Cocktails and Commodities

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People are looking for, I want a margarita in a can, I want a Cosmo in a can. Enough with the self-serve, which I don't know what that really is. But now I can get that convenience of a cocktail, but it goes down like a seltzer. That has taken off.

Welcome to the Barron's Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Anne Mukherjee. She's the CEO of Pernod Ricard in North America. Jackson, when you say Pernod Ricard, I mean, it's not Pernod Ricard, right?

I just pronounce every letter that's in there. Pernod.

I think with French, you leave the last letter off for like every other word. Is that the rule?

I think sometimes it's 3 letters. E-A-U-X. Like, come on.

Ann is talking about ready-to-drink cocktails. You can buy them in cans, you can buy them in bottles, you pour them over ice and you drink them. There's no shaking, there's no stirring, there's no fraction work involved. Ready-to-drink is the fastest growing category in booze, and it might even be denting demand for hard seltzer. More on that in a moment, plus the outlook for stocks, bonds, commodities, cryptos, and more from a top Wall Street strategist. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

This is a special holiday episode of the podcast. Tell folks what we mean by holiday episode.

Uh, extra festive?

I mean, that's part of it, yeah.

Is that where you're off for the holidays? So you give me a couple of interesting phone calls you had recently and tell me to pass them off as if you're doing the episode, but really I'm doing the episode.

I mean, mostly extra festive though. I think you had it best the first time. Yes. And about those phone calls, later we'll hear from Darrell Cronk. He's the Chief Investment Officer for Wealth and Investment Management at Wells Fargo. And he'll talk to us about what we should all do with our money in 2022. He's fairly bullish. And for now, let's hear from and Mukherjee, who runs North American operations for Pinot Ricard. I want to tell you a few things for background. Jackson, what are you drinking these days?

Sparkling water.

No alcohol?

Well, like, it's half vodka, but—

I read that the young people are doing—

they do Dry January, right? I'm a little worried because we're doing this alcohol episode just ahead of Dry January. I don't want to— I don't want to sound like I'm not taking Dry January seriously.

I've never heard of Dry January, but—

Then I think we're okay. Now, Pernod Ricard is a French spirits distributor whose brands include Absolut Vodka and Jameson Irish whiskey and Beefeater gin and Malibu rum. And it competes against a UK giant called Diageo. It owns Johnnie Walker and Captain Morgan and Kettle One. And then there's Italy's Campari Group. It owns Campari, of course, along with Skyy and Wild Turkey. And there's Beam Suntory. That's a subsidiary of Japan's Suntory Holdings that owns Jim Beam and Maker's Mark. And of course, there's America's Brown-Forman, which owns Jack Daniel's. Spirits have been outperforming other alcohol categories lately, and the fastest-growing part of spirits is ready-to-drink cocktails. It more than doubled in the U.S. in 2021, and for some companies it's growing even faster. I'm not talking about those big lousy bottles of overly sweet no-name mixers you might have seen where you add your own alcohol. I'm talking about cocktails where the mixing is already done. There's a brand called Cutwater that I've had at my local golf course. They have a vodka mule that has vodka and ginger beer and bitters and lime., and it comes in a soda can. That brand was bought 2 years ago by Anheuser-Busch InBev, the parent company of Budweiser. Lately, premium spirits brands have been launching or buying their own ready-to-drink cocktails. For example, last year Beam Suntory bought a brand called On The Rocks, and now you can buy ready-to-drink margaritas featuring Beam's Hornitos Tequila and Mai Tais made with its Cruzan Rum. And Old Fashioneds with its Knob Creek bourbon. Jackson, have you tried a ready-to-drink cocktail yet?

Uh, not yet.

I'm not a big cocktail drinker, but this past summer I noticed something called Skinny Girl Margarita in the pantry, and I thought, okay, there's a mixer and I have a little bit of tequila on hand, I can put those together. And, um, I said, wow, this is really strong. I didn't put that much tequila in. It turns out it was a ready-to-drink cocktail that had tequila, and I was going double tequila, I skinny-girled myself right into an early bedtime. So let's be careful out there.

Is that ice clinking around I'm hearing?

It's a little field research. My wife picked up a bottle of that on the rocks for the holidays.

Is that the Mai Tai or the Old Fashioned?

This one's the Old Fashioned.

Oh no.

