Raising the Bar: Spirits Industry Navigates Premiumization, Agave Pricing, and Global Uncertainty

Raising the Bar: Spirits Industry Navigates Premiumization, Agave Pricing, and Global Uncertainty

The global spirits industry continues to grapple with a complex blend of opportunities and challenges. Premiumization remains a dominant force, driving consumer demand for higher-quality products, but inflation and volatile input costs—particularly agave—are placing pressure on profitability. The latest earnings from industry giants like Diageo, Pernod Ricard, Brown-Forman, and MGP Ingredients illustrate the delicate balancing act required to maintain growth amid a turbulent economic landscape.

Premiumization: The Driving Force Behind Growth

Premiumization continues to be a key driver of growth in the spirits sector. Diageo has made significant strides in this area, with premium-plus brands now contributing 48% to its branded spirits segment sales. Similarly, Pernod Ricard’s high-end brands such as The Glenlivet and Martell Cognac saw strong performance in the most recent quarter. However, rising inflation is starting to weigh on consumers’ ability to spend on ultra-premium products. Following its July 2024 earnings announcement, Diageo’s stock dropped by around 2%, reflecting investor concerns about the company’s slower growth in certain markets, alongside inflationary and forex pressures.

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Guy Phillips, Chairperson at Spayne Lindsay & Co., added, “In times of economic uncertainty, premium brands tend to hold up better than lower-priced alternatives. Consumers may reduce volume, but they continue to choose quality, and that’s a trend we believe will persist.”

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MGP Ingredients, which focuses on premium American whiskey, reported an 11% increase in branded spirits sales for the second quarter of 2024. The growth was driven by a strategic focus on premium whiskey brands, such as Penelope and Rebel, as well as the expansion of their distribution network. MGP continues to prioritize premiumization, although the company remains cautious about the rising cost of raw materials, particularly agave, which has affected its tequila segment.

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Tequila: A Rapidly Expanding Category

Tequila continues to be one of the most dynamic segments in the spirits industry, outpacing other categories in growth, particularly in the U.S. Brown-Forman’s focus on brands like Herradura and El Jimador has positioned it well, but it faces challenges with price competition in key markets such as Mexico and the U.S. Their cautious approach to raising prices by 2-3% contrasts with more aggressive strategies from competitors, but the company remains committed to the long-term growth of its tequila portfolio.

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Becle, the parent company of Jose Cuervo, reported a significant 16.6% increase in tequila sales for the second quarter of 2024, driven by price increases and strong demand for premium and ultra-premium tequilas. Notably, the company’s Cristalino tequila line saw an 8% increase in depletions, underscoring the ongoing shift toward premium products. Despite this growth, Becle remains mindful of increased competition and the need to manage agave costs effectively.

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Diageo’s tequila brands, Don Julio and Casamigos, continue to gain traction in the super-premium and ultra-premium segments. While the company faces increased competition, it remains confident in its ability to maintain market leadership by focusing on its premium offerings. Don Julio, in particular, has performed well in the higher-end Reposado and Añejo categories, further solidifying its position in the luxury market.

Agave Prices: A Pressing Concern

Agave pricing has become a critical issue in the spirits industry, particularly for tequila producers. Prices for agave soared to record highs in 2022, reaching as much as MXN 32 per kilogram (approximately $2 per kilogram), but have since fallen dramatically. By early 2024, agave prices had dropped to around MXN 5 per kilogram (approximately $0.30 per kilogram), easing some of the cost pressures on tequila producers.

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Becle, the parent company of Jose Cuervo, reported that although agave prices have begun to ease, the full financial benefit has yet to be realized. Pernod Ricard, with its Avion brand, and Brown-Forman, known for Herradura, are also benefiting from this moderation in agave costs but continue to face pressure in the highly competitive tequila market.

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Guy Phillips commented, “we expect lower agave prices to drive significant increases in tequila profitability in the coming years.”

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Despite this price relief, the industry remains cautious. Brown-Forman reported a 7% decline in organic tequila sales, highlighting that while agave prices have eased, consumer demand and competition remain key challenges. Diageo, with its high-end Casamigos brand, is similarly optimistic about agave price stabilization but is wary of other inflationary pressures impacting profitability.

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Vodka: Losing Ground to Tequila

Vodka, once the dominant spirit in the U.S., is increasingly being overshadowed by the rapid growth of tequila. Brown-Forman noted that tequila is on track to surpass vodka as the largest value category by the end of 2024, signaling a major shift in consumer preferences. Younger consumers are particularly drawn to tequila, with 22 to 24-year-olds drinking tequila at the same rate as beer, a stark contrast to previous generations’ preference for vodka.

