27
  SPEAKER_01: So that may be things like hard seltzers, where we've seen significant success of the likes of brands like Whiteclaw, uh, which they're the low calorie seltzers, but they still have, you know, I think they're around uh 5% ABV.
• 24:41
  SPEAKER_01: And then we're starting to see as well the likes of known low spirits, uh, which are certainly a niche in their self.
• 24:48
  SPEAKER_01: But brands like Seedlip, who DiAgio actually went on to acquire um are on supermarket shelves and they're retailing for not too dissimilar prices to a lot of the spirits, which I think is quite interesting in itself because here in the UK that ultimately means the uh the retailer is not paying or not, they don't have the cost of the duty on these, but they're still marketing and selling these products for similar prices to what is the you know the spirit um so I think that's that's where we're at with the spirits market and probably what it looks like.
• 25:20
  SPEAKER_01: But I do think it it does require an opening of these these new um new marketplaces.
• 25:28
  SPEAKER_00: Yeah, you know, everybody's been talking about alcohol consumption going down, but if you do a little bit more research and just look at the facts, it has been declining since 1890, 1809.
• 25:43
  SPEAKER_00: But like you said, we have been consuming less overall, but we're spending more to enjoy the spirit a little more, you know, on a higher quality.
• 25:53
  SPEAKER_00: So it it was it has always been in a downtrend already, and it doesn't mean that your revenue necessarily has to decline as well.
• 26:01
  SPEAKER_00: Uh if you just look at the revenue figures, they they are not not in the the same decline as the the consumption going down.
• 26:10
  SPEAKER_00: So I I would agree mostly with your uh bool case, and I think um to add to that, if that were to happen and people start, especially investors, start to notice the the turnaround maybe and see the the same bool case we are seeing, this should also be reflected in the valuation.
• 26:29
  SPEAKER_00: I mean, some of the valuations are at all-time lows.
• 26:33
  SPEAKER_00: If you look at like an EV2 e-bit, maybe or uh operating cash flow uh metric.
• 26:38
  SPEAKER_00: I mean, getting the buybacks, getting the dividends, uh a higher exit multiple.
• 26:45
  SPEAKER_00: If the recovery plays out, I think investors could be rewarded very well.
• 26:51
  SPEAKER_01: Yeah, I think that's fair.
• 26:52
  SPEAKER_01: Um, and I think almost we could you know jump into it now if you want to just talk a little bit about valuations, but a lot of these valuations are at 10-year lows, and just not not in relation to this podcast, but I was listening to um an episode of Invest Like the Best yesterday, uh, which is one which um will be I definitely recommend, but it was uh with Andrew Milgram, and he talked about how a lot of people are aware that uh that it's challenging and we're in a financial or a challenging financial environment.
• 27:21
  SPEAKER_01: However, we're seeing these sort of tops with the SP being at uh all-time highs.
• 27:28
  SPEAKER_01: But I think actually where this actually in fact offers a good opportunity is a lot of these spirit companies are at tenure lows.
• 27:36
  SPEAKER_01: So it's it's uh running counter to how the index is running, which I think it's it's definitely um you know, for any contrarians out there who are looking for opportunities that are aren't following the market trends, certainly worth looking at.
• 27:51
  SPEAKER_00: Yeah, I think the only reason the SP is at all-time highs is because of the the big tech.
• 27:57
  SPEAKER_00: Uh if they didn't go up like 50 to 100% uh this year, I mean the the SP would have been down.
• 28:05
  SPEAKER_00: Lots of companies are are struggling.
• 28:06
  SPEAKER_00: I mean, there's there's a lot going on in the world, a lot of uncertainty, tariffs going on, and um the largest companies just keep proving us wrong, and investors are still excited and uh pretty bullish about these companies, but uh they are not excited about the spirits company at all.
• 28:23
  SPEAKER_00: So definitely if you're a contrarian, give it a look.
• 28:27
  SPEAKER_00: So, how about I give you my bear case scenario and then we'll meet in the middle at the base case?
• 28:35
  SPEAKER_00: I'll give you my bear case and then um just see if I missed anything.