I had the Mai Tai last night.

Now, we've talked on this podcast about how demand for hard seltzer soared in 2020 and about how major beer brands piled into the category in 2021. Sales growth appear to have stalled during the second half of 2021. White Claw, the top brand, posted sales declines at one point. Boston Beer, the company that owns the number 2 hard seltzer brand, Truly, destroyed millions of cases when sales fell short of projections. Boston Beer shares were recently down 50% in 2021, but Pernod Ricard shares trading in France were up 34%. Shares of the big spirits makers have been trading at elevated valuations. Many are expected to post brisk earnings growth in the years ahead, especially if ready-to-drink cocktails continue to pick up where hard seltzers left off. So now let's hear from Anne, and Jackson, you take over after that, and I'll talk to you in the new year. What do you say?

Catch you in 2022, Jack.

Hey there, guys.

Hi, Anne. It's Jack Howell from Barron's. How are you? Good, Jack. How are you? I'm doing well, thanks. Give us the State of the Union in drinking. What are people drinking? What are they drinking more of? What are they drinking less of? What are you seeing out there?

First and foremost, the spirits category in the marketplace is just— we're seeing 2x the growth than historical numbers. So there's a lot of activity going on. A lot of it is coming from the fact that people are shifting from beer and wine more to spirits, more to ready-to-drink. But the real growth is coming because of premiumization. People are buying stuff, but they're buying the more expensive stuff. So you see a lot of value growth in the marketplace. And so we're seeing both volume and value go up, and it's been really healthy for the industry.

Premiumization. Okay, you make more money, people buy pricier spirits, but then the spirits industry has a long reputation of being a consumer staple, you know, something people don't want to do without even when, you know, the recession hits. Does it change anything if people are buying pricier spirits? Does it still have that consumer staple quality as people go up in the, you know, the prices they're willing to pay?

Yeah, I mean, what we've seen in the pandemic was that because people weren't going out to bars and restaurants, they were stocking up at home.

I don't know what you mean.

Go on.

Exactly. What? And the other thing that we saw was people had a lot of disposable income because they weren't going to restaurants, they weren't traveling, right? So they have money to spend. So they're like, okay, let's try, you know, some of the more pricier things. Like, I used to get a $25 glass of cognac in the restaurant. Now I can buy a $100 bottle and I get 10 servings. Okay, let me try it out. Part of it is it's turning into a habit 'Cause once you taste the good stuff, you don't wanna go back.

What are the best performers in your portfolio right now? I have your brands here on another screen. What are the brands where the people in charge of those are, you know, they're walking tall these days?

So first, let's talk about the fact that whiskeys in general are on fire. Jameson, which is our largest brand, double-digit growth. People love Irish whiskey, but people are also loving American whiskey. I'm seeing triple-digit growth in some of my American whiskey businesses. We've got Jefferson's Ocean, you know, we've got Rabbit Hole. The other one that's doing great for us is cognac. Our Martell business is up double-digit. And then finally tequila is up for everybody, everybody, the whole segment's up 180%. So our tequila businesses are doing really great with Avion and Alto.

So it's kind of a good time. You know, everybody's talking about inflation. What does inflation mean in your business and how are you managing it right now?

Yeah, listen, it's interesting because what is the inflation driven by? First, you know, it is driven by demand. People are wanting more. But whether it be labor costs, whether it be dry goods, whether it be wet goods, whether it be transportation and logistics costs, you know, trying to find containers to come over the ocean or, you know, trucks here in the United States, we're seeing it across the board and it's putting massive pressure on our costs. And as a result, we're having to price to cover the cost. And every time we do, we're not missing a beat. Consumers are willing to pay more to get what they love. And so, so far it's, you know, there's been a good balance between supply and demand.

So you're not, you're not running into shortages or anything like that?

We at Pernod Ricard, we've worked, I would say, miraculously with a lot of agility to keep those shelves stocked. And whether it's you know, some really smart people 5 years ago who laid down enough liquid that would give us advantage 5 years later, to really agile ways of working across our system. You know, if one port is not available, we'll go find a second port, right? We work with our distributors to figure out, you know, in-country logistics. So this is a time where you have to be massively agile with your business system and, you know, think outside the box.

