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Stocks to Quench Your Thirst (Part 1)

28 November 2007 - Features - Editor

The financial rewards of holding stocks of companies that make and market beer may be considerable, but there are other joys as well-except for teetotalers! Beer does more than quench thirst, and is a wonderful social phenomenon of our times. Many countries have their own quaint customs and festivals that involve plenty of beer, with major sports events being other occasions to enjoy this delightful beverage. Though people of other nationalities may object, it is widely believed that the British are amongst the top beer lovers in the world. Certainly, most folk of this normally sedate land, change character at the very sight of a tankard!

The Unique Economics of Beer Stocks

Malt is a key ingredient for the financial success of beer company stocks, though producing the best quality of such raw materials requires agricultural expertise. Malt production is highly specialized, with local characteristics that do not lend themselves to globalization, or even scaling up. Malt producers have traditionally been at logger heads with brewers, as the latter has seen many capital-intensive technological changes over the courses of history of beer stocks. Brewers, unlike malt producers, have to be rapacious, trying to expand as quickly as possible, and to hold growing market shares.

The British malt industry has responded to monopolistic holds of domestic brewers by going global. British malt has earned an image of quality that is fairly uniform across many important beer consuming markets, and has become a key material to support values of some favorite beer stocks across the world. Export revenues have also made British malt producers vulnerable to global economic cycles, and most units have also had to invest in new technologies. There has been a degree of consolidation in the segment as a result.

Even Satiated Investors Long For Beer Stocks

Owners of beer stocks, like avid consumers of this beverage category, can never get enough! The global beer industry is relatively profitable, and demand grows steadily without any blips. The business is driven by brands that command durable loyalties. However, competition is strong, so market shares need continuous and expensive marketing support. There is also a scramble to corner strategic raw materials. All these factors combine to make consolidation unusually attractive. Beer company managements always try to buy each other stocks!

Diversification has been another compulsion of all executive teams responsible for beer company stocks. The original motivation for this may have been some slackening of demand for beer in the early years following World War II, but the convention has continued even after demand has stabilized. It may be that some fixed costs in distribution and logistics are better covered by other beverage categories. Owners of stocks should not complain provided that all product margins remain healthy!

Stocks to Quench Your Thirst (Part 2)

 


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