• 28:39
  SPEAKER_00: Okay, go for it.
• 28:40
  SPEAKER_00: In my bear case, and I think the worries turn out to be real and lasting.
• 28:47
  SPEAKER_00: So the younger generation keeps drinking less.
• 28:50
  SPEAKER_00: Uh, that's a trend that will continue, continue.
• 28:53
  SPEAKER_00: Maybe even the GLP1 drugs cut into demand even more.
• 28:57
  SPEAKER_00: Uh, I've I think I've heard a couple of these CEOs talk about noticing a decline, uh, DIGO and uh a couple others uh since the GLP drug launched.
• 29:08
  SPEAKER_00: Maybe even a different kind of stimulus drug, uh maybe cannabis gets legalized, I don't know.
• 29:16
  SPEAKER_00: Uh takes a another slice of the market.
• 29:19
  SPEAKER_00: Perhaps governments will put on even more taxes on alcoholic beverages.
• 29:23
  SPEAKER_00: It gets harder to buy.
• 29:25
  SPEAKER_00: Maybe even countries ban it altogether.
• 29:27
  SPEAKER_00: I mean, the more that comes out, alcohol apparent is very bad for you.
• 29:32
  SPEAKER_00: It's shown in the research.
• 29:33
  SPEAKER_00: So who knows?
• 29:33
  SPEAKER_00: Maybe there will be a country that bans it altogether, and others might follow.
• 29:38
  SPEAKER_00: And then even today's valuation is still too high if if if this turns out to be the case.
• 29:44
  SPEAKER_00: Um, I mean, revenue stalls or shrinks, uh, companies have to discount to clear their inventory, which will hurt their brand image.
• 29:52
  SPEAKER_00: I mean, margins will fall and you can go on and on and on.
• 29:56
  SPEAKER_00: And uh, I think that would probably be the bear case scenario.
• 30:00
  SPEAKER_01: Yeah, I'll just echo a few of those points.
• 30:03
  SPEAKER_01: Uh I think if we if we start with Gen Z, we have what there has been this narrative, and there's somebody who works in the alcohol sector, it's certainly been around for a few years now that Gen Z are drinking less.
• 30:12
  SPEAKER_01: However, as we I think we both found when we were doing our research, and and thankfully just before uh I put my put my piece out, there was um a bit of a sort of change in that narrative because it was some counter information coming out and that I think from a recent survey for 26,000 consumers found that um 73% of those sort of aged 21 to 27 had consumed alcohol in the past six months, um which this was sort of up from 66% two years prior.
• 30:41
  SPEAKER_01: So obviously it's just one survey, you know, you can't you can't take that for granted, and you know, but again, I do appreciate it was against 26,000 consumers.
• 30:49
  SPEAKER_01: However, what I I would certainly point to with that is that Gen Z are actually getting older, and maybe Gen Z over the last couple of years, those who have almost came off age or sort of moved out and have started jobs or started university have found it more financially challenging to purchase alcohol because they you know they've had to prioritize elsewhere.
• 31:10
  SPEAKER_01: So it could be the case that Gen Z have not had money in their pocket, and and in fact that's that's the reason they've not drank alcohol rather than this cultural shift, which from somebody who who comes from Scotland and we have one of the uh the worst cases of sort of alcoholism in in Europe and possibly even the world, um I think it is the case that there's not this cultural shift.
• 31:32
  SPEAKER_01: Young people are still consuming alcohol, but to your point, it's it's yet to be determined if that is going to be a cultural shift or it's just a temp or if it's just temporary.
• 31:42
  SPEAKER_01: Um if we come back to uh the sort of macroeconomic pressures, obviously, I think one thing that maybe you didn't touch on is just obviously um there has been a lot of tariffs and there's been pressure there.
• 31:53
  SPEAKER_01: Uh I can't remember the exact number, but I did I do think Diagio said that tariffs would hurt them by um about a hundred million um in my write-up.
• 32:02
  SPEAKER_01: Um and that obviously is something that that is certainly for investors, you know, that's that's something they need to be well aware of.
