If you’ve been tempted to try one of the new craft ales or artisan gins in the nation’s bars and pubs, you’re not alone – the beer and spirits trade is on a roll.
Gin broke the £1bn sales mark for the first time ever in the UK in 2016, six months ahead of forecasts, making it a record-breaking year.
For six consecutive quarters, sales of gin in pubs and clubs have seen double-digit growth, outperforming every other spirits category, according to the latest report from the Wine and Spirit Trade Association (WSTA).
The artisan gin boom gained momentum in 2009 when London-based Sipsmith won a two-year legal battle to be allowed to make gin in small quantities.
Since then, growth has been nothing short of phenomenal – 96 new distilleries opened over the two-year period 2015-16, taking the total to 273, compared with just 110 in 2010, a 148% increase.
Gin sales in pubs and bars have increased by £300m since 2012, while sales of gin in shops, supermarkets and off-licences have increased by 68%.
Alcohol exports are also up, with British gin now sold overseas in 139 countries around the world. America, Canada, Spain and Germany are the top buyers, with exports to the US up a staggering 553% in the past decade.
The gin boom helped spirits overtake beer in terms of excise duty in an historic industry first. HM Revenue and Customs (HMRC) earned an extra £225m in revenue from spirit drinkers in 2016, taking total spirits duty to more than £3.38bn, while beer duty stood at £3.32bn. Wine remains the biggest contributor to the Treasury at more than £4bn.
WSTA chief executive Miles Beale said: “The WSTA dubbed 2016 the year of gin, and the gin boom has had a large part to play in the windfall now being enjoyed by the Treasury.
“The 7% increase in revenue takings came as a result of the Chancellor freezing spirit duty in 2016 and allowing the industry to grow and invest.
“It proves the point that cutting or freezing spirits duty brings rewards, which is why the inflation-busting rise in duty this year was such a disappointment and threatens the industry’s ability to invest, grow and export.”
Why gin is a winner
The Isle of Wight’s Mermaid gin is one of the new artisan brands enjoying dramatic success. Launched in 2015, the company saw a 10-fold increase in sales from year one to year two.
Already Mermaid’s HMS Victory Navy Strength Gin has been awarded a prestigious ‘Best in Category’ accolade at this year’s American Distilling Institute (ADI) Spirit Competition.
Mermaid initially focused on capturing local trade, then winning over the sailing community who use the island as a base – sponsoring a series of races – and is now promoted across the UK.
Its unique blend of botanicals – the flavourings that make gin so distinctive – includes rock samphire seaweed. It’s this ability to vary the recipe, using local ingredients, that has encouraged the launch of so many regional distilleries.
Mermaid’s marketing director Xavier Baker believes it’s all part of the general movement to try local produce.
Supporting local producers
“A lot of it stems from the craft beer scene, people trying different beers – also people going organic, trying to support local producers. On the gin side, the product lends itself to that, because you can use local botanicals. For us it’s rock samphire. It’s part of the exploration – different tonics, different garnishes.”
Mr Baker says there may be a risk of a gin ‘bubble’, however, with the market close to saturation point in the next couple of years. “But hopefully the ones that are producing good, true gins and are passionate about gin will carry on.
“It will get to the point where there is too much out there, but it’s got a way to go yet.”
He says there will inevitably be some consolidation. “The bigger guys step in – it’s happened to a couple of distilleries already, but they allow them to carry on relatively independently – the same management team, the same distillers, and they are just there for support.”
Whisky sales up
Of course, gin is not the only UK spirits player in town. The latest HMRC figures show the number of 70cl bottles of Scotch whisky released for sale in the UK in the first three quarters of last year totalled 57.2m, up 5.6% from 54.2m in the same period of 2015.
The increase built on a rise in demand in 2015 – the first period of growth for whisky sales in the UK since 2010. Scotch exports increased last year by 4% to more than £4bn, with the value of single malts exceeding £1bn for the first time.
It marked a return to growth for Scotch exports, after a few years of levelling off and small declines as a result of economic headwinds and political uncertainty in some markets, according to the Scotch Whisky Association.
Last year, Scotch remained the biggest net contributor to the UK's balance of trade in goods. In 2016, without the impact of whisky, the UK trade deficit in goods would have been 2.8% larger at almost £139bn.
