The Beverage Industry is a mature sector and includes companies that market nonalcoholic and alcoholic items. Since growth opportunities are few compared to existing business, many members of the industry endeavor to diversify their offerings to better compete and gain share. Too, they may pursue lucrative distribution arrangements and/or acquisitions to expand their operations, product portfolios, and geographic reach.

Most equities in this group are suitable for conservative investors. The largest companies offer reliable dividends, with regular increases, and above-average Stock Price Stability. There are a few selections for those that are more venturesome. Such issues might serve a particular market niche, for example, energy drinks or developing overseas markets. Generally, the group turns in a steady performance throughout the business cycle, but it will generally suffer in the most stressful of economic times.

The Nonalcoholic Segment

Historically, two large entities have dominated the nonalcoholic beverage landscape: Pepsi (PEP) and Coca-Cola (KO - Free Coca-Cola Stock Report). They distribute their well-known carbonated and noncarbonated drinks internationally via sizeable bottling companies. The bottlers depend on these two industry leaders to create new products, improve existing offerings and maintain sufficient advertising. Related capital spending amounts to several billion dollars each year. The industry titans often boost their results (and those of their subsidiaries) by purchasing smaller market players or by inking promising distribution agreements. In prosperous economic times, consumers usually favor the most famous brand names. Still, when customers are short of disposable income, they can turn to competing, inexpensive private label and lesser-known beverages. Sales are seasonal, not surprising, peaking during warm summer months. Consumer preferences will drive product diversification. Most notably, greater awareness of the causes of common health issues, e.g., obesity and diabetes, has increased demand for bottled water and other low-sugar or sugar-substitute drinks. Soda, including diet options, continues to fall out of favor. In response, beverage companies have capitalized on the popularity of energy drinks and ready-to-drink coffee. However, energy drinks have come under scrutiny due to their high levels of caffeine, as regulators attempt to size up the associated risks. Product diversification may be achieved through internal or external means. The same goes for geographic expansion. The BRIC Nations (Brazil, Russia, India, and China), key markets in the global arena, have gotten much attention. Beverage companies have spent heavily to open new bottling plants and develop distribution networks in these countries. Some carry significant debt leverage, but cash flow is fairly predictable and usually more than sufficient to cover annual interest payments (and dividends) and maturities.

Wine, Beer, and Spirits

The range of wine, beer and distilled spirits offered by brand and type is wide. Demand is somewhat inelastic across good and bad economic times. There is an overall long-term trend of rising affluence around the globe. Thus, more and more consumers are becoming increasingly discerning about what they purchase. Premium alcoholic beverages are gaining in popularity, particularly flavored offerings. Investors should consider, though, that this trend is disrupted during recessions, when people trade down to cheaper, low-margined products. As is the case with premium wine and spirits, craft beers are very popular with consumers. These beers are priced higher and are quite profitable, as long as the cost of their rich ingredients is covered. Small brewers, paying close attention to quality, expand slowly, but, over time, can win a decent share of business. Large brewers, mindful not to lose sales, have developed their own premium brands, while some have acquired smaller rivals. Like their nonalcoholic peers, makers of alcoholic beverages invest large amounts of cash in marketing and advertising to build brand recognition. Debt burdens can be rather hefty here, as well, especially when a company is aggressively expanding through acquisitions as has been the case in recent years. Indeed, a steady wave of consolidation has left this group much less fragmented than it was last decade.

Common Characteristics

Both the nonalcoholic and alcoholic sides of the Beverage Industry are dominated by a few sizeable players and competition among them is often intense. Changing consumer tastes adds operating risk. Pricing and margins frequently come under pressure. Also, volatile commodity costs will challenge managements to protect profitability. Good operating efficiency and cost-control practices, mostly on an ongoing basis, are important. Notably, some companies hedge raw material (e.g., aluminum and carbon dioxide) costs. Missteps in reading the trends of ingredient prices can have a measurable negative impact on earnings. We find that beverage makers with the most established brands produce the widest operating and net income margins.

Government Influence

Much has changed since American Prohibition of the 1920s and 1930s. With the exception of a few counties and towns, the prohibition of alcohol has been repealed in all U.S. states. Industry sales are considerable, and regulators on both the state and federal level see ``sin’’ taxes as a good source of revenue. In fact, taxes are the most expensive component of the brewing process. Authorities are also considering tax increases on soft drinks to curb citizens’ sugar (corn syrup) intake and boost revenue. Other governments around the world have also weighed similar tax hikes to shore up their budgets. Incremental taxes have not hurt overall beverage demand, but, to a degree, they have pressured sales of premium offerings. Foreign governments, from time to time, come under pressure from religious/health leaders to limit or ban alcohol consumption or local industry/public calls to restrict alcoholic/nonalcoholic beverage imports. All in all, this industry has a lengthy history of steady single-digit yearly sales and net-profit growth.