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Diageo also mentioned vodka in the context of price mix pressures, with vodka and rum being categories where consumers are buying fewer units per basket due to household financial constraints. However, when consumers do purchase these spirits, they continue to choose their preferred brands, indicating that brand loyalty remains strong despite volume declines.

Rum: A Growing Force in the Premium Market

The rum category is experiencing growth, particularly in the super-premium segment, with brands like Diplomático and Don Papa leading the way. Brown-Forman, which acquired Diplomático Rum in 2023, marked its entry into the super-premium rum category. Brown-Forman’s acquisition reflects the company’s broader strategy to invest in high-growth, high-margin brands. This acquisition allows Brown-Forman to participate in the growing premium rum segment, which has seen increasing interest from consumers. It’s important to note that while super-premium rum is growing, it represents a small portion of the overall rum market, accounting for only 4-5% of global rum sales according to industry leaders.

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Similarly, Diageo’s acquisition of Don Papa Rum in early 2023 signals the company’s confidence in rum’s premium potential. Don Papa has been growing at an impressive pace, with annual growth rates of 18% in Europe and 27% in the U.S.from 2016 to 2021. This acquisition aligns with Diageo’s broader focuson acquiring high-growth brands that fit into the premium and super-premium segments. Don Papa’s strong brand narrative, rooted in the Philippines, and its expansion into over 30 countries, further supports the growing consumer interest in premium rum.

Whiskey: A Cornerstone of Growth

Whiskey remains a cornerstone of growth for many companies in the spirits industry. Brown-Forman’s portfolio of premium whiskey brands, such as Woodford Reserve and Old Forester, continues to perform well, although there were challenges with Jack Daniel’s Tennessee Whiskey, which saw a 6% decline in organic sales due to lower volumes in key markets like the U.S. and U.K. However, the company is optimistic about the long-term prospects of Jack Daniel’s, particularly with its strategic expansion into emerging markets such as Brazil and Türkey.

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MGP Ingredients also reported strong growth in its whiskey portfolio, with record sales in its “brown goods” category. Premium whiskey brands were key contributors to the 11% growth in its branded spirits segment. Meanwhile, Davide Campari-Milano has been positioning Wild Turkey as a competitor in the luxury whiskey market, with new premium offerings such as Russel’s Reserve 15-year-old contributing to its success in the super-premium whiskey category. Campari’s strategy of premiumization within its whiskey portfolio has seen positive results, with increased brand recognition and consumer demand in the luxury market.

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Valuation Trends: Shifts in EV/EBITDA Multiples

The EV/EBITDA 1-yr forward trading multiples of key players in the spirits industry have shifted over the past three months, reflecting investor sentiment and operational performance.

•    Brown-Forman saw a 9.3% increase in its EV/EBITDA multiple, rising to 19.1x, reflecting strong growth across its premium whiskey and tequila brands.

•    MGP Ingredients experienced an 8.6% rise, with its EV/EBITDA multiple ending at 9.2x, driven by its focus on premium whiskey brands.

•    Becle saw a significant 19.2% decrease, with its multiple falling to 12.3x, reflecting challenges in managing agave costs and increased competition in the tequila market.

•    Diageo ended the period with a multiple of 14.7x, down 1.4%, reflecting relative stability despite inflationary pressures.

•    Pernod Ricard saw a 3.7% drop in its multiple, ending at 12.1x, as the company navigated destocking pressures and a challenging European market.

•    Davide Campari-Milano reported an 8.4% decline, with its multiple ending at 14.9x, as the company continued to grapple with inflation and supply chain issues.

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This mixed performance highlights the varied challenges spirits companies face as they navigate inflation, raw material costs, and shifting consumer behaviors.

The Road Ahead: Premiumization Meets Cost Pressures

The spirits industry’s path forward is fraught with both opportunities and challenges. While premiumization remains a key growth driver, inflationary pressures—especially in raw materials like agave—are likely to continue influencing profitability. Diageo and Pernod Ricard are betting on their strong premium portfolios to navigate these headwinds, while Brown-Forman and MGP Ingredients are focusing on operational efficiency and strategic pricing to manage costs.

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As agave prices begin to stabilize, the tequila market will remain a focal point for many companies. However, the broader spirits industry must continue to adapt to a volatile global environment, where inflation, supply chain disruptions, and geopolitical risks all play a role. For now, companies are cautiously raising a glass to premium growth, while bracing for the uncertainties that lie ahead.

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