By George Evans, CIO, Equities and Portfolio Manager and Alice Fricke, Senior Client Portfolio Manager
During one of our recent research trips, it seemed that every television screen
During one of our recent research trips, it seemed that every television screen we saw was tuned to the World Cup soccer matches. That was certainly the case whenever we walked by a hotel bar. And in them, most of the patrons were drinking beer.
Evidently, beer is the most popular sports drink … well, sports spectating drink. In fact, several of the 11 Russian cities where the matches are being played are running low on, or – in at least one case – are entirely out of beer. Clearly, spectators are raising a mug to the cup. And not just in Russia: with 32 teams from continents involved, the cup matches are estimated to attract more than 3 billion viewers worldwide,1 many of whom will likely be drinking a beer while watching. More to the point, for our purposes as investors, many of them will be drinking branded and premium priced beer.
Throughout the world, the force of mass affluence is enabling consumers to move up the spending pyramid of “Bread, Booze and Bling,” affectionately known on our team as “the George Evans’ Hierarchy of Human Needs Pyramid.” This is why we have long owned one on the world’s major brewers, Heineken, as part of our Bread, Booze and Bling investment theme.
Beer is estimated to comprise 75% of the world’s alcohol market. Although the volume of beer consumed worldwide has not been rising, the value of the beer market is growing at roughly 6% annually and is expected to continue doing so at least into the next decade.2 In the global beer market, less is more in terms of profitability for the brewers. Why? In the emerging market world, rising prosperity is enabling beer drinkers to shift from informally produced brews to branded beers that are more expensive but safer. In the wealthier regions of the world, beer drinkers are paying more for premium brands and craft beers. This evolution in consumer behavior is further supported by improved transport and storage infrastructure in many regions and by better logistics and supply chain management nearly everywhere, providing choice and availability.
In our opinion, this “premiumization” trend in beer consumption can continue for several years. We believe a company like Heineken, with over 250 brands in 70 countries, can benefit from this trend. Heineken sells over 60% of the beer it brews in emerging markets, and earns over 60% of its operating profit from these markets. In the more developed markets, the company focuses on its premium brands and on cider, a faster growing segment of the industry. Over the past 10 years, Heineken’s annual returns on invested capital have ranged from 7% to 14%. Of that capital, 40%-50% is sourced from the debt markets, an acceptable level for a stable, very regionally diversified business like this one, so Heineken has returned 11% or more on equity during each of the past nine years.3
We do not have any guarantee that these trends will continue. But as we watch so many fans drinking beer as they watch the World Cup, we’re reminded of why we invested in brewing.
- Source: “Soccer World Cup 2018: Global Audience to Hit 3.4 Billion, FIFA Revenue to Reach $6 Billion, The Hollywood Reporter, 6/14/18
- Source: Deloitte report cited above and Zion Market Research, “Global Beer Market Predicted to Reach $750.00 Billion in 2022, 3/2/2018
- Source: Bloomberg
As of 3/31/18, Heineken represented 1.14% of Oppenheimer International Growth Fund’s Holdings.
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Disclosure: I am/we are long HEINY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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