Barnstorming brand power
The double-whammy of reduced spending power in key emerging markets, and rising health concerns surrounding cigarette and alcohol consumption, has had a worrying effect on volumes at British American Tobacco, Imperial Tobacco and Diageo in recent times.
British American Tobacco reported just last week that total cigarette volumes declined 1.4% during 2014 to 667 billion sticks, and follows Diageos interim results which showed physical drink demand slide 1.9% during July-December.
Still, the results underlined the terrific pricing power wielded by these firms British American Tobacco saw revenues at constant currencies rise 2.8% last year to 15.7bn, while Diageo saw organic net sales remain broadly flat despite the effect of falling volumes.
The strength of the cigarette makers blue-chip labels such as Dunhill and Lucky Strike allows the business to effectively raise prices to mitigate the effect of declining packet sales, just like Imperial Tobacco which counts West and Davidoff amongst its key brands. Meanwhile Diageo can rely on the likes of its Johnnie Walker whiskey and Guinness stout labels to drive revenues skywards.
Legislators upping the ante
However, legislators around the world are ramping up activity to boost their pro-health agendas, a trend which could have a devastating effect on sales across the tobacco and beverage sectors looking ahead.
The British Parliament is due to vote this month on whether to introduce plain packaging in the country, measures which would follow moves made by Australia in 2012 and which are being mooted in other markets. British American Tobacco has already threatened legal action should UK members vote to pass the bill.
Diageo is also facing a raft of other adverse legislative moves, from the establishment of minimum alcohol prices in Ireland through to discussions concerning a ban on drink sales on UK trains. Of course these measures are fairly modest versus the crippling laws facing the tobacco industry, but represent the creeping progress of legislators on curbing the profitability of drinks and cigarette producers.
Developing markets set to drive demand
Still, the jaw-dropping sales potential in emerging markets should still power revenues higher in the coming years. Not only are legislative pressures in these regions not as pertinent as those seen in the West, but a backcloth of rising personal disposable incomes and population levels is driving demand for luxury consumer goods through the roof.
As I have mentioned, shoppers have felt the pinch during the past year on the back of wider macroeconomic problems, and this has been a particular problem in new territories. But Diageos investment in Indias United Spirits and Chinas Shui Jing Fang shows the confidence the company has in future alcohol demand from Asia.
And in recent days British American Tobacco announced plans to purchase the near-25% stake it doesnt already hold in Brazils largest cigarette manufacturer, Souza Cruz, for 2.3bn. Latin America is the home to the vast majority of the worlds smokers, making the region a happy hunting ground for the industrys major players.
But whether or not you fancy stashing the cash in the firms mentioned above, I strongly recommend you check out this brand new and exclusive report that highlights a hatful of blue-chip beauties poised to turbocharge your dividend income.
Our “5 Dividend Winners To Retire On” wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report — it’s 100% free and comes with no further obligation.
Do NOT buy this stock
Theres lots of opportunity out there in todays market but theres also PLENTY of danger.
In anticipation of Champion Shares PROs brief opening to new membership a few short weeks from now, the analyst team behind the Motley Fools most exclusive service has agreed to share 1 stock they believe YOU would do best to avoid.
PRO research is rarely made available to the general public. To find out the name of this “don’t buy” company — and to claim your 100% FREE copy of Steer Clear Stocks right away — simply click here.