• 32:09
  SPEAKER_01: Um and then if we just consider just the GLP1 drugs, something I have been doing uh more recently, actually, just off the back of this, I think almost it put me onto it, is looking at the likes of Novo Nordisk and Eli Lilly and how GLP1s are impacting consumer appetite.
• 32:27
  SPEAKER_01: And now there is about you know, give or take in the US alone, there could be about 100 million potential consumers of GLP1 drugs.
• 32:35
  SPEAKER_01: Um and if everyone of out of those hundred million consumers goes on to GLP ones, obviously there's uh what you know, what is the what is the uptake of alcohol or the consumption of alcohol look like?
• 32:46
  SPEAKER_01: So, yeah, from that perspective, I think there's there's a lot of things that are still unknown within the in the alcohol market, but obviously as as somebody who works in the whiskey market, I think ultimately I am I am bullish um long term, regardless, because I wouldn't choose to stay working in the market if I if I didn't think there was a future for it.
• 33:06
  SPEAKER_00: Yeah, that makes sense.
• 33:07
  SPEAKER_00: As most things in life, the truth or the outcome is usually somewhere in the middle.
• 33:13
  SPEAKER_00: So let's discuss our base case.
• 33:16
  SPEAKER_00: Uh I think our my base case is probably a little different from yours, uh, since you're a little bit more into the industry and bullish perhaps on the industry, or it would indeed make sense to start your own whiskey brand.
• 33:28
  SPEAKER_00: But my base case would be that um the recovery is perhaps probably a little slower and a bit bumpier um than before.
• 33:38
  SPEAKER_00: I I think sales growth should return, probably in the low single digits, if I had to make uh an educated guess, somewhere between three to five percent.
• 33:48
  SPEAKER_00: People will probably cut back on alcohol during tougher economic times, and when times are good, they would probably spend a little more on the on quality alcohol uh spirits.
• 34:00
  SPEAKER_00: It probably takes another year or two to, or maybe even three, to work through the inventory they build up for COVID.
• 34:07
  SPEAKER_00: Companies are going to get more selective with their investments.
• 34:10
  SPEAKER_00: I think most of them made a mistake.
• 34:13
  SPEAKER_00: Uh I mean, COVID was a once-in-a-lifetime um pandemic, so I mean they had to make an educated guess then, and this is what they did.
• 34:24
  SPEAKER_00: I think the valuations where they are right now are probably going to stay there or pretty close to there.
• 34:31
  SPEAKER_00: I think 15 times earnings for a company like Diagio is very fair, even if it starts growing revenue again.
• 34:38
  SPEAKER_00: That would still give you decent returns, probably high single digits each year, uh a dividend, and perhaps if the cyclicality uh returns to normal, they could buy back some stock at the lower valuations, so you get a few percentage points there as well.
• 34:56
  SPEAKER_00: But that would be my base case.
• 34:58
  SPEAKER_00: I I think the best years are probably behind them, but that doesn't mean that they will be best bad investments.
• 35:05
  SPEAKER_00: Just look at like the tobacco companies, they are doing exceptionally well if you look at their stock prices.
• 35:11
  SPEAKER_00: Yeah, I think volume will keep declining, besides uh except from emerging markets, they will probably still grow there.
• 35:19
  SPEAKER_00: So uh that would be my base case.
• 35:22
  SPEAKER_00: I'm very curious to hear yours.
• 35:24
  SPEAKER_01: I don't think I can disagree with anything you've said there.
• 35:26
  SPEAKER_01: I think we're very much in this for another couple of years.
• 35:30
  SPEAKER_01: I think what is interesting is obviously the last company we talked about was LVMH, which if you compare LVMH and Diagio, for example, if they're the two easiest ones to talk about, probably the two largest.
• 35:43
  SPEAKER_01: It's LVMH has been you know sales-wise has stagnated as well.
• 35:48
  SPEAKER_01: So this is not just uh spirits, this is very much the luxury sector and premium premium sector as well that's that's been affected.
• 35:56
  SPEAKER_01: However, as a as an investor or a consumer right now, for me, I think that LVMH has a certain level of protection because they are protected with the weather goods segment of the business that has been the driver.