What about all these people drinking that seltzer, you know, the cucumber elderberry It was a huge business, and I guess— I don't know if the volume is still there, or there are just so many participants now that some of the participants seem to be struggling with it. But is there any of that seltzer that took a bite out of your business, or where do you think that that seltzer business is heading?

So when we first saw the seltzer business, it was taking a lot more out of beer, and it's really because of the alcohol levels, which were lower, and it allowed young consumers— millennials, right? To what we call session drinking. They can drink sessionally throughout the day. Now, unfortunately, that saw rapid growth in the pandemic. Over the last 6 months or so, that growth has really slowed down. I think one of the big reasons is if you take a look at hard seltzers, the flavor, the taste is just not there. Where we've seen a lot of that shift is into spirit-based ready to drink. This is about a 25 million case business right now on the spirit side. It's grown 200%.

Into next year, if the world reopens and people are going out more and they're hitting more restaurants and hitting more bars, if you had this big boom with people buying more spirits for home, do you hang on to that business and you pick up some more restaurant business? Does it shift from one side to the other? How's it look to you, you know, next year, assuming a reopened sort of more normal economy?

So I think we're creating a new habit coming out of the pandemic where people still, you know, call it Monday through Thursday, they're now beginning to enjoy stuff at home. But now because they wanna get out, they've been vaccinated, they're going to those restaurants, right? And expecting more because now they know how to make stuff at home. They want even a better experience in the restaurant.

I ordered a piña colada at a restaurant the other night and they brought it in a pineapple.

Like it was like way over the top of the cherry. It was a whole huge thing. So you're not talking about those kind of, cocktails.

You're talking about simple classic cocktails.

Simple. But millennials, back to your point, they want experiences. So they want that pineapple piña colada with the cold ice with the smoke coming out. Like, they'll pay $50 for that, right? So, you know, it's, it's everything from, like I said, convenience all the way to premiumization. And we're seeing that even at restaurants.

I wasn't too embarrassed to drink it.

I drank— I did drink the whole thing.

Good for you.

For the record. And by the way, do you have a favorite cocktail? And as a follow-up to that, what is the cocktail— if I go out into, let's say, a dinner with some maybe business people, what should I order to really impress people and show them how cool I am? It's too late for me, but if there's someone out there for whom it's not too late, what should they order to really sound like they know what they're doing when they're ordering a cocktail?

Well, listen, it is never too late. Okay. Second, You know, it's a little bit like when you go to Starbucks, right? I'll have the half-caf latte, hot, cold, no foam, whatever. It's about, do you know how to order your drink? Are you sophisticated, right? I'll give you one of mine. This is my favorite cocktail to order, especially on a Friday night. I like a very ice-cold, extremely dirty Absolute Martini, and I only take blue cheese olives. I don't do anything else. I really know my vodka when I, and I know the restaurant knows vodka when I say, okay, I want Absolut, but do you have Elix, which is small batch Absolut, incredible texture. So look, you wanna impress people, take the brand that you love, understand what makes it so great. And when you make that order, the people at the table's like, wow, they really know their stuff. That's all that matters.

Thanks so much for taking that time to speak with me.

Thank you.

It was fun.

Hey Jack, so do I just go ahead and take it from here? Okay then, I'll have that 2022 market outlook on stocks, bonds, commodities, and cryptocurrencies after the break.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data. So you have the right ingredients to help you shine. Morningstar, where data speaks.

Welcome back. A lot of Street firms have, you know, $4,400, $4,500 as target prices for this time next year. Ours is $5,200.

That's Darrell Cronk. He's the Chief Investment Officer for Wells Fargo Wealth and Investment Management. When Darrell says a lot of firms have target prices of 4,400, he's talking 2022 price targets for the S&P 500. That index is made up of the biggest US stocks, and it's around 4,800 now. So a price target of 4,400 is an expected decline of just over 8%. Darrell's 5,200 price target represents an expected gain of over 8%. Jack sat down with Darrell to talk about why he still liked stocks in 2022, even though the other firms think valuations valuations are currently frothy. They also chatted about bonds, commodities, and cryptocurrencies. I'll bring the highlights from those topics soon, but let's turn back to stocks. Darrell thinks they'll be buoyed by earnings and dividend growth, but we might not have the 20-plus point gains we've seen in 2020 and 2021.

