Trevor Stirling: Campari & Aperol, The Not-So-Bitter Siblings

In the know with Bernstein Research Welcome to In the know with Bernstein Research. In this series we discuss investment controversies together with what is top of mind and in the news with Bernstein's research analysts. Our disclosures can be found at the end of this and every episode. I am Richard Moffert and today with me have Trevor Sterling, our top ranked European beverage analyst to discuss the latest trends in the space, before digging into what we see as one of the most interesting companies, Campari. Good afternoon Trevor. - Good afternoon Richard. - Right, alcohol. So there's many current theories to what's actually happening, the different drivers and the reason the demand is up and down. But why don't we start with your view on the space and in particular sort of get an idea of the direction and travel that we sort of see over the next 10 years. - Yeah well let's start off Richard I think what gets forgotten is in most emerging markets per capita ethanol consumption is slowly bit steadily going up. And in most emerging markets, it's in people are constrained, consumers are income constrained. They would love to drink more alcohol, they don't have enough money, when they do get more money they drink more alcohol. And that's something that's been there for decades probably and looks like it's going to continue to be there for decades to come. Where the debate is is around the developed markets and in particular in the United States. We've seen this huge surge in consumption of alcohol consumption during COVID and then a decline afterwards. And that the reasons behind that decline are where the debate is most intense at the moment. We think it's a mixture of structural and cyclical problems. So structural in that some young people definitely are drinking less alcohol, some people who go on to GLP ones do drink less alcohol. But it's also been around cyclical, those young people are drinking less alcohol that may be partly because they don't have as much money and they're living at home with their parents. And then there are the classic economic cyclicality. So consumer confidence in the US is at all time lows at the moment. So at least since we started measuring consumer confidence. And if we dig into the young, the health angle and young people sort of view on alcohol. And then you go down and log some history. You know, assuming society's perception alcohol has waxed and waned with various health trends over the last 100 years even. Is that any good comparisons we can make with today? Well, it's a good question. The obvious one that people start off with is tobacco. And if you think about attitude to tobacco, have changed dramatically over the last 30 to 40 years. But I think with tobacco, you know, there's a huge scientific consensus that any amount of tobacco consumption is bad for you and leads to cancer. And equally, so passive smokers are not particularly well liked in society. Whereas with alcohol, there is a huge debate raging about the safe limit to alcohol is the one is any alcohol consumption bad for you and not. But in general, the vast majority of people are drinking alcohol don't want to stop. They may wish to cut back a little bit, but they don't want to stop. And I think that's a complete contrast to virtually every smoker I know would be delighted if they could stop smoking. So I think there's a big difference in terms of societal attitudes to alcohol. And so those tobacco analogies are potentially misleading. And what about regulation? Because again, I mean, we have had prohibition in the US in the past and that obviously faded. What do you think the current in developed markets, this sort of regulatory political viewers towards alcohol? In the US, until very recently, the debate around alcohol in the US focused on drunk driving. And indeed, the most vocal lobby group in the US was an organization called MADD, Mothers Against Drunk Driving. And there was much less discussion around moderate consumption of alcohol, whether it was unhealthy for you or not. That's obviously changed in the last few years. You know, I'd say the intensity of the debate was strongest at the start of 2025 when the outgoing surgeon general from the Biden administration recommended putting warning labels on alcohol around any amount of alcohol consumption was bad for you. That then prompted a huge debate that sort of culminated in the latest guidelines, the US guidelines in terms of broad food consumption, but including alcohol. And I think this pendulum start to swing a little bit. I think there is keyly a universal recognition that drinking too much alcohol is bad for you. It's bad for your own health. It's bad for your income. It's bad for your family's income. And heaven knows if you get into a car, it's bad for the people you might run into in the car. But the, it's a very used example, the American Department of Health and Human Sciences when they were reaching the conclusions around those dietary guidelines, there were two reports. One was commissioned by the National Academy of Science, Engineering and Medicine. And that came out that said that if you look at cross all cause mortality, that there was, if anything, maybe a small net benefit to drinking alcohol, on the other side, there was another report from an organisation called the Interagency Coordinated Committee on the Prevention of Underage Drinking, which said that pointed out the health risks from drinking moderate amounts of alcohol. And in the end, Congress decided to go with the first report. And I think this is not continuing in the academic world about which of the approaches that were taken is the right one. But I think it's very clear is that moderate consumption of alcohol, the risk, if there is one, is small. And a famous British statistician, you may remember him, David Spielhalter, who was very influential the time of COVID, talked about, well, there's not a safe level of living. And every time you get in the car, there's a risk. And yet we're not talking about banning people