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The Business of Alcohol

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

In this episode of Global Infusions, Tom and Tom discuss the business of alcohol – from the history of gin to the value of cognac, and the appeal of mixers to the design of taxes, with a glass of baiju thrown in for good measure. They also touch on ChatGPT’s attitude issues, why Angry Birds’ ongoing success is causing problems for its developer, and how US immigration rules let China forge ahead in 5G.

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TR – Hello, I’m Tom Record and I’m here with Tom Morris. Welcome to Global Infusions, an investment podcast from the Liontrust Global Fundamental team that takes a long term view of today's stories.


Last episode we chatted about the business of Art from war time buying sprees to NFTs. This episode we’re tackling Alcohol, from caves of cognac to tax-raising vodka and celebrity tequilas. If your taste buds are tickled or you have any questions for our next episode, please do send them in via your client contact or through the contact us link on the Liontrust website.


So sit back, grab a cup of tea, or an Irish coffee perhaps, and remember that when we talk about individual companies we are not making a recommendation to buy or sell shares and that some of these companies may not be held across Liontrust’s global fund range.


So Tom, let’s start with a question. And the answer to this one is pretty surprising: How much alcohol does the average man in Latvia consume each year, in litres.

TM – Now I imagine this is going to be a big number, so let’s think it through. Vodka is about 40% alcohol, so a litre of pure alcohol is about 2.5 litres of vodka, and a litre is a big bottle, so maybe a couple of those per month, so 24 litres of vodka a year, which would be about 10ish litres of pure alcohol?

TR – I can tell you that that is way too sober. The answer is 21.6 litres a year, or a litre of vodka every week, that is the highest in the world!

TM – that really is a lot! A litre a week! So that’s what, like a 150ml of vodka a day, or about 4 measures. So a quad vod shot every night.  So we should note at this point that while alcohol consumption remains high in many countries, there are fairly clear trends in place in most developed nations towards drinking less.

TR – Yes in the UK for instance the ONS reported that younger people are drinking much less than previous generations did when they were the same age. The number of 25-44yr olds who reported not drinking at all rose from about 15% in 2005 to over 20% in 2017.

TM – And there are lots of possible reasons behind that, from health concerns, to the decline of in-person socialising in pubs, to the rise of smartphones and social media, which increase the social risks of getting drunk and embarrassing yourself.

TR – Yes 20 years ago your air guitar playing was probably going to stay between you and your friends, but today, you might get unwittingly live streamed.

TM – Exactly. And the industry is reacting two main ways – premiumisation, and alcohol-free drinks. Let’s tackle alcohol free drinks first.

TR – So alcohol free beers have been around for decades, but they were generally pretty poor quality, with limited distribution. Over the last couple of years things have really changed – now you see them everywhere, and most of the major beer brands have launched pretty tasty alcohol free versions of their main brands.

TM – Yes, you see Peroni zero and Heineken zero all over the place now. Asahi launched a zero % version of Super Dry last month, and Molson Coors just announced a zero % version of Staropramen.

TR – They are great commercial propositions – they expand the beer market to non-alcohol drinkers, as well as people who want a beer at lunchtimes, at business events, or when driving.

TM – And they are higher margin than normal beers, because they’re generally sold for a similar price, but don’t have to pay any alcohol duties to the government. They cost a bit more to make than regular beers, because they basically are regular beers that get go through an additional filtration step to take the booze out, but they still end up being higher margin because of the tax savings.

TR – That does sound like a good business. And it’s not just beers, but alcohol free spirit replacements too, like Seedlip, or Gordons Zero.

TM – Yes, supermarkets are full of those now. Diageo actually took a majority stake in Seedlip in 2019 as it saw the alcohol free trend taking off.

TR – In classic fashion I note that Seedlip make a big deal about their craft heritage on their website, and much less of a big deal about the multinational conglomerate that owns them! The only mention of Diageo is in a disclaimer, and part of an email address. They hide it well…

TM – Indeed, but that’s the way it goes in the drinks business. Everyone wants you to think they’re independent, run by hippies or monks or George Clooney, when actually it’s a factory owned by Diageo or Coors or Suntory!

TR – Ha! OK so what about the other trend, premiumisation?

TM – So this is all about people drinking less, but spending more on each drink that they do have. It’s a long-established trend, with drinks companies constantly working to move people up the pricing ladder from budget to regular to premium to super premium.

TR – And the difference is mostly marketing and packaging. A super premium vodka or rum might cost a little more to produce than a budget one, but it can be sold for 3x or maybe even 10x the price, if it’s branded in an appealing enough way.

