Equities

Bottoms up! Finding the advantage in the global beer value chain

December 04, 2024 - 3 min read

Golden fields of barley, almost ready to be harvested. Crisp golden ale, sold on draft, in bottles, and in cans. The beginning and the end of an industrial process. With almost 2 billion hectolitres produced globally every year, beer is big business. But as an investor, how do you know which part of this industry's global value chain you want to include in your portfolio?

From the agricultural suppliers all the way through to the brewers, the distributors, and the retailers, beer has many moving parts. A link that has a smaller share of the revenue could command the largest share of profits. To find out who captures the greatest value in any global value chain, our proprietary investment process uses an approach called Global Profit Pool Analysis. This analysis can help determine competitive rivalry within an industry, which ultimately provides us with insight into how an industry works, how it creates value, and, most importantly, who captures that value.

As an active manager with a long-term approach, we look to invest in high-quality businesses rather than trade stocks. Our investment process evaluates companies the same way they evaluate themselves—by seeking to understand competitors, regardless of size or region. You can't understand the business drivers of a US brewer without understanding those of its global competitors.

Company by company, product category by product category, what do we learn from this?

We learn that the player who captures the most profits is typically the one whose contribution is the most difficult to replicate. So, what does that mean in this global value chain? We believe the brewers are creating the most value in the beer industry. They are the most highly differentiated link in the chain, with global brand power, pricing and bargaining advantages, the highest barriers to entry, and the highest potential profit margins.

Then we look for growth—meaning durable cash flow growth—and attractive valuation, meaning buying these companies when they trade at significant discounts to their intrinsic value. Just as we approach the beer industry to find out who is capturing the most value, we apply the same rigorous research to sectors as diverse as oncology all the way to sportswear. This is because the qualities that make a business great are universal in nature, regardless of location, domicile, or market capitalisation.

Recorded in June, 2021

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