• 36:10
  SPEAKER_01: Whereas spirits companies that are not divide diversified are perhaps struggling.
• 36:15
  SPEAKER_01: So probably a question out there can you know can you get exposure to spirits or alcohol through LVMH and still be diversified, or is your preference to to purely go out and buy um spirit-only companies?
• 36:28
  SPEAKER_01: So I think there's a there's a still a question mark there.
• 36:31
  SPEAKER_00: To interrupt you, I do think that the difference is LVMH thesis is not built upon the spirits and champagne.
• 36:40
  SPEAKER_00: Uh, I think you buy L VMH for the leather goods business mostly.
• 36:44
  SPEAKER_00: And if you are going to invest in a company like DiAgio, I mean you have to know whether the spirits market is declining or growing, or you know what I mean?
• 36:54
  SPEAKER_00: So I don't think it's material for LVMH.
• 36:57
  SPEAKER_01: Yeah, I would agree.
• 36:58
  SPEAKER_01: And I think you know we we've seen maybe the last two or three years uh quite substantial declines in LVMH's spirit revenue.
• 37:06
  SPEAKER_01: However, as as somebody who maybe taking this from somebody who works in the spirit sector rather than an investor in a spirit sector, my bull case would be getting back to or reversion to the mean for the luxury goods or for the the high-end, high gross margin goods sooner rather than later.
• 37:25
  SPEAKER_01: And then also opening or reopening of um new marketplaces, whether that be the existing ones where we've had a lot, there's been good opportunity in recent years, such as China or even the likes of India, where there was, I'm not sure if you saw in your research, but there was a deal in place between the UK and India.
• 37:44
  SPEAKER_01: The there's quite substantial tariffs on Scotch whiskey just now that over the next decade will bring those tariffs down from about 150% down to 75.
• 37:54
  SPEAKER_01: So there is there is definitely, you know, that's as somebody who works in the whiskey market, that's my thesis, that's what I'm I'm targeting.
• 38:01
  SPEAKER_01: Um whereas at the sort of lower end of high volume, low pricing, yeah, this is this is a tricky one, and I'm not I'm not sure how that gets back to normality, and you know, if that's affected by things like Gen Z drinking preferences or GLP ones as well.
• 38:19
  SPEAKER_01: So for me, it's probably high end, high profit, gross margin, premium on luxury, and that's where I think the bull case lies.
• 38:28
  SPEAKER_01: I couldn't say for certain at the lower end of the market.
• 38:31
  SPEAKER_00: You know, over the past 25 years, the market share for wine has always been around 15 to 16 percent.
• 38:38
  SPEAKER_00: It hasn't really changed.
• 38:40
  SPEAKER_00: Beer has been declining from 55% to closer to 40%, and spirits has only gained market share.
• 38:48
  SPEAKER_00: So, I mean, if you if you look at the trend, spirits is growing, and that is definitely uh a tailwind for the spirits companies and a headwind for um beer companies like Heineken and uh and stuff.
• 39:01
  SPEAKER_00: So looking at what it's happen, what is happening today, would you invest in any alcohol and spirits companies in today's market?
• 39:11
  SPEAKER_00: Do you think it's an interesting market long term for investors and uh and why?
• 39:15
  SPEAKER_01: I think probably the you know, if I was to look at this as a blank canvas and not have any investments, my own opinion, um, and obviously just for transparency, of course, I do have some Diaggio shares.
• 39:26
  SPEAKER_01: I think Diageo are the best bet for you know, based on the size, based on um even things you know we've not got into today, but things like the cash management within the business.
• 39:37
  SPEAKER_01: I agree.
• 39:37
  SPEAKER_01: I think um, you know, it's for Diagio as well.
• 39:41
  SPEAKER_01: There is just the fact that they own so much of the best brands or the most in-demand brands, such as Johnny Walker, Smirnoff, even Captain Morgan's that have real staying power.
• 39:52
  SPEAKER_01: So for me, I think Diageo is probably the best bet.
• 39:54
  SPEAKER_01: Um, and you know, ultimately if if it's even about uh I think in the UK we've seen so many older people who have Diagio shares and they've held them for so long because they're a regular dividend payer and things like this.