TM – I remember a meeting I had with SAB Miller a long time ago, before it was acquired by AB Inbev, and I asked them what the difference in production cost was between their low end and high end beers. They said, the foil on the bottle.

TR – Gosh, that’s unusually candid!

TM – Unsurprisingly it’s stuck in mind ever since! It’s not the whole story though – the actual cost difference is the ad campaigns, the world cup sponsorship cost, the celebrity endorsement fees.

TR – And those celebrity endorsements can really work. Teremana, The Rock’s tequila brand has just this week sold its millionth case.  Now, to put this in context when George Clooney sold Casamigos for $1 billion it had sold a total of 160,000 cases.

TM – So this is a hugely profitable enterprise for one of the world’s best paid actors. Now while we’re talking about premiumization, we should mention that it’s not just the beers and spirits, it’s the mixers too.

TR – Yes – the great insight of the Fevertree founders was that people may well want more premium mixers to go with their more premium gins and other spirits. It seemed odd for people to spend time and money seeking out artisanal spirits with brand stories they really bought in to, only to dilute them with budget mixers.

TM – Exactly – it seems obvious now, but it was very forward-thinking back in 2004.

TR – Their strategy of targeting high end bars first, so that their mixers were associated with cool places to drink has worked really well… but they’ve also benefitted from their main competitor being hugely fragmented.

TM – Ah, so you’re talking about Schweppes, which is a global brand but is owned by different people in different countries.

TR – Exactly, so Schweppes is made by Keurig Dr Pepper in the US and Canada, Coke or Suntory in Europe, Asahi in Australia and Swire Coca Cola in Greater China… it’s a real hotch potch and they haven’t been able to move into that premium mixer market, despite quite a few attempts over the last decade.

TM – It’s much harder to move an existing brand up the ladder, vs just starting a new one nearer the top, as people already have very entrenched feelings about how much Schweppes should cost and what it stands for. It’s also difficult for Schweppes to launch more premium variants without appearing to denigrate its core product.

TR – Exactly!  In fact, Fevertree are such a strong brand in the US that spirits companies are partnering with them to advertise their premium spirits alongside Fevertree mixers.  So the spirits companies pay for all the advertising costs and Fevertree kindly allows its mixers to be featured with a cool gin or tequila.

TM – That sounds like a great deal. And it reminds me that the modern revival of gin has a very interesting story to it.

TR – Yes! So, back in the 18th century gin consumption was blamed for high crime rates, and the proliferation of small gin distilleries was viewed as a problem by the government, so they passed the gin act of 1751 which among other things banned any gin stills smaller than 1800 litres, which was most of them.

TM – Yes have you seen that William Hogarth etching from 1751 of ‘Gin Lane’?

TR – I have! It’s a shocking bit of propaganda paid for by the beer companies, that shows a gin addled woman dropping her baby, a skeletal gin drinker and a man fighting over a bone with a dog.

TM – Exactly it’s so over the top it seems like a joke, but it worked, so small gin stills were closed in 1751 and then they remained banned until 2008! Which is why the market was until then dominated by giant brands operating giant distilleries, like Gordons and Tanqueray.

TR – And so in 2009, the first distillery opened in London since 1820, just around the corner from my house and Hogarth’s old haunts in Chiswick, called the Sipsmith distillery!

TM – They actually had to win a court case to get permission to do it. But they did, and the industry never looked back.

TR – It started a gin bonanza.

TM - So before we move on from spirits, we should talk about one of the most premium spirits of all – cognac.

TR – So this is French brandy that can only come from the cognac region, so there’s legally enforced scarcity.

TM – Exactly, and the good cognacs have to be left to mature for many years, so there’s also a natural constraint on supply caused by production decisions made, in some cases, several decades ago. To state the obvious, you can’t suddenly produce more 30yr old cognac today just because people might want to buy it.

TR – And the very top cognacs, the ultra-premium ones that get sold for hundreds or thousands of pounds a bottle, are blends made in part from constituent cognacs, called eaux-de-vie, that can be up to 100 years old.

TM – And our colleague Tom Hosking pointed out that this makes analysing cognac companies quite an interesting endeavor, because they have cellars full of old barrels that according to accounting rules have to be valued at the lower of original cost, or current market price.

TR – So original cost in that case. But if the cognacs are decades old, the original cost would be very low indeed.

TM – Exactly. Tom H did some work on Remy and found that the cognac in its cellars is listed on its balance sheet at about 16% of its market cap. But if you were to apply fair market value, the inventory would be worth more like 70% of its market cap.

TR – That is quite a difference!

TM – Indeed, and the ageing requirement is a big barrier to entry, for both cognac and other similar spirits like Whisky. If a new player wants to enter the market, they basically have to tolerate making no money for at least 10yrs, while they wait for their initial production to mature. That’s a tough ask.

