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Rupert Hargreaves
Rupert Hargreaves
Articles (1342)  | Author's Website |

Warren Buffett on the Predictable Nature of the Beer Market

Comments from Berkshire's 2005 annual meeting

October 29, 2020 | About:

Beer is a big business. The global beer market size is estimated at just under $600 billion in 2020. It's projected to grow at a compound annual rate of 8% through 2025, according to a 2019 report by Global Market Insights.

Historically, the market has grown at a lower, but still impressive rate, thanks to a combination of population growth (volume) and price increases. The beer market is one of the few markets in the world that's highly predictable in the long term. That suggests that the sector leaders should be good investments.

Warren Buffett (Trades, Portfolio) laid out similar views on the sector at the 2005 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting. At the time, he was answering a question from an audience member about his decision to invest in Anheuser-Busch (XBRU:ABI) several decades prior:

"And it's a fairly easy-to-understand product and consumer behavior is fairly easy to understand. It's a very, very — exceptionally strong business...Beer business is not going to grow significantly in the U.S. Worldwide, beer is popular in a great many places, and Anheuser will have a very strong position in it. But I would not expect the earnings to do much for some time, but that's fine with us...

What we're looking for is businesses with a durable competitive advantage. I don't think there's any question that Anheuser has a very, very strong consumer position...the other thing about it is, of course, in beer you do not see the prevalence of private labels or generic products that you see in a great many consumer products that are being — that had strong positions over the years, that are being attacked. That's a small plus. But beer consumption per capita is going no place. And there's nothing that will change that."

These comments suggest that Buffett believed Anheuser-Busch was a strong business with a massive competitive advantage. It's not clear why, if he believed this to be the case, Buffett did not allocate a large percentage of Berkshire's capital towards the company, as he did with Coca-Cola (NYSE:KO).

However, I would guess that while Buffett did indeed like the sector and the company, he did not want to be linked too closely with the alcoholic beverage business. After all, Buffett is never seen to drink anything other than Coke, and Charlie Munger (Trades, Portfolio) has often warned about the perils of alcohol (he has said a close friend of his died of alcoholism). Based on these traits, it would be difficult for these investors to stand by an investment in an alcoholic beverage company.

Still, the lessons are useful for other investors. Buffett and Munger saw the beer market's steady growth, and they likened it to the market for Coke's products. Beer, they said, made up around 10% of the average U.S. citizen's total liquid intake.

The figure for soft-drinks at the time was around 27%, of which 40% was Coke products. So, Coke had a bigger market and a broader global appeal. The group was growing overseas, unlike Anheuser-Busch. Even today, the international beer market remains highly fragmented. As such, Coke certainly looked as if it was a better investment at the time.

That does not mean that it will always be the case. Investors should buy what they know, and if one understands the beer market better than the market for soft-drinks, then perhaps a beer business might be a better investment.

Considering the stability and long term outlook for the market, it certainly could be worth considering as this predictability may make it easier to predict companies' long term cash flows for valuation.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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