Boring Liquor's Exciting Opportunities

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Boring companies can be some of the most exciting investment opportunities. When I say “boring" companies, I mean the types of companies that sell the types of products that have existed mostly unchanged for decades, if not longer. When looking for these types of boring investments, it does not get much more boring than the alcoholic beverage industry. Despite being boring, this industry is not entirely without a little excitement (for good or for ill).

May I Take your Order?
The privately-held CKE Restaurants, the owner of the fast food burger chains Carl’s Jr. and Hardee’s, recently announced the introduction of the Jim Beam Bourbon Burger. As the name would suggest, this burger features a barbecue sauce flavored from Beam, Inc.’s (NYSE: BEAM) Jim Beam bourbon whiskey. This is reportedly the first time that a liquor-flavored sauce brand has ever appeared on a fast-food menu. This first of its kind fast-food licensing deal will put the Jim Beam burgers in more than 3,000 Carl’s Jr. and Hardee’s restaurants; introducing the already popular bourbon brand name to an even wider audience of consumers in the US and abroad.

This move, while unique to fast-food, would not be new to the restaurant industry as a whole. In 1997, Brown-Forman (NYSE: BF-B) lent its popular Tennessee whiskey brand name to casual restaurant operator T.G.I. Friday’s to create the Jack Daniel’s Grill menu, now featured in more than 1,000 restaurant locations, including over 350 international locations in Europe and Asia. This was also followed up in 2001, when Brown-Forman licensed of their brand to the condiment maker H.J. Heinz Company to create a successful line of Jack Daniel's barbecue sauce, steak sauce and marinade.

Since spinning-off in 2011 to form a pure-play spirits company, Beam has been accelerating its growth efforts. This CKE Restaurants deal continues Beam's attempts to capitalize on the fast-growing popularity of their many bourbon brands. Some of these attempts have been less successful than others. Last month Beam announced a plan to reduce the alcohol content on their higher-priced, premium Maker's Mark bourbon, down from 45% alcohol by volume to 42%. This move to water down Maker's Mark to meet increased demand overseas was met by a predictable internet-rage from long-time fans of the iconic bourbon brand. It was only a few days later that Beam's management reversed their decision. Thus far, Beam's entry into fast-food has been met with a much more positive fan reaction.

China Worries and Luxury Crackdowns
Not every piece of exciting news from this boring industry is good news. On Thursday shares of Paris-based Pernod Ricard (NASDAQOTH: PDRDY) fell 4.43% in Europe after the company’s Asia conference call. Revenues from China came in lighter than expected due to soft sales during the Chinese New Year, an important time for gift giving (as Christmas is in the western world).

Worries have persisted about new rules enacted by China’s government last year. The rules allow for the crackdown on extravagant institutional gift giving by government officials and businessmen. The United Kingdom’s Diageo (NYSE: DEO) and its Chief Operating Officer commented on the matter, saying that the UK spirit maker’s business is not dependent on these large institutional orders, which are the target of the Chinese government. Pernod Ricard similarly downplayed the worries, as demand in China is still growing for imported premium liquor brands. Despite the Chinese New Year softness, the head of Pernod Ricard’s Asia division still expects double-digit sales growth for China.

The UK and French liquor rivals have both pushed hard to expand into China, where fast-growing sales among the emerging middle-class can often offset weakness in many European countries. Each are becoming more reliant on China for new growth opportunities. When China experiences some weakness as well, that can become worrisome.

The newly enacted rules in China, while involving premium liquor and other luxury products, are not actually targeting Pernod, Diageo and other luxury product makers specifically. The target of this crackdown is actually corrupt Chinese politicians, government officials and business people who use these luxury items are possible bribes. The rules are meant to crackdown on corruption, not crackdown on luxury spending. And a less corrupt China is a good thing for everybody in the long run, including Pernod Ricard and Diageo.

Boring Bottom Line
The liquor industry in general has been one of the particularly boring spots in the stock market. But in these exciting times of market crashes, European uncertainty and Washington-inflicted artificially-created crises, I will take boring any day of the week. While recent slowdowns in China can be disconcerting for investors, interesting initiatives at brand expansion by Beam (following in the footsteps of Brown-Forman) brings a little excitement to this boring industry.


Matthew Luke has a position in Pernod Ricard. The Motley Fool recommends Beam, Diageo plc (ADR), and H.J. Heinz Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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