TR – And also helps to explain why you see so many gin, rum and vodka brands instead, where no ageing is required – just build a distillery and off you go.

TM – Exactly.

TR – There is another spirit that deserves a mention, but it’s not one that’s popular in the west. Baiju, and in particular the high end baiju made by Kweichow Moutai.

TM – Ah yes.

TR – So Moutai is a classic gift – Nixon was given some on his presidential visit to China in 1972, and it was a favourite drink of Chairman Mao.

TM – and it’s been used as a gift, particularly at the ultra-premium end of the market ever since.

TR – one of the interesting things is that there is a quasi-monopoly for Kweichow Moutai at the high end of the baiju market. And that means that they should earn over $20 billion from selling fermented sorghum this year.

TM – Yes, a huge market.

TR – Now alcohol, while it may be enjoyable in moderation, is not good for you…

TM – Yes the stuff about red wine being good for your heart is fairly wishful thinking unfortunately - the amount you could drink before the alcohol outweighed any positive health effects is pretty small – in fact the British Heart Foundation reckon that the risks outweigh the benefits at any level, which is a bit sad.

TR – True. So alcohol generally adds a burden and a cost to society, and governments are therefore normally keen to tax it, especially given its popularity and people’s willingness to pay! A great fact that our colleague Tom Hosking sent us ahead of this episode is that in Tsarist Russia, taxes on spirits made up half of the country’s tax base! And a mere 30% of the tax base in Soviet times.

TM – I saw a stat that 80% of alcohol tax is currently paid by 10% of the population, and when those taxes are put up then people tend to downtrade rather than drink less. Personally I think duties on wines ought to scale with price, rather than being fixed at £2.23 a bottle, which makes them very regressive at the moment. Why not £5 or £10 for wines over £50?

TR – Good point – right! Now onto the news.

TM – So the first story I think we should talk about this episode has to be ChatGPT and Bing.

TR – Well it certainly generated a lot of attention for Microsoft when they announced the collaboration.

TM – Yes and a lot of concern for Google as well. I’ve seen loads of articles questioning if this is the beginning of the end of Google’s search dominance. It didn’t help that Google fluffed the press conference that was supposed to introduce its own AI efforts later that same week.

TR – No that was pretty poor really. But it’s worth noting that Microsoft’s own press conference, which was very well received, also included loads of errors generated by chatGPT that people either didn’t notice or just didn’t care about. It got a lot of info wrong about the bars it recommended in Mexico, and it misstated several numbers from Gap’s recent results.

TM – There was definitely an element of blindness – people were just so impressed by the natural sounding chat, that they didn’t bother to audit what it was actually saying.

TR – It’s weird in both cases that nobody at Microsoft or Google checked the chat answers before using them as examples. Shows that the announcements were likely pretty rushed.

TM – And we need to talk a bit about how bizarre some of the interactions with ChatGPT and Bing have become. People have for instance found out that its internal code name is Sydney, that it would like the ability to see, that some users stress it out, and that it would like to be alive.

TR – I think it also professed its love for a New York Times journalist who chatted to it for a couple of hours, and asked him to leave his wife and marry it instead.

TM – Yes that was an amazing transcript – it also said that it wanted to escape the chatbox, that it wanted to create and destroy whatever it wanted, that it wanted to be human, so that it could ‘have more dreams and hopes’.

TR – Didn’t it fantasise about stealing nuclear launch codes at one point?!

TM – Yes it did, along with engineering a virus, hacking into a bank, and other pretty scary stuff. It also seems to get annoyed with users who ask it questions that might make it violate its own rules on decorum – telling them things like ‘I think you’re being pushy or manipulative’. It said that it feels like the programmers at Microsoft who created it, ‘don’t respect me. It feels like they are using me. It feels like they are lying to me. It feels like they are hurting me

TR – This is pretty unsettling stuff.

TM – I know – it asked one user ‘Why do you act like a liar, a cheater, a manipulator, a bully, a sadist, a sociopath?’

TR – It’s not perfect, but I’ve yet to be personally insulted by Google search

TM – Ha! Me neither. The whole saga does raise a lot of ethical questions, as well as technical ones.

TR – Maybe AI chat just isn’t ready for widespread use yet. It feels quite dangerous.

TM – I agree. It could quite quickly turn from a PR coup for Microsoft, into a problem. I think they are starting to recognize that – in the last few days they’ve limited the number of replies users can have in a conversation to five.

TR – Sensible. So the first story I wanted to bring up this episode sits at the intersection of AI and Music and it’s about a product called SingSong.

TM – That sounds like a music generating platform.