• 40:06
  SPEAKER_01: Um but I wouldn't perhaps be too comfortable investing in some of the smaller publicly traded companies.
• 40:14
  SPEAKER_01: Um, you know, the Kamparis, who I think Kampari could even be argued as a bit overvalued just now, or the um the likes of Quantro as well.
• 40:24
  SPEAKER_01: I just think they don't have they don't have that uh global reach that somebody like Diaggio has.
• 40:30
  SPEAKER_01: Diaggio has the marketing behind them, they've got the distribution power as well.
• 40:34
  SPEAKER_01: And I think if I was, you know, if I was to pick one of these companies, that's probably where where I put my money.
• 40:40
  SPEAKER_00: Yeah, I I I agree.
• 40:41
  SPEAKER_00: I think Diaggio and Kampari are probably the best bets.
• 40:44
  SPEAKER_00: I think they manage working capital the best.
• 40:46
  SPEAKER_00: They do sacrifice a little bit on profit margin, but I think you're more than compensated by yeah, the ability to rapidly turn dollars tied up in uh working capital into profits.
• 40:57
  SPEAKER_00: I think Remy is probably the worst in class.
• 41:00
  SPEAKER_00: I mean their accounting is pretty good, especially accounting profitability, but I think they have the lowest organic growth, they have a lackluster operating return on invested capital.
• 41:10
  SPEAKER_00: I think that's uh a company probably to stay away from.
• 41:13
  SPEAKER_00: I mean, it's no advice, but just what I would do.
• 41:16
  SPEAKER_00: And Prono is actually not a very good acquirer.
• 41:19
  SPEAKER_00: I mean, if you just look at some of the companies they acquired, I I don't know the balance sheet, they have intangible assets representing 50% of total assets compared to 30% for Diaggio and Brown Forum.
• 41:33
  SPEAKER_00: And so I don't know, just uh a couple thoughts on uh some of the companies.
• 41:37
  SPEAKER_00: I think Diageo and Campari are worth looking into if you had to choose.
• 41:41
  SPEAKER_00: But for me personally, if you are curious about my take, usually I like looking for must-have products or services before investing, things people can do without.
• 41:54
  SPEAKER_00: It makes them a lot more stickier, they have more pricing power and allows for larger modes.
• 42:00
  SPEAKER_00: But as you might know, Sonny, alcohol isn't really something we need, if I'm being honest.
• 42:05
  SPEAKER_00: It's actually probably better for society if we don't drink it.
• 42:09
  SPEAKER_00: And thus, I think generally speaking, the industry doesn't hold the same pricing power because it's not a must-have product, it's also quite addictive and has to destroy many people's lives and families.
• 42:24
  SPEAKER_00: Of course, those are the most horrible stories, and no one is really supporting that.
• 42:28
  SPEAKER_00: But you know, I'm not against investing in alcohol-selling companies, whether it's beer, spirits, wine, but it doesn't attract me either.
• 42:35
  SPEAKER_00: So I probably wouldn't, even if the companies dropped another 50% invest in them.
• 42:40
  SPEAKER_00: I just don't really care too much about them.
• 42:42
  SPEAKER_00: I think there are more interesting IDs out there, and besides, it's not really my circle of competence.
• 42:49
  SPEAKER_01: So yeah, I would I would possibly disagree with that one then.
• 42:51
  SPEAKER_01: I think um with the likes of you know somebody like me, obviously, I have a uh bit of an insight to work with the likes of Diageo and and see how they're performing almost on a daily or a weekly basis.
• 43:03
  SPEAKER_01: So it gives me a bit of an insider's edge.
• 43:06
  SPEAKER_01: However, what I would I would would certainly agree I that Diagio shares, if I would, you know, if they pulled back by say 50% for me, I think that would be a very attractive investment opportunity.
• 43:18
  SPEAKER_01: Um but that wouldn't be the case with the like with the rest of the companies that we've perhaps talked about today.
• 43:25
  SPEAKER_01: And I again, you know, obviously for companies to pull back 50%, unless it was just a downturn, you're assuming there would some be some form of new news or regulation that has come out um which has has caused them to drop 50% hypothetically.