It'll be a solid year. It'll be above trend average, we think. It won't be, again, the 20% annualized you've enjoyed for the past 3 years running. And frankly, shouldn't be because if it was, you'd have to expand multiples from what everybody would agree are on a historical basis pretty lofty levels.

That's my next question. What if the return next year is 28.4% total return on the S&P 500?

Do you start then to get worried that, "Hey, wait a second.

This is looking a little bit like a melt-up type of bubbly situation or getting ahead of itself." What would you start to think if we saw that kind of return next year?

I think I would have to start thinking that, to be frank, because at a 28-30% return, you would push, you know, price earnings multiples up probably around 25-26 unless you just got unbelievable earnings growth. The one thing I'd remind you, though, is the last 6 quarters in a row, we have beaten earnings at the end of the quarter by double digits of what the consensus expectation was walking into the quarter. That has never happened in history.

Let's turn to bonds now. We've spoken on this podcast about how bond yields stink. There just isn't much income in fixed income anymore. Still, Darrell says it's not a good idea to abandon bonds.

Don't forsake fixed income, right? You can't take it out of your portfolio. To your good point, it's a ballast in the portfolio and it needs to be there for important reasons.

One way investors might approach bonds in a low-yield environment is to look for types of bonds with higher yields, trading in low-yielding government bonds for riskier corporate junk bonds, for example, or buying bonds that take longer to mature. Darrell says reaching for yield is a bad idea.

So what people have tended to do is, you know, significantly extend their maturities, right, to get a higher yield or go down the credit quality spectrum into more junkier stuff. And that works as long as, you know, kind of the music's playing. But when the music stops and you have to find a chair, you're taking risks that you may not be thinking you're taking or as aware that you're taking as you are.

Also on Darrell's radar are commodities, which have had a disappointing decade as an asset class. Darrell thinks industrial metals, precious metals, energy, and agricultural commodities have been undersupplied for years and could be at the cusp of what he calls a supercycle.

If you go back and study commodities over any long period of time, they have what they call super bear and super bull periods of time where they move in almost a decade-long cycle. We think you're right on the cusp of starting a new super bull in commodities. I would say if you are concerned about higher inflation or sustained higher inflation, commodities tend to be one of the best performing assets in that type of environment. So you should have a full allocation. I would say a full allocation, at least in our books, is probably 10 to 15% of a portfolio. And I would take that allocation from the fixed income piece. As I said before, fixed income is challenged and you'll get a much better return in the commodity space.

We talked about real estate investment trusts, or REITs, on an episode a few weeks back. Darrell thinks REITs will be helped by attractive dividends and supply-demand dynamics, but that interest rate hikes could leave investors with more options to park their money, and that could be bad for REITs. He prefers REITs that specialize in single-family homes. Finally, Jack asked Darryl about cryptocurrency. We've done a few podcast episodes on crypto, and normally this is the part of the interview when the chief investment officer says something like, crypto is interesting, but don't get too carried away. Darryl said it was a viable asset class.

It has very low correlations with other assets. We don't have a lot of historical evidence here because we haven't been in high inflation regimes. Regimes, but it's proving to be a little bit of a high inflation ballast, I guess, in many cases. Our opinion, and take it as such, because everybody's got an opinion on this, is I think digital assets, and more importantly, distributed ledger, which is what cryptocurrencies and digital assets are built off of, is a game changer. It's like the iPhone in 2007. It's that transformational, and it will be over the next decade. Without the iPhone in 2007, we would have never spun off a whole myriad of industries, sectors, businesses, and I truly think digital assets will do that over time. So, I think you have to have some exposure there in your portfolio. I think it's probably in the neighborhood of 5%, 7%, 8%. I wouldn't go crazy, but we do like it, and we think it adds not only diversification benefits with the low correlation, it adds a little bit of an inflation hedge, and we think the growth potential is there for it as well.

Thank you for listening. Streetwise is hosted by Jack Hou and produced by Jackson Cantrell. I hear he does good work. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you get your podcasts. And if you listen on Spotify, you can now rate us there. If you listen on Apple and you haven't yet written a review, we'd love to hear from you. If you want to find out about new stories and new podcast episodes, you can follow Jack on Twitter @jackhou. That's H-O-U-G-H. And if you have any questions, concerns, or complaints, you can email me at jackson.cantrell@dowjones.com. See you next week.

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