getting cars or banning people living. So I think the debate is swinging away to, is there a small upside risk or downside risk associated with alcohol consumption and more of a focus on the unhealthy, clearly unhealthy patterns of consumption? And is that reflected in alcohol companies approach to marketing into their consumer? Because I mean, the tobacco industry, if you're a cynic, you know, they sail the right things and they launch vapes to supposedly help people get off cigarettes, but really they've just created themselves another set of dependencies and another industry quite effectively. I mean, the alcohol businesses sail the right things. When do you think actually it's commercially important for them to be positioning in a sort of healthy drinking environment? It's a bit of a work in progress, which is probably the best way to describe it, but it's been migrating for probably 20, 30 years. So I remember when I first started as a sales side analyst back then, SAP Miller was an independent company and it was led by a man called Graham Bekai. And he was very clear about what he called license to trade. He said, in the alcohol industry, we're selling a drug. We're selling a drug that's been used by humans for thousands of years, but we're selling a drug. And as I mentioned earlier, it's a drug that if misused can be very harmful. So if we want to continue selling the drug for people to use responsibly, we have to be squeaky clean on every other dimension and that includes the way you market your products. Now, you've gone to the days of scantily clad women in bikinis advertising beer. Thank heavens. We have seen the marketing of alcohol has moved quite dramatically in terms of it. But I think the industry is also saying, okay, well, how can we get on the right side of things? And in particular, the rise of non-alcoholic beer as an example of where the industry is moving and wants to move in a way that benefits everybody. You touched on that. Where do you see which spaces, which products do you see winning in this sort of future, who's going to be gaining share in the alcohol market? Well, I think if you're looking more broadly at categories, I think one area is around non-alcoholic and low alcoholic. And from the flavor profile, non-alcoholic beer is now very close to replicating the taste of full alcohol beer. And that's certainly not the case in spirits and in wine. I think there is an interesting area in spirits for around, you know, bitters, if you like. A modern equivalent of angastura bitters could probably work very well. But I think it's inherently much more difficult in spirits and in wine because the ethanol content is higher. So when you take out the ethanol to replicate the taste of the alcoholic liquid, it's just so much harder. But I think second area, more broadly, is let me call it the aparatification. So it's strengths that are fruity, fizzy, interesting flavors, refreshing. When you make them up, they're about 10% alcohol, between 5% and 10% alcohol. And whether that be a beer that has those characteristics or a beer-based strength that can cause those characteristics or a spritz of some variety or even gin and tonics and your dad's you was talking about, well, classic gin is 40% alcohol. But a lot of people are diluting their gin with non-alcoholic gin. So maybe should we have gin at 20% alcohol? And that's legally call something gin if it's only 20% alcohol. But I think that's the direction that spirits and spirits moving in as well. And with that, I mean, one company that you've identified as a clear future winner. Partially, there's an idiosyncratic nature of their business as Campari. Could you just give us sort of the ported history of the business and their products and where they sit in the space? So the business itself, the name Campari Company is based on the Campari brand. So the intensely read Italian Apparatif, which was invented in Milan quite a long time ago. But that company was pretty small until about 25 years ago they started on the acquisition trail. And one of the brands they bought was Apparel. Now they actually bought it from CNC, who is the Irish Cider Company. who owned this Italian business called Barbero and in there was Apparol. Now when they bought it, it was really only drunk in the Venetal region of Italy. Venice is the spiritual heartland of Apparol and slowly but steadily they took it national across Italy and then they took it into initially the German speaking countries where the first geographic exposure, geographic expansion axis and then more recently the developed world in general in the Indy speaking worlds but also into France and Italy. In parallel Camporia is a number of other brands and so they have a very significant tequila brand in the US called Espelon tequila. They clearly have the mother brand, they own rum, appleton estate that many people will have heard of and most recently they bought Cuviazea and let's get into Apparol. I suppose the strategy these early bright colored drinks, I mean is that an accident because they're very eye catching and is this part of the success? I think you have to say it yes because the brand is typically built from the on trade so people going into a bar and do you see somebody else drinking this weird orange stuff that you've never seen before and you say what is that and then you taste a little bit and you go actually that's not too bad and that's the way it builds its orange color is definitely part of the marketing. I suppose in theory an orange color is something that could be replicated but so far nobody succeeded in getting close and actually the process of making Apparol it takes weeks to actually extract the color and the herb essences. It's quite a difficult process and so I think it's a very difficult process to replicate so it's not just the color it's the flavor profile too and how fast does Apparol grown? It's been probably going at 20, 25% per annum for 20, 25 years. I mean I couldn't give you the exact number but it is a phenomenal process of steady growth and most brands have much more ebbs and