Whisky accounts for more than a fifth of the UK's total food and drink exports. In 2016 the European Union remained the top destination for exports, worth around £1.2bn, with US exports growing 14% to £865m, followed by Asia, with shipments of £768m.
After the US, Poland showed one of the biggest year-on-year increases at 18.9% by value (£63m total sales), with India another dramatic riser at 13.8% (£97m), Japan up 8.4% (£82m), and Germany up 13% (£164m). China remained fairly static at +0.5% (£41m).
Exporting alcohol from the UK
The UK is by far the largest exporter of spirits in the world and the industry supports some 296,000 jobs in the UK, both directly and indirectly. Around 45% of all UK spirit exports, by volume, go to the EU and 33% by value, worth £1.6bn.
However concerns remain about Brexit, in particular a ‘cliff-edge’ scenario. “As an industry we are all in this together,” said Mr Beale. “Any disruption of trade is bad for businesses on both sides of the Channel.
“It is the joint ambition of the UK and European wine and spirit industry to secure free trade flows and we have agreed to make this clear demand to all our politicians.
“It is very encouraging to see Philip Hammond has heard our views, and those of other industries, and realised the need for a transitional period to allow time to agree and prepare new and equally frictionless customs arrangements.”
Craft ale boom
When it comes to brewing, it’s a tale of two extremes – with the big brewers getting bigger, while under their feet a host of new microbreweries are springing up selling an ever-increasing range of premium craft ales to discerning consumers.
According to a 2015 global beer market report by Allied Market Research, the global beer market is expected to reach $688.4 billion by 2020, maintaining a compound annual growth rate (CAGR) of 6%.
It says a significant increase in the consumption volume is being fuelled by growth in developing regions.
Takeover creates world's biggest brewer
Last September Anheuser-Busch InBev won shareholder approval for its takeover of US giant SABMiller, in a $100bn deal that made it the world’s biggest brewer.
The new group, which will produce roughly 30% of the world's beer – 137bn pints – will trade under the AB InBev name.
AB InBev brands include Budweiser, Stella Artois, Corona and Beck's, while SABMiller labels include Peroni, Pilsner Urquell and Grolsch.
However, to win approval from national regulators, AB InBev has had to agree to sell the Peroni and Grolsch brands to Tokyo-based drinks company Asahi, together with British craft brewer Meantime, which it bought in 2015.
AB InBev has also had to sell SABMiller’s 49% stake in China’s Snow brand, the world’s biggest-selling beer by volume. More than 18bn pints of Snow are produced each year, making up 5.4% of global beer sales.
Meanwhile rival Molson Coors bought SAB’s 58% of MillerCoors and the Miller global brand portfolio from AB InBev for $12bn – again, to reassure regulators.
By virtue of the merger, Heineken moved up to second place in the global brewing stakes, at 9.0% of sales, with Carlsberg third at 6.1%.
While there will always be a market for mass-produced beer brewed on an industrial scale, the premium end of the market has grown dramatically, both in terms of value and volume.
According to Allied Market Research, micro-breweries are expected to register a CAGR of 9.3% globally during the period of 2015‐2020, with a growing number of discerning consumers ditching bland big-name offerings in favour of the superior taste and quality on offer from craft beers.
“Growing sales of premium, and super-premium beers have shrugged off all doubts about the dip in the consumption volume,” says the report.
“Consumers are increasingly opting to experiment with locally-produced premium and international beer varieties.” It predicts the premium beer segment will continue to show a CAGR of 6.4% through to 2020.
15% rise in craft beer sales
According to a Euromonitor report, sales of craft beer grew by roughly 15% per year from 2010-15. In the US, they accounted for 10% of sales, while in the UK, they made up approximately 5% of beer sold.
The UK’s craft ale boom dates back to 2002, when Gordon Brown halved the beer duty for breweries making less than 5,000 hectolitres (880,000 pints) a year.
Credit must also go to the Campaign for Real Ale (CAMRA), founded in 1971, which successfully fought the brewing giants to revive and popularise a product they were trying to kill off.
According to research by accountancy firm UHY Hacker Young, the total number of breweries in the UK increased by 8% from 1,558 in 2014 to 1,692 in 2015, as the popularity of craft beer has continued to soar. That compares with 767 breweries in 2000, a 188% increase.
