Diamond Estates’ brands include Twenty Bees, EastDell and Lakeview Cellars. To cope with the new conditions, it has raised prices by $1 a bottle.The Globe and Mail
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Canada’s publicly traded wine, beer and spirits companies were more than ready to toast to the 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, 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 also signs that consumers are reacting to rising economic uncertainty by shifting to lower-priced choices. That’s maintaining volumes on one hand but squeezing margins on the other.
“Prices for beer, wine and spirits are definitely going up,” says Nick Corcoran, equity research analyst with Acumen Capital Finance Partners Ltd. 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’ve gone to a [Vintners Quality Alliance] 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, he adds.
But for investors, there are opportunities, analysts say.
Top picks in the space
One is a company like Waterloo Brewing Ltd. WBR-T, based in Kitchener, Ont., whose brands include Landshark Lager 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 benefiting from interest in pre-mixed alcohol-based drinks. Waterloo makes Seagram Coolers, Mott’s Clamato 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. DWS-T, based in Niagara-on-the-Lake, Ont., says reopening is welcome but comes with new challenges.
The past two years saw the company’s 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.
The 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 Winery and Queenston Mile Vineyard. To cope with the new conditions, it has raised prices by $1 a bottle.
Andrew Peller Ltd. ADW-A-T, based in Grimsby, Ont. reported a weak fiscal 2022, ended March 31, on June 15 with sales, profit and margins all down. Its brands include Peller Estates, Trius and Thirty Bench. Peller says it’s also raising prices, and Waterloo Brewing is doing the same.
Bottle, labels and boxes are top costs for wineries. Most bottles come from Europe or China and well-publicized container shortages have increased prices dramatically. 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. BR-T, based in Calgary, costs are rising faster than the prices they charge. In most categories, they’re up against multinationals that have more room to absorb the cost increases.
A beneficiary of the renewed interest in hard liquor is Corby Spirit and Wine Ltd. CSW-A-T of Toronto, controlled by France-based beverage giant Pernod Ricard SA. 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, Canada, at Morningstar Inc., notes that Waterloo Brewing, Andrew Peller and Corby all pay good dividends.
Corby has the lowest payout ratio, which is the proportion of earnings paid out as dividends to shareholders. Corby’s 77 per cent ratio is slightly better than Waterloo’s 81 per cent. Andrew Peller’s ratio of 163 per cent means it is paying out $1.63 for every $1 it earns, which is not sustainable in the long run.
Corby also has the best dividend yield at 5.4 per cent versus 4 per cent for Andrew Peller and 3.1 per cent for Waterloo. Corby has the lowest trailing price-to-earnings ratio as of June 17 and its shares have been the top performer. Corby is 4 per cent higher year-to-date, while Peller and Waterloo are down by 27 per cent and 34 per cent respectively.
“If I had to pick one of the three companies, as a conservative, dividend-oriented investor, it’s 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 of Diamond Estates sees bright spots. Traffic through its Niagara-on-the-Lake 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.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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