• 43:41
  SPEAKER_01: However, I'd I'd just add on that I think there is, you know, if we look at the the historic link with humanity and how individuals can have consumed, um, you know, i I think it's easy to say that we, you know, we wouldn't invest because um you know.
• 44:00
  SPEAKER_01: It's the extreme end, it's destroyed many lives, but I do think there is a alcohol is not going anywhere.
• 44:06
  SPEAKER_01: I think is probably the the point I'm trying to make, and that with with alcohol, um, you know, it will be around spirits and whiskey, cognac and so on will be around long after we are no longer here.
• 44:18
  SPEAKER_01: Um whether there was the same demand for them or not, that's that's yet to be determined.
• 44:22
  SPEAKER_01: All you need to do is look at something like the cigarette industry or at the tobacco industry, which has had massive declines probably since you know if you go back to the the 40s or 50s.
• 44:33
  SPEAKER_01: But my last point would just be that I I think when it comes to these companies, I can't see that decline being as much off a cliff edge unless, again, you know, happy to be proven wrong or not so much in the if I work in the whiskey industry, but the likes of the you know, I think GLP ones, in my view, are probably going to create the the largest amount of damage to the revenue and possibly share prices for these companies if they if they continue to take off as much as they have.
• 45:04
  SPEAKER_01: I don't think it'll be that structural change with or or um with the Gen Z.
• 45:11
  SPEAKER_01: I think it will it will be something that like GLP ones that will shift the market, and I think that's that's where you could obviously see that bear case heading.
• 45:19
  SPEAKER_00: I I I think maybe a good comparison is maybe DiAgio or a similar company could be a bit like Coca-Cola.
• 45:29
  SPEAKER_00: I mean, they have basically faced a lot of the same headwinds and struggles.
• 45:35
  SPEAKER_00: Um but Coca-Cola share price went sideways for 15 years after the 90s for basically the same reasons as today slow volume growth, over reliance on pricing, changing consumer tastes, and that is basically what is happening today.
• 45:52
  SPEAKER_00: And Coca-Cola overcame it, so it can be it's it's pretty likely uh these companies will also overcome it.
• 46:01
  SPEAKER_00: So, yeah, that's those are our thoughts.
• 46:04
  SPEAKER_00: Anything you'd like to say before uh we end today's topic uh on the alcohol and spirits industry?
• 46:10
  SPEAKER_01: Anything we missed maybe, or no, I think I think you've actually made a valid point there that possibly the likes of the alcohol companies could be in the same basket as the likes of Coca-Cola or even McDonald's, and how although for many for many years customers have have bought into these, um the preferences are starting to shift.
• 46:29
  SPEAKER_01: Uh my only my final point was uh this was something that came out, I would have uh pointed readers to it, but it came out just around the same time or just after I published my write-up.
• 46:39
  SPEAKER_01: But there's a really good uh four-part uh global spirits series by I think a new writer on Substack called Sector Stories.
• 46:46
  SPEAKER_01: I don't know if you reread our work.
• 46:48
  SPEAKER_01: Um but she's done some really good work on the spirits industry and how a lot of these publicly traded companies are are managing their cash, which is really interesting to read.
• 46:59
  SPEAKER_00: I'll make sure to link it in the show notes.
• 47:01
  SPEAKER_00: So uh I think I think that's it for today.
• 47:03
  SPEAKER_00: I would like to say thank you, everybody, for uh listening once again.
• 47:07
  SPEAKER_00: Thank you, Sonny, once again for coming on the show.
• 47:10
  SPEAKER_00: Make sure you check out Secret Slas Investing over on Substack, and we'll see Sunny again in a couple weeks.
• 47:17
  SPEAKER_00: So uh thanks, Sunny.
• 47:19
  SPEAKER_00: Great team, thanks for having me.
• 47:20
  SPEAKER_00: I'll make sure I uh raise a glass of whiskey to you.
• 47:22
  SPEAKER_00: Always a pleasure.
• 47:23
  SPEAKER_00: See ya, see ya.