Key Trends Driving Beverages Beyond Reopening
The three key trends our analysts are watching:
1. Price/mix-led earnings upgrades as pricing power to manage inflation and Europe channel mix recovery comes through in Q1/H1.
2. A margin upgrade narrative should build into FY23 as commodity costs roll over in Q2/Q3.
3. Re-rating potential as investor focus switches to medium-term organic growth towards the year-end (post-re-opening and inflation), which we think has accelerated versus pre-pandemic following growth-accretive M&A, accelerated premiumisation, geographical, and category shifts.
We think investors are under-estimating the Beer industry’s pricing power to manage input cost inflation. In 2008, the sector delivered strong price/mix in a period of mid-teens input cost inflation, which was followed by solid margin expansion in 2009-10 as pricing held firm while commodities softened. Over the medium term, we think the organic revenue growth profile for the Brewers has improved.
Similarly, we think the Bottlers are well placed to manage input cost headwinds through pricing and optimising promotional spend. Over the medium term, increased investments in the faster growth Energy and Coffee categories should accelerate growth.
The Spirits sector has been rewarded with a re-rating from household penetration gains in the US and Europe, resilient emerging markets and accelerated premiumisation trends. We expect another round of upgrades through the upcoming earnings season, however we expect the page of upgrades to moderate after that. The sub-sector is also most vulnerable in a rising bond yield environment.