Big brewers muscling in
Of course, the big brewers are trying to buy a slice of the craft ale market. At the same time as SAB Miller was buying London’s Meantime brewery, the Camden Town Brewery was bought by AB InBev, and is opening a new brewery in Enfield.
James Simmonds, partner at UHY Hacker Young, said: “Craft beer is leading the way in the surging popularity of artisan products and has pushed aside other brands in high street bars. Many are now firmly established household names.
“This increasing popularity has transformed many microbreweries into highly profitable businesses for entrepreneurs looking for a niche position in the food and drinks market.
“As a result of their success, microbreweries across the UK have also become attractive acquisition targets for larger breweries. It is likely that larger breweries will continue to show more and more interest in the smaller breweries that are popping up around the UK.”
One British microbrewery taking a different approach is Brewdog, which has grown from being a niche player in the burgeoning craft ale market to a market leader with global ambitions.
In 2013 BrewDog raised £4.25m via crowdfunding to expand from its Scottish base and launch its products around the world.
The brewery smashed all previous crowdfunding records by selling £1m of shares in the first 24 hours of the offering, which it calls Equity for Punks. It is currently raising a new round of crowdfunding investment to open a chain of craft ale bars in the US.
Early investors in the company are estimated to have made a return of 2,800% at the start of 2017 when San Francisco private equity company TSG Consumer Partners bought a 22% of the company in a £213m deal that values the company at £1bn.
What affects the sector’s share prices?
Obvious things to watch out for in terms of share price movement are potential takeover deals – look out for some of the ‘smaller’ giants such as Heineken, Carlsberg and Diageo as they hit the acquisition trail. Don’t rule out further mergers at the top end, either.
According to Munich-based beer magazine Inside Beer, one possible deal would be between Molson Coors and Heineken – both family-based companies.
It reports comments from Pete Coors, vice-chairman of Molson Coors, at a conference in San Diego, when fielding questions about possible cooperation between the two companies.
His answer was: “The Heineken family is a great family and we have business relationships with them in other places around the world.”
The CEO of Heineken International, Jean-François van Boxmeer, recently told Institutional Investor: “Family control is here to stay and I am comfortable with that. You can be a superb growing company and a family company. Peter Coors’ and Eric Molson’s families control the votes of Molson Coors.”
Consumption trends are obviously important to watch, too, as are economic trends. When the global economy is on the up, as now, people are inclined to drink more. In bad economic times, people might want to drown their sorrows – but they can’t afford to.
What can make one company buck the trend?
As above, watch out for mergers and acquisitions (M&As) at the top end. At the micro end of the market, many breweries are in private hands. Look out for those gaining market share, pumping the publicity machine, and offering crowdfunding deals.
However, be aware there is, as yet, no marketplace for buying and selling crowdfunding shares. You would benefit from a takeover, however, if you have a slice of the equity. Always check the small print on crowdfunding deals.
What can make a company's share price fall?
Study companies’ quarterly reports, and industry insights. Falling sales and declining market share will obviously affect share prices, as will any ‘bad news’ hitting the headlines – scandals surrounding top executives, claims that staff are being treated badly.
And just as the share price rises on news of a takeover bid, so it will fall if the deal falls through – sometimes to a level much lower than at the start of the process, if only temporarily.
Profit warnings will also have an impact on share prices – stay ahead of the curve by checking the company’s quarterly results and looking for warning signs.
What should I look out for in company accounts?
As with any company, make sure the fundamentals are sound. Look out for high levels of debt, declining sales and/or profit margins.
Look, too, at the executive summary – are there solid expansion plans to keep growing the company’s market share? Are there problems in any of its key markets?
Look for the current ratio on the balance sheet, which compares a company’s total assets and liabilities. The higher the better – value investors look for at least 2:1.
‘Book value’ is another key indicator – a company’s assets minus its liabilities. This can then be divided by the number of shares in issue to arrive at its price-to-book ratio.
What else is there for alcohol investment?
Shareholder revolts can signal all is not well with a company. If, for instance, they are trying to force down executive pay, you need to ask why. If the company were performing well, it’s unlikely anyone would ask any questions.
Industry-specific issues would be increases in commodity prices that would have to be passed on to consumers – beer’s main ingredients, barley and hops, are both in high demand globally.
Many UK craft beers use imported hops, rather than British varieties, so the weak pound is pushing up prices. Meanwhile British barley is in demand from overseas buyers, pushing the price up by roughly £50 per tonne.