Canada’s publicly traded wine, beer and spirits companies were more than ready to toast to full post-pandemic reopening after two rough years.
But even as the Covid-19 threat has receded new pressures have emerged, putting their celebrations on hold. Inflation is raising the cost of aluminum cans and glass wine bottles and the carton boxes used for shipping. The price of fuel for farm equipment and delivery is rising as are inputs such as fertilizer and the grapes and grains needed to make their products.
There are signs that consumers are reacting to rising economic uncertainty by shifting to lower priced choices. That is maintaining volumes on one hand but squeezing margins on the other.
“Prices for beer, wine and spirits are definitely going up,” says Nick Corcoran, an equity research analyst with Acumen Capital Finance Partners in Calgary, which covers niche and small-cap Canadian companies.
“When consumers go into a liquor store they have less money to spend, so where in the past they might gone to a VQA wine, they may go to a lower price blended wine. In the beer space, they might move from a domestic craft or import to a more value-type beer.”
For investors there are opportunities, analysts say.
One is a company like Waterloo Brewing Co. (TSX:WBR) based in Kitchener Ont., whose brands include Landshark and Laker. Laker accounts for three quarters of Waterloo’s branded volume, Mr. Corcoran says and benefits from more frugal consumer habits. Waterloo is also benefitting from interest in pre-mixed alcohol-based drinks. Waterloo makes Seagram Coolers, Mott’s Caesar and Absolut vodka drinks under agreements with other distillers. Here, they can pass along inflationary costs.
Murray Souter, chief executive officer of Diamond Estates Wine and Spirits Ltd., (TSX: DWS) which is based in Niagara-on-the-Lake, Ont. says reopening is welcome, but comes with new challenges.
The past two years saw its carefully nurtured strategy of export sales to China evaporate with continued lockdowns there. Bar and restaurant sales dried up, but have returned although not to pre-2019 levels. Better news is that Ontario’s move to sell beer and wine sales in grocery stores gave domestic wineries a boost. Consumers embraced it as “a one stop shop,” for wine and beer to avoid a second trip to the liquor store. Online sales also grew significantly as consumers opted for the ease and safety of home delivery.
Diamond Estates’ brands include Twenty Bees, EastDell and Lakeview Cellars. It recently acquired Creekside Estate and Queenston Mile Vineyards.
To cope with the new conditions, it has raised prices by $1 a bottle. Andrew Peller (TSX: ADW.A) based in Grimsby, Ont. reported a weak 2021 yearend June 15 with sales, profit and margins all down. Its brands include Peller Estates, Trius and Thirty Bench. Peller said its prices are rising too. Waterloo Brewing has done the same.
Bottle, labels and boxes are top costs for wineries. Most bottles come from Europe or China and well-publicized container shortages have dramatically increased prices. The industry is also competing for consumer interest with legalized cannabis and its spinoffs as well as a growing fondness for hard spirits and seltzers.
“It’s about changing preferences,” Mr. Souter says. “Flavoured gins, bourbons and scotches have an exotic feel to them. That subtracts consumer attention from wine.”
Mr. Corcoran says for all the Canadian players which include Big Rock Brewery Inc. (TSX:BR), based in Calgary, costs are rising faster than the prices they charge. In most categories they are up against multi nationals who have more room to absorb the cost increases.
A beneficiary of the renewed interest in hard liquor is Corby Spirit & Wine Ltd. (CSW-A-T) of Toronto, controlled by the France-based beverage giant Pernod Ricard. Its brands include J.P. Wiser’s Canadian whisky and Lamb’s rum. Through Pernod Ricard, Corby also represents Absolut vodka and Beefeater gin.
Ian Tam, director of research in Canada for Morningstar Research Inc., notes that Waterloo Brewing, Andrew Peller and Corby all pay good dividends.
Corby has the lowest payout ratio. A payout ratio is the proportion of earnings paid out as dividends to shareholders. Corby also has the best dividend yield at 5.6 per cent, versus 3.6 per cent for Andrew Peller and 2.9 per cent for Waterloo. Corby has the lowest trailing price to earnings ratio and its shares have also been the top performer. Corby A is 9 per cent higher year-to-date, while Peller and Waterloo are down by 17 per cent and 29 per cent respectively at time of writing.
“If I had to pick one of the three companies, as a conservative, dividend-oriented investor, it is screaming Corby to me,” Mr. Tam says. “The valuation is attractive and the dividends are steadier and less likely to be cut.”
Looking ahead, Mr. Souter sees bright spots. Traffic through its Niagara winery has resumed. Ontario’s experiment with wine and beer in grocery stores will probably expand. And online sales grew 10-fold during the pandemic.
“It’s been challenging, but we have come through and hopefully – cross your fingers – we don’t have to go through any more of these pandemic waves,” he says.