flows than them with Apparol it's been slow steady for a very long but in fact not even slow rapid and steady for a very long time was just point to the sort of persistent appeal of this business and the brand. What about what's next then so how big could it get and where hasn't it conquered? But if you benchmark it and if you say Italian consumption is 100 then the UK is around 10. The German speaking countries so Switzerland, Germany, Austria are around 50 and the US is at 4. So you don't really have to believe that the average American is going to drink what Italian drink but if the American American even drinks the same amount of Apparol as the average Brit does we're looking at 150% growth for the brand. So I think the avenues suddenly for the next 5, 6, 7 years will be the UK, the US still there's plenty of room in France and Spain to expand and probably eventually emerging markets. I think that's considerably done the tracks. And emerging markets later just because the cost of the product. It's the cost yes. Well the other the other dimension is your apparel is based on cheap sparkling wine. So and in Europe and indeed the US you have that be that Prosecco in Italy or Cremel in France or Carver in Spain or Zecht in Germany and that culture of cheap sparkling wine isn't there in emerging markets. So in emerging markets the brand might have to be built through pre-packaged apparel, apparel spritz rather we would just have to see how that happens. Okay because that access to the mix just doesn't exist at the right price. If you don't have a base of cheap sparkling wine it's very hard to push an apparel spritz. And I mean you gave an anti-dead terms of penetration. So what are the other competitors I mean who would they be having to push out in the US for example to get that sort of growth. Yeah well they would say their biggest source of volume is actually from beer. But they're probably taking a little bit of volume away from gin and tonic. But when they look at the correlations and where they think they're sourcing their volume from a lot of it's coming out of the beer market. Now I think it's not exclusively beer but it's it's it's not so much that there isn't really another competitor that they're taking share from in that sense. So there isn't another spritz out there. There isn't the answers if they're taking from you know aparini or anything like that. And in your flip side is their biggest competitors are very fragmented as well. And at the moment it's mainly in the retail sector where you see grossers trying to copy apparel spritz with their own label equivalents. If you go to a bar there are very few people trying to push you anything other than apparel spritz. Maybe one or two there's another Italian lacura similar profile called select. So I think some bars are tried off with select spritz as an alternative to apparel but that's tiny. It really still is a category on it so. But presumably it could be like gin and tonic in that the growth of the spritz category. They might lose a bit of share in the spritz category but if the spritz category grows and they're the dominant player then I think you use the example of Hendrix gin that volume is it you know they've lost a bit of share in premium gin as gin is exploded but their market is it would they're one of the biggest beneficiaries of that gin tonic explosion. Now that's absolutely true Richard and if you take a look maybe in London or let's say other European countries you might see people offering limoncello spritzes. Now the average Italian thinks that's an aberration that shouldn't be permitted but limoncello spritz is being offered but interestingly it's a limoncello spritz it's not a branded spritz and actually for campari they would like to say well actually you should be thinking about campari spritz. So if you want something it's a bit more bitter and a little bit less sugary then campari spritz is definitely an alternative to apparel. So increasingly campari company are looking at the portfolio. So they have apparel spritz they have campari spritz they have a brand called crudino which is effectively a non-alcoholic spritz and they've recently launched a pink, let me call apparel aperitif type drink called saati Rossi which is a slightly different profile a little bit less spissier a little bit more emphasizing the fruit character and that's done very well for them in Germany. So I think they would say probably yes Richard they will lose some total share of total spritzes but as the spritz category grows that's good for everybody and the apparel and campari company can get the lion share of that growth and we talk about the management and just how they've positioned is this I just say I mean the historic growth of apparel points to something's going right but is that you know they landed on a lucky product or do you think there's a lot of design behind this rollout. Well campari had been run for well over 15 years by man called Bob Kunsok on civets and he undoubtedly was the architect of the current success of campari group. Now he wasn't there when they bought apparel spritz for he joined very shortly afterwards and I think he displayed a great talent for spotting these brands with potential, dusting them off finding the new the new angle but also very important making it replicable so that they could take apparel and make a success in multiple countries and take it if you like away from its hot its heartland. I give you another example is several decades ago they bought a Scotch brand sigamot Scotch brand called Glenn Grant and I Glenn Grant is probably not still not very well known but back then it was mainly sold as a three-year-old literally at just about at the minimum age at which you can sell sigamot whiskey and it was being sold mainly in Italy. Today recently at a charity auction in the autumn of last year they offered a Magnum bottle the 1.5 liter bottle of Glenn Grant I think it was a 60-year-old liquid and it went for over 250,000 pounds so that is premiumization in action not everybody's going to go and fork out 250,000 pounds