With the economic picture growing gloomier by the day, investors may be looking for sectors that have historically proven to be resilient during a recession. “Alcohol has the tendency to survive the times,” said Mark Neuman, chief investment officer and founder of Constrained Capital. His ESG Orphans exchange-traded fund, which has $1 million in assets under management and targets companies excluded from ESG-focused portfolios, holds alcohol stocks such as Anheuser Busch InBev , Brown Forman , Diageo , Constellation Brands , and Molson Coors Beverage . “In a market where things go down, these should go down less,” he said. Historically, recessions don’t reduce the volume of alcohol consumed per capita, a June analysis by Goldman Sachs found. However, a separate report from Bernstein found that during times of abnormally high unemployment per capita consumption fell 1%. There have been increased warnings about a potential recession. JPMorgan Chase CEO Jamie Dimon recently told CNBC he expects the economy to tip into a recession in six to nine months, while Goldman Sachs CEO David Solomon advised investors to be cautious as there is a “good chance” of a recession . Economists surveyed by The Wall Street Journal said the probability of recession in the next 12 months is 63%, while Bloomberg economists put the odds of one happening in that time frame at 100%. President Joe Biden , on the other hand, told CNN he doesn’t think a recession will happen , and if it does it will only be “slight.” Right now, unemployment remains low, with September’s rate at 3.5%. While alcohol consumption may remain steady, or dip slightly, during a potential recession, there are nuances that may have an impact on some companies’ bottom lines. Consumers are trading up For the past several years, consumers have been trading up to higher-end cocktails and beers. This shift to premium products, coupled with annual price increases, has resulted in a 4% compound annual growth rate in alcohol sales — despite consumption remaining consistent over the past 80 years, Wedbush analyst Gerald Pascarelli wrote in a note earlier this month. Spirits are particularly hot, including those that are ready to drink. Overall, the ready-to-drink category brought in more than $1.4 billion in sales in the 52 weeks ended Oct. 1, according to NielsenIQ. Canned cocktails were the bulk of those sales, coming in at more than $1 billion, representing a 66.5% increase year over year. Hard seltzer, on the other hand, is losing ground as consumers turn away from the typically malt-based beverages. Sales declined 7.5% during that same time period, according to NielsenIQ. However, the cohort is still much larger than canned spirits, with $4.2 billion in sales over the last year, the data show. Distributors expect hard seltzer sales to fall 6% this year and 4% in 2023, according to a separate note from Goldman Sachs earlier this month. “While a few distributors see a pathway for the category to stabilize by next year, most are concerned that the core hard seltzer customer may have already moved on,” wrote Goldman analyst Bonnie Herzog, who reiterated her sell rating on Truly maker Boston Beer . Good times for tequila, Mexican beer Another macro trend is the popularity of Mexican products, in part because of the growing Hispanic population in the U.S., as well as increasing interest from non-Hispanics, experts said. It also plays into the trend for premium products. “The hottest in spirits by far is tequila,” said Brian Sudano, managing partner of consulting firm and research company Beverage Marketing. Tequila and mezcal made up the second-fastest growing spirits category by revenue and volume last year, according to the Distilled Spirits Council of the United States. The Mexican spirits accounted for nearly one-third of the total increase in spirits revenue in 2021, the council said. Mexican beer is also gaining in popularity. Constellation Brands’ Modelo Especial, considered at the premium end of the U.S. beer market, was the No. 3 brand in 2021, according to Sudano. It was the only one of the top three on the sales upside, with 12% growth, he said. Based on its performance in 2022, Modelo Especial will likely take the No. 2 spot from Coors Light, Sudano said. Constellation Brands CEO William Newlands touted that continued share gain this year during the company’s earnings call earlier this month. “We continue to see further opportunities to maintain the growth momentum of Modelo Especial, particularly given the resilience of premiumization trends and our relentless focus on striving to close the brand’s distribution and awareness gaps,” he said. Health and wellness is another growth factor, as consumers look for drinks that have lower carbs, sugar and calories. “Many people still feel like spirits may be aligned better with their health and wellness,” said Bernstein analyst Nadine Sarwat. There has also been an uptick in the growth of nonalcoholic beer, which also plays into that theme, said Christopher Shepard, senior editor at Beer Marketer’s Insights. What’s more, the vast majority of the buyers are those who are still drinking, but looking for moderation, he said. Those nonalcoholic beverage makers are also now moving into the alcohol space , Shepard pointed out. Coca-Cola teamed up with Molson Coors to release Simply Spiked Lemonade and Topo Chico Hard Seltzer. Its Fresca Mixed products are produced by Constellation Brands and it is working with Brown Forman on Jack and Coke in a can. PepsiCo has collaborated with Boston Beer for Hard Mountain Dew and with FIFCO USA for Lipton Hard Iced Tea, while Monster Beverage plans to release an alcoholic beverage under Beast Unleashed late this year. Meanwhile, those companies that had invested heavily in hard seltzers are now looking to expand their offerings, Shepard said. For instance, Boston Beer just released Truly Vodka Seltzer to get into the spirits-based ready-to-drink craze. For Goldman’s Herzog, it’s still too early