There's a big disparity between the mega-cap multinationals in the beverage sector and the more locally active mid-cap players. With their vast scale and emerging-market exposure, global brewing and distilling heavyweights SABMiller (SAB) and Diageo (DGE) are clearly very different beasts to Irn-Bru maker AG Barr (BARR). However, there is a common thread: they're all exposed to the vagaries of consumer habits.
This is borne out by the recent experience of SABMiller, the world's second-largest brewer, which makes the likes of Peroni, Grolsch and Fosters. In mature markets such as the US, craft and 'local' beers have shown double-digit growth in each of the past three years, according to market research firm Euromonitor. That trend comes at the expense of the kind of conventional large-scale brewing operations run by MillerCoors, SAB's US joint venture, which has been losing market share. SAB's volumes were down 3 per cent year on year in North America in the October to December quarter, although the pain was somewhat mitigated by price increases.
But headwinds in mature markets haven't stopped SAB's share price rising 11 per cent over the past year. That partly reflects strong growth in Africa, where SABMiller has an extremely strong market position (SAB still uses the South African Breweries tag for its subsidiary in the country). But mainly it reflects takeover rumours: investors have been hoping that SABMiller will be taken out by the global leader, Anheuser-Busch InBev (US:ABI). The result is that the company's shares trade on a rather full multiple.
Meanwhile, Diageo's management has been concentrating on cost-cutting measures in response to a deteriorating outlook for demand. In the five years to 2012, total global spirit consumption increased by about 6 per cent a year on average. But growth has subsequently all but evaporated - a problem some analysts believe will persist through to the end of the decade. The clampdown on extravagant gift-giving in China is one well-publicised problem. And artisan operations also form a growing segment of the distillery industry, albeit not on the same scale as in brewing. That means Diageo is facing increased competition on a local level in many markets as consumers opt for specialist brands - it's hoping the glitzy launch of its new Haig Club whisky, fronted by David Beckham, will stop the rot.
| Company | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC View |
| Barr (Ag) | 610 | 712 | 21.4 | 1.9 | 2.2 | Buy, 634p, 24 Sept 2014 |
| Britvic | 660 | 1,634 | 15.8 | 3.2 | -3.4 | Buy, 680p, 26 Nov 2014 |
| Coca-Cola HBC | 1,081 | 3,939 | 21.4 | 2.6 | -38.9 | na |
| Diageo | 1,933 | 48,603 | 20.2 | 2.7 | -2.6 | Hold, 1,791p, 1 Aug 2014 |
| SABMiller | 3,442 | 55,547 | 21.9 | 2.0 | 11.5 | Hold, 3,537p, 13 Oct 2014 |
Favourites
Investors in UK soft-drinks maker Britvic (BVIC) have some cause for optimism in the form of a restructuring plan that is on track to deliver around £30m in cost savings. Adjusted operating profits were consequently up 18 per cent at the September year-end, and the full benefits of the restructuring and investment programmes will become apparent in the current financial year. We're keen on its international prospects too - it's making good progress in the US and India with its kids' fruit shoot drink. AG Barr remains more domestically focused, but it still has regional gains to make as it shifts south from its Scottish heartland - a process helped by investment in new, ultra efficient bottling and logistics facilities.
Outsiders
With a strong presence in emerging market economies, both SABMiller and Diageo are exposed to the US dollar's rise, and both look fully valued. Diageo also faces some residual corporate governance issues linked to its £1.8bn acquisition of a majority stake in India's United Spirits. Yet for defensively minded investors they still represent viable 'buy and forget' options, with very broad exposure to the global economy and strong pricing power, even if their dividend yields look somewhat meagre these days.
