Changing demographics and evolving consumer tastes will provide a boost to Corona maker... [+]
Like it or not, demographics in the U.S. are changing: Millennials have overtaken Baby Boomers as the largest generation in the country, Asian-Americans are the fastest-growing segment of the population and, by 2050, whites will no longer be in the majority. With demographic change comes evolution in consumer tastes; as cultures intermingle, they share with each other their food, their drinks and their consumption habits. And nowhere will this be more apparent than in the world of alcohol.
According to a recent analysis from RBC, few parts of the business world have experienced a shift in a consumer preferences quite like that of the beverage sector. Consumers have moved away from vodka and towards whiskey and tequila; domestic beers are "bleeding" market share to craft and imported beer; and the most expensive brands are the ones growing the fastest. Yet these shifts are only the beginning of a transformation of consumer taste, argues lead analyst Nik Modi. As Millennial buying power increases and the Hispanic population in the U.S. grows, Modi writes, their consumption habits will shape the fortunes of beverage companies like
In RBC's view, the company that's best-positioned to gain from demographic and taste evolution is Constellation, due largely to smart acquisitions the company has made over the last few years. In 2013, Constellation acquired popular Mexican beers
"According to the US Census Bureau, by 2020 an estimated 18% of the US population will be Hispanic. That number has grown from 12.5% in 2000 and 16.3% in 2010," Modi writes. "We believe this demographic tailwind will favor Constellation’s beer portfolio, [as] Hispanics reaching legal-drinking age over the next few years will likely provide an ongoing tailwind for brands like Modelo Especial and Corona."
The numbers bear this out: there are currently 33 million Hispanic consumers of legal drinking age. By 2045, that number is expected to have increased to 47 million, an increase that would work out to an additional 1.5 million Hispanic consumers of legal drinking age each year.
Modi is careful to note that the boost to Constellation isn't purely because Hispanic consumers will only drink Mexican beer. Rather, the word-of-mouth effect will work its magic, and these consumers will set the trend for other segments of the population.
"Different demographic groups are quickly adopting the traits and consumption habits of other demographic groups --mainly Hispanics," Modi says. "This trend of influence by Hispanics and multiculturals is not only bolstering the growth of Mexican import beer, but expanding the American consumer’s taste palette (more sweet, more flavor). This in turn is why innovation is so critical in the beverage category and most recently has driven a resurgence in the flavored beer category, though at the expense of cider."
While a decline in cider consumption could negatively impact Boston Beer, the real brands that appear poised for a struggle are Anheuser-Busch and MillerCoors. MillerLite, in particular, has lost 20% of its volume over the last five years, while craft beer has grown 10% to 15% over the same period.
Millennial love for imported and craft beer has been well documented, but Modi says that there's another trend at play: an increased willingness on the part of Millennials to pay for a more "premium" beverage:
The skew of Millennial money towards premium alcohol could benefit both Boston Beer (which is used in the above graph as a proxy for craft beer) and, especially, Brown-Forman. Modi notes that over the last ten years, "super-premium" spirits have grown 160% while "value" spirits have grown just 9%. And Brown-Forman's portfolio -- which includes the likes of Jack Daniels, Woodford Reserve and Herradura tequila -- skews super-premium, with more than 75% of Brown-Forman brands falling under the "premium" or "super-premium" categories.
There's one area of alcohol that's positioned to benefit from all of the above trends (Hispanic influence, preferences for premium and increased Millennial spending power): mezcal/tequila. In Modi's view, mezcal both appeals to bourbon drinkers (it has a "smokey taste profile," he says) and Hispanic consumers because of its Mexican authenticity. What's more, "like bourbon, many mezcal/tequila offerings can command a superpremium price and have 'lifestyle appeal' playing into the premiumization theme."
In other words: whoever can corner the market on mezcal will be the alcohol-maker to beat.
RBC has Constellation rated as outperform, with a $181 price target -- a valuation that implies a roughly 15% upside to the stock's current price. It has given Brown-Forman a sector-perform rating with a $109 price target (implying a 13% upside) and Boston Beer a sector-perform rating with a $172 price target (or 9% upside).