for the vodka seltzer and Hard Mountain Dew to move the needle for Boston Beer, although she said Twisted Tea’s growth trends look promising. “While the bulls would argue that Twisted Tea and other innovations should be enough to overcome the drag from Truly’s decline & share loss, the bears (and we) would counter that SAM’s efforts won’t be enough to offset the magnitude of Truly’s losses (even at Twisted’s relatively more attractive margins),” wrote Herzog, whose price target implies about 30% downside from Monday’s close. Boston Beer has an average analyst rating of hold and 8% downside to the average price target, according to FactSet. “One of the things that we have learned from watching the beer industry over the last decade, and even further, is that the consumer keeps moving. The consumer keeps being interested in what’s next,” Shepard said. What a recession may mean While consumers’ consumption may not change much during a recession, they could spend less by buying cheaper products. “What’s the biggest debate in alcohol right now? Well, it’s — Is the consumer going to potentially downtrade out of these higher-priced offerings into lower-priced offerings?” Wedbush’s Pascarelli said. When that happens, spirits tend to get hit harder, Bernstein’s Sarwat noted. “The variations in liquor prices are far greater than beer,” she said. “In a recession, beer tends to gain about one percentage point of share from spirits. That makes intuitive sense because beer feels more affordable,” Pascarelli said. There is also downtrading within spirits, as people trade a higher-priced liquor or brand for a less expensive option, Sarwat added. If downtrading occurs, then those who produce mostly spirits would feel the pinch. However, those who have a diversified alcohol portfolio with different price points may also be affected, Pascarelli said. “It’s going to result in a native mix shift,” he said. “People are going to be buying lower-priced products, so they’re not going to be as profitable.” Among key spirits, bourbon and vodka are showing resiliency to downtrading, while within tequila, share shifts continue to favor the high end — although the gap has narrowed, Pascarelli said in his note. High-end beer continues to outpace lower-end beer, but he believes we may see some switching from premium/premium lights into lower-priced economy beers. “There may be some early signs of downtrading from high-end wine into lower-end wine; that said, luxury wine is not showing signs of downtrading at this point,” Pascarelli wrote. However, while a recession may cause a blip in profits for alcohol stocks due to downtrading, as soon as a recovery starts the trend toward premium will get back on track, Sarwat predicted. That’s because, in general, consumption is driven by generational trends and policy changes, not the economy, she said. How to play the space With that mindset, you shouldn’t alter your long-term investments because of a potential recession, Sarwat said. “If I’m talking to a shorter-term investor, they really care about where we’re going to be over the next year,” she said. “So they might really like spirits, but they’re thinking, ‘I just can’t get close to spirits right now because I’m worried about a recession.'” Both Sarwat’s and Pascarelli’s top pick is Constellation. The beverage company is best known for its Mexican beers, Corona and Modelo, which play at the super premium end of the U.S. beer market, Sarwat said. They both like that the brand appeals to the growing U.S. Hispanic population and have a lot of blank spaces to grow with non-Hispanic consumers. “Fundamentally, it has a very, very strong portfolio just from a brand perspective,” Sarwat said. An investor with a shorter horizon may also like Constellation if a recession hits, since beer will be better positioned relative to other alcohol players, she pointed out. The company is also trading at a discount, because it has made some past capital allocation errors, including taking a stake in Canopy Growth at the peak of the cannabis valuation bubble, both Sarwat and Pascarelli said. The stock has an average analyst rating of overweight and there is 22.8% upside to the average price target, as of Monday’s close, according to FactSet. Pascarelli has two other names he rates outperform: MGP Ingredients, which he likes because of its exposure to distilled spirits, and winemaker Duckhorn Portfolio. MGP Ingredients over-indexes to whiskey, he said. “Whiskey is going to continue to outperform over the broad spirits category.” Duckhorn is a “pure play luxury wine company” that looks insulated from potential downtrading, he said. “The core consumer base of this wine category will be better able, presumably, to withstand outsized levels of inflation because they’re higher earners,” Pascarelli said. “Then, over the long term, once this inflation subsides, they have the premiumization trends that we’ve seen over the past decade.” MGP Ingredients has almost 21% upside, according to the average analyst price target on FactSet. Its average price target is buy. Duckhorn also has an average rating of buy, with 30% upside to the average price target. Diageo is another name liked by analysts. The London-based global company, whose brands include Johnnie Walker, Tanqueray, Baileys and Guinness, has an average rating of overweight and 17% upside to the average analyst price target, according to FactSet. While it does have beer in the portfolio, Thornburg portfolio manager Nicholas Anderson views it more as a spirits company. “[Spirits are] an affordable luxury. People have shown a willingness to pay up for a better drink,” said Anderson, who manages the Thornburg International Growth Fund, which has a total of $1 billion in assets. Diageo makes up about 2% of the fund. Anderson isn’t concerned about an economic downturn. “Maybe growth will slow in a really bad recession, but we think this company is poised to survive and thrive,” he said. — CNBC’s Michael Bloom contributed reporting.
