Many alcoholic beverage companies are focusing on the growth strategy of premiumization. This is a long-term push that offers consumers higher-quality spirit beverages at a premium cost. High-end offerings provide good expansion opportunities, since these products can serve developed markets with significant disposable incomes, as well as emerging markets, since premium alcohol brands are a relatively inexpensive aspirational purchase. Some of the likely winners in this space include  Brown-Forman (BFB), Constellation Brands (STZ), Molson Coors (TAP), and Anheuser-Busch InBev (BUD).

From a short-term perspective, although the recent recession prompted more off-premise (at home) consumption, many consumers have not traded down to less-expensive alcoholic beverage alternatives. And regardless of near-term trends, premiumization is a longer-term expansion vehicle since launches, marketing, and building brand recognition take time to bear fruit.

In addition, the premiumization route means that companies must spend more on higher-quality ingredients. For instance, craft brewers use more costly barley for beer, while distillers use premium grain for whiskey. These actions inevitably lead to elevated operational expenses. However, there are long-term benefits as these higher-end offerings result in increased profit margins due to elevated pricing levels and healthy demand over time.


Constellation Brands is a world leader in wines, which accounted for about 87% of the company’s revenues last year.  Although the wine industry is highly fragmented with a broad range of price points, Constellation’s premiumization strategy is to buy high-tiered labels and bid adieu to less profitable lines. For instance, it acquired Fortune Brands’ U.S. wine business in 2008. The acquisition allowed the company to expand its premium wine labels with higher-end selections, such as Clos du Bois and Wild Horse. In a similar premiumization move, Constellation is pursuing high-end alcoholic beverages. For example, it purchased the popular SVEDKA vodka brand in 2007. Management was able to acquire more well-known alcoholic labels because it has raised over $525 million since 2008 through the divestment of some of its less profitable brands, such as the Almaden and Inglenook labels in 2008 (sold for $134 million), and its U.K. Cider business earlier this year ($70 million). Constellation Brands is clearly positioning itself to benefit from the shift to higher-priced beverages.


Arguably the most recession resistant group, makers of distilled beverages have well-diversified portfolios, both in terms of alcohol types and price points. Accordingly, given the rise of off-premise (at home) consumption, these distillers constantly seek to update and expand their premium portfolios.  For example, Brown-Forman’s drink lineup ranges from whiskey to bourbon to vodka, with options in various price categories.

Premiumization in the spirits arena is often accomplished through the creation of different versions of similar alcohol offerings. Brown-Forman, for example, has been building on the popularity of its Jack Daniel’s line by offering Gentleman Jack, a premium whiskey from a well-known name. Furthermore, it recently introduced Canadian Mist Black Diamond, another premium product-line extension to one of its whiskies. Apart from product innovation, ample money is spent on marketing and promotional campaigns in order to bring awareness to the consumer. With a lineup of well-known brands, Brown-Forman should be able to ride the premiumization trend as well as, if not better than, most.


The trend toward a more refined palate has not been lost on those that enjoy a good brew. The emergence of “craft beers” started gaining popularity in the United States in the 1980’s and continues to be an example of premiumization. These microbreweries and their products are differentiated from large breweries because they are independent companies that manufacture on a much smaller scale than their larger brethren. Furthermore, the ingredients used to produce these brews are higher quality than mass produced beers and, thus, come at a higher price for the consumer. However, demand for these brews remains strong as consumers have been willing to fork over more money for these artisan beers. This trend has piqued the interest of the bigger breweries.

In fact, although large manufacturers cannot technically produce craft beer because their production is on a much larger scale, they have been seeking a place in this niche market by creating “craft-style” brews. For instance, Molson Coors introduced Blue Moon, which is one of the many “stealth micros.” These beers replicate small-batch styles but have the backing of the megabreweries’ resources.  Still, independent Craft Brewers Alliance (HOOK) appears a solid option for investors seeking to take advantage of the premiumization trend in the beer space with a “pure” play investment. Moreover, since Anheuser-Busch InBev owns 35.5% of the company’s outstanding shares, Craft Brewers not only has material backing from an industry giant, it could eventually wind up an acquisition target.

Long-term investors may want to consider companies that are employing the premiumization strategy. Growth opportunities for these companies are more likely to be realized on a 3- to 5-year horizon because initial operational costs may well cause some near-term margin erosion. However, as economic conditions improve, healthier demand for these premium selections should follow.