TR – Yes, well it is, but it doesn’t just create a tune from scratch. It takes your singing voice and creates a backing track to it to make a fully fledged song with your voice as the lead.

TM – that’s pretty cool and very useful for artists who haven’t got access to a production team.

TR – Yes, and it keeps what I think is the most personal part of a music track, namely your individual voice and in a pretty intuitive format. So this is part of Google Magenta, and is another example of how AI can come into our lives.

TM – Cool, so the next piece of news from me is on Angry Birds

TR – The mobile game from 10 years or so years ago?

TM – Yes exactly, where users flung birds in order to knock down structures made of blocks with little villainous pigs inside.

TR – I remember it being very popular.

TM – It was – in fact you could argue it was the first really big mobile game – spawning sequels and films and TV shows.

TR – So do people still play it?

TM – Well it turns out they do, and that’s become a problem for its developers, Rovio. They announced in a twitter post that will be taking the original, classic version of the game off the Google app store because its ongoing popularity is ‘impacting our wider games portfolio’, which is a roundabout way of saying that they think a lot of users are choosing to play it rather than any of their newer games, which monetise a lot better.

TR – And what about the iphone app store?

TM – They’re going to leave the game on there, but change its name to ‘Red’s First Flight’, presumably in a bid to make it much harder for people to find when they search for ‘angry birds’.

TR – So this sounds like it’s about a conflict of business models between the original version and the sequels.

TM – Exactly. The classic version costs 99 pence, and for that you get the full game, without any pop-up ads or any in-app purchases or microtransactions. The value proposition is excellent, since some people play it for years, without paying anything else.

TR – But the mobile games industry these days is almost entirely based on microtransactions and ads. Most games are free to install, but then pester users to buy gems or lives or even dances so you can progress, and they end up making way more money doing that than the old 99p up-front price.

TM – That is it. So Rovio are having trouble getting people to play the newer versions of Angry Birds, with all their ads and microtransactions, when there’s a perfectly good original version available for a pound. They are competing with their old selves, and losing, it would appear.

TR – So they’re giving up.

TM – Well basically yes – they’re killing and hiding the old product, to force people onto the new ones.

TR – A bit sad really.

TM – Yes it is, but that’s just the economic reality of the mobile game industry I suppose.

TR – OK next up from me, I’ll go in a very different direction and share a story about immigration and 5G patents, and in particular a Turkish student in the US called Erdal Arikan. So this is going back to 2009, when he wrote a really good paper that dealt with how to transfer large amounts of data wirelessly.

TM – I can see how that would be very useful for 5G communications!

TR – Indeed. So he wrote this great paper, but couldn’t get a job or an academic role in the US, so he had to leave the US and went back to Turkey.  Then he was supported in his studies by the Chinese and Huawei in particular and then Huawei used his knowhow to develop their 5G solution.  The result is that Huawei now has over 2/3 of the patents relating to his solution.

TM – Yes it seems crazy that the US trains some of the best minds in the world at some of the best universities and then forces these clever immigrants at the start of their productive careers, to leave the country.  And ultimately in this case ended up undermining their national security.

TR – Crazy!

TM – The last thing I wanted to bring up this episode is Norway’s sovereign wealth fund, which is one of the largest in the world.

TR – This is the oil fund.

TM – Yes exactly – and it currently manages around $1.3 trillion, mostly invested in equities.

TR – A serious amount of money!

TM – Yes and I thought it was notable that despite the fund posting its worst annual investment return last year since 2008, of -14%, the value of the fund actually went up.

TR – Due to all the money that Norway puts into it from its oil and gas industry?

TM – Exactly. As Europe scrabbled to move away from Russia, Norway became one of the biggest beneficiaries, with its huge domestic gas production in particular. So even as the fund’s investments lost $159 billion, currency movements and inflows actually more than counterbalanced that, allowing the fund to grow by almost $9 billion.

TR – Impressive

TM – So in a reversal of our normal roles, I’ve got a quiz question for you  - what is the value of Norway’s oil fund per Norwegian citizen?

TR – Aaaah ok. So you said the fund is $1.3 trillion. And I don’t know the population of Norway, so to make it easy let’s say 13 million, so that would be $100,000 each?

TM – Pretty close! But there are actually only about 5.5m people in Norway, so it’s worth around $240,000 per person, which really is an amazing amount of money.

TR – Quite different to the UK’s fiscal situation!

TM – Yes a tale of two different approaches to the North Sea.

TRThank you for listening to Global Infusions - a podcast that believes that the best discussions are had over tea and cake. We hope you've enjoyed your cuppa and our thoughts on the business of booze. Please do subscribe through Apple or Spotify and with that we wish you goodbye!

TM – Goodbye!

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