At Forager, we invest in businesses that we like and that we believe hold the potential for long-term returns. If you’ve listened to our podcast, it’s clear we’re pretty big whisky fans too – which leads to an interesting question: do we think whisky itself is a worthwhile investment? That’s something Steve and Gareth discuss in February’s Stocks Neat. In their opinion, whisky (at least in Australia) isn’t something they’d rush out to buy – and there are three key reasons as to why.
The Australian industry is young
The whisky industry is a multi-billion-dollar market that’s expected to grow over the coming years. In a world that has an abundant supply of almost everything, niche and genuinely unique brands can be immensely valuable. If you own a 300-year-old Scottish distillery, you’re likely just a few Instagram ads away from immense riches.
In places like Tasmania, distillers have produced a range of award-winning drops worthy of the world stage. But the local industry is very young. This means there’s not only less variety among Australian whiskies but less irreplicable history too, which suggests that Australian spirits (at least for now) lack the same value seen in more established regions.
“Kudos to Bill Lark for what he’s built. He’s done a very good job and basically created this industry in Australia,” says Gareth, reflecting on the country’s major distillers. “But it’s only really been a couple of big personalities that have driven the whole industry, rather than many generations of art.”
Long lead times hurt the case for investment
“I’ve always liked beer as a business but hated wine,” Gareth says. “And whisky is probably worse than wine.”
Whisky companies hold the potential for higher margins. But to even be considered whisky in many countries, spirits need to sit in barrels for a minimum of two years before being sold – and that’s without accounting for the rest of the production process, which includes malting, mashing, fermenting and distilling in addition to the ageing process itself. While whisky maturation – the time spirits spend in barrels interacting with flavourful compounds – is often a key selling point for distillers, it also means an investor’s capital is tied up for years, sometimes decades, before they make their profit margin.
People often only think about profit margin, but Gareth says investors need to think about more than that: “How much profit will I make on each dollar of sale? How long will I tie up my assets to generate that sale? And how much leverage do I use to juice returns?” When applied to Australian whisky, it’s the ‘how long’ that’s a problem – especially compared to beer, which has a shorter turnaround.
“With whisky, you get your margin but you’re tying up your assets – or those working assets, at least – for a long time. So you need to make a really high margin there,” Gareth says. That, he adds, or a distiller may need to consider lots of leverage. Beer is a different story, though. “A good beer business might make 4%–5% margins. It doesn’t sound like a lot, but beer also ferments in just a few months,” he continues. “So on all your important equipment, you make that ‘margin’ four to six times per year, which means you might end up with an attractive 20% return on equity without using any leverage.”
Excise tax remains an obstacle to pricing
So, what might prospective buyers need to see before investing in a distilling company? For Gareth, that’s much higher margins.
“I think some of these little distilleries that are 300 years old in Scotland probably do get that kind of return on equity – 30%, something like that,” he says. Turning to Lark Distilling Co as an example, he notes: “I think Lark could get there one day but I, personally, think the gap in the market is for a really nice $100 bottle. I don’t think they’re addressing that and it’s an opportunity.”
A major obstacle in the path of Australia’s growing distilling industry, however, is the country’s high taxes on spirits (known as excise tax), which have had an impact on whisky prices. In fact, at one stage, Australia had some of the highest alcohol tax rates among wealthy countries. Depending on alcohol concentration, for example, a standard 700mL bottle could attract roughly $30 in tax. Unfortunately, while distillers have rallied for an easier taxation environment, it still remains an ongoing barrier for businesses – and, for Steve and Gareth, a barrier for investment.
Want to know what we are investing in?
Stay up to date by tuning into Stocks Neat – the podcast talking sips and stocks, with nothing watered down. Each month, join Steve Johnson and Gareth Brown for a drink as they discuss share markets and taste-test some of whisky’s finest. You can also stay in the know by reading our investment reports for the Forager Australian Shares Fund and International Shares Fund.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.