Hard liquor can take the edge off inflation

Liquor companies are taking inflation in their stride. A push into premium brands, coupled with the fact that more drinkers are switching to spirits from beer in key markets, should help maintain their edge.

Johnnie Walker distiller Diageo, Budweiser brewer Anheuser-Busch InBev and Swiss food giant Nestlé beat analysts’ sales expectations across the board in results reported Thursday. But the ability of these big consumer-goods companies to protect profit margins from cost inflation has been mixed.

Ticker	Security	Last	Change	Change %
BDWBY	BUDWEISER BREWING CO. APAC LTD.	3.9185	+0.04	+1.12%

Liquor specialists seem to be performing the best. Diageo expects to grow its margins in the financial year through next June, despite higher costs for commodities, shipping and packaging. Analysts also increased profit expectations for Italian competitor Davide Campari-Milano, the maker of brands such as Aperol and Grand Marnier, after it released strong results earlier this week.

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Meanwhile, AB InBev’s shares fell 6% in morning trading Thursday, in part because the brewer wasn’t able to pass on all of its higher costs to drinkers in North America, its most important market. Operating profit margins in the region fell 2.8 percentage points to 37.6% in the second quarter compared with the same period of 2020. Beer has been losing market share to spirits in the U.S. for years, but the trend picked up during the Covid-19 pandemic. This leaves brewers on a weaker footing when they need to increase prices.

Liquor companies’ big push into more expensive brands in recent years also gives them an advantage, as wealthier drinkers are less sensitive to price increases. Premium drinks now account for 38% of Diageo’s total liquor retail sales, according to IWSR data, up from 34% in 2015. AB InBev also is growing its high-end beer business, but these brands generate a lower proportion of the company’s overall revenue—around 30% at the latest count.

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Makers of kitchen and bathroom basics have the toughest challenge. Nestlé, Unilever and Reckitt have all lowered their margin guidance over the last few days. One issue is timing. In certain European markets, manufacturers are locked into annual price contracts with supermarkets and will only be able to push through increases when these expire. But it is also harder to charge more for basic goods like paper towels and cleaning products.

Shares in Diageo and Campari currently trade at 27 times and 42 times expected earnings, respectively, a hefty premium to the wider consumer staples sector. Investors are paying a stiff price for protection from inflation, among other things. So far, so reassuring: Higher costs are going down easy for liquor brands.