The story of George Clooney’s tequila company, Casamigos, its rapid rise in popularity after just four years on the market and its sale in a massive deal to British beverage giant Diageo in 2017, may not be the typical arc of an alcohol brand, but it does point toward the possible rewards and riches which draw so many to investing serious money in the industry.
“When you hear that somebody created a tequila brand and sold it for $1 billion, your ears perk up,” Austin College Assistant Professor of Business Finance and CPA Shannon Cornelison-Brown says.
But before investors start banking on any kind of buyout or even think about making it into the black, Cornelison-Brown says alcohol is largely considered a luxury industry and one that comes with some important considerations and upfront costs.
“First, whether it’s the wine, beer or liquor, you’ve got a lot of capital expenditures, overhead that you have to pay for at the beginning and that’s usually for the machinery to make it,” Cornelison-Brown says. “Two, you can see some large outgoing expense when it comes to advertising or promotion of the brand name to keep that product visibility in the marketplace. Three, in making some of these products, it can take years for the fruit or ingredients to age, which can mean that much longer of a wait to see a return on your investment.”
Cornelison-Brown says the alcohol industry has numerous strengths, one of which is experimentation and variety in connecting consumers with new products and brands.
“There’s more creativity in the lines of distribution,” Cornelison-Brown says. “You really see this in things like the monthly or quarterly subscriptions to have craft beer or wine dropped off directly at your home.”
Smaller breweries, distilleries and wineries often enjoy strong support from the local markets in which they operate and produce their products, adding to the allure, says Cornelison-Brown. But she explained the consumer base for American-made spirits is also growing internationally.
“You’re also starting to see emerging markets and they’re starting to acquire North American tastes,” Cornelison- Brown says. “You can certainly see of that demand in wine. The variety of fruits from our different regions is attractive and that has driven up demand.”
Cornelison-Brown says while large beverage companies still hold a major- ity of the market share, many, especially those in the beer and wine business, have turned their attention to incorporating smaller, craft producers into their respective portfolios. Anheuser-Busch InBev, maker of Budweiser and other major brands, has spent millions of dollars in recent years to purchase a host of craft beer makers including Karbach Brewing in Texas and Wicked Weed Brewing of North Carolina.
“There’s a good chance that there will be more acquisitions occurring within the industry,” Cornelison-Brown says.
But every investment comes with some risk. Cornelison-Brown says alcohol products are made with a variety of ingredients and can be sourced from around the country and around the world. If crops are affected by weather, insects or disease, it can lead to significant reduction in availability and overall product quality.
Cornelison-Brown says recent international trade tariffs and taxes announced by the White House may also have ongoing ripple effects throughout the alcohol industry. American bourbon and wine makers have expressed concern that they may become victims of the retaliatory “trade war” waged by foreign markets and countries in response to new U.S. policies.
“If the government does place any additional tariffs or taxes on those ‘sin products’ out there — alcohol, cigarettes, etc. — that could lead to higher prices for those items in the market and that could lead to less profit,” Cornelison-Brown says.
Cornelison-Brown says first-time investors in the alcohol industry shouldn’t put up any money they can’t afford to lose and may find more stability by going with the makers of well-established brands over startups and smaller craft- beverage operations. But with some financial forecasters predicting another economic recession in the not-so-distant future, Cornelison-Brown says investors should be aware that alcohol and other luxury products may take a hit.
“Like investing in anything, I think having a solid grasp of the expenditure outlay, the time frame and how long it will take to see a return on a particular product, that helps give you an idea of how the money is spent and how it comes back,” Cornelison-Brown says.