on a bottle of Scotch but I think that shows you what they've done with Glenn Grant's. Appleton rum they've also done a very good job and also while Turkey bourbon is another brand where they've definitely bought it several, I think probably about 15 years ago now and generally just steady growth from while Turkey. Now it hasn't all been bed of roses because Bob Concircance of its step done about two years ago he was his replacement was an internal replacement that didn't really work out for them and they decided to part company very quickly within I think six to nine months of material being appointed he had resigned. The thing about Campari is there is one decision-making here. The chairman Luca Garafolio owns 53% of the shares 80% of the voting rights so he is the decision-maker and he obviously decided things weren't going so well and instead they brought on board Simon Hunt. Simon Hunt is an industry veteran he had been many years working at the Agio Perno Al-Ada Mech but probably most importantly he had about ten years as chief executive of William Grant again another family run spirit's business with a long tradition and they decided he was the right man I think they got it right second time round. Was he the guy behind? So Hendrix. Success has a thousand fathers don't they say that and we won't talk about failure but it's definitely Simon was instrumental in the growth of Hendrix too. I don't know exactly whether it was all Simon I doubt for the resorce Simon but Simon certainly was instrumental in the growth of that brand yes. And obviously I mean he talked to touch the shell structure there's a very clear alignment as well between majority of my knowledge shareholders I mean that is his key source of wealth as that it is, yes, absolutely. So he, the family over the years have taken the dividends from Campari and invested that in a property portfolio and other assets, but still he's share in Campari is by far the biggest source of the family wealth. And obviously the M&A strategy being very clear, what about innovation or do you think they just need to focus on existing brands that don't need to take many risks from here? Let's say that they've had so much opportunity with those brands they bought that they didn't really need much innovation. They are starting done that innovation route. And as I mentioned to you earlier this is brand Sartarossi, which has just been a fairly big success in Germany, which has not been ruled out to other countries. So I think you're probably arguing to see more innovation in that whole spritz category to see what can they come up with that would complement apparel and Campari. So I guess I think you're going to see more innovation. But your future world innovation is very hard and in alcohol. Not many people succeed. If you think about the properly innovative drinks like Bailies are few and far between where you actually create a new category or a new brand that's relatively unusual. More often you find something that's unloved and give it the love and turn it into success. You know you talked about the opportunity that comes from having a single shareholder but there is a potential risk there as well. And that is because the shareholder has at the moment five times voting rights. And over the course of the next four or five years that's going to go to ten times voting rights. They could in theory issue a lot of capital and still retain control and still push that through. So to some extent you are dependent on the judgment of Luca Garafolio and his chief executive about the deal so doing. So the M&A strategy has been broadly successful but that hasn't all been perfect. So any key missteps? The biggest misstep by far was buying Kuvazier. Kuvazier is one of the four big cognac brands globally. The other three being Hennessy Martella and René Maffem. All inside family control groups and highly unlikely that they're ever going to come to market. All I should have said as well. All inside family controlled French groups. So highly unlikely they'll come to market. And there was the opportunity that Suntory had decided that cognac wasn't the category for them and they were disposing of Kuvazier. Now I think it's a very interesting brand that an interested category in the long term but the US cognac market has been under severe pressure and they bought it as that pressure was starting and it got a lot worse after they bought it both in terms of the category dynamics and the competitive dynamics inside the US category with Hennessy discounting very heavily. So that has turned out to be a deal where they significantly overpaid. So there's a risk there about judgment. If I want to use analogy for a long time ABN Bev was an M&A machine and had done successful deal after successful deal and then they bought SAP Miller and it was a deal too far. Is Kuvazier a deal too far from which lessons have been learnt or is there risk of another Kuvazier? We're in the former camp rather than the latter but there's definitely a risk you bear. But also presumably that might have been the only time you could buy Kuvazier that was the price if they hadn't bought it someone else would. So yes so you said should they've walked away and kept the money kept the money in the back pockets or could have they bought it cheap later who knows. So hindsight's wonderful but that's definitely one has to say the most significant misstep. But if in 10 years time we'll sat Drink and Kuvazier is then. If in 10 years time they've turned the brand round you're absolutely right. And in terms of competition, longer term you know I think what do you see as the biggest threats to this business? It's hard to see a big threat in the short term. I mean there it's the growth of alternative split strengths is a bit of an irritant but it's not a serious threat. I said I struggled to imagine the day when Limoncello Spritz is as big as Apparel Spritz is let alone the fact that we've mentioned earlier the Limoncello's are not branded per se. And if we look over the last two five, ten years campari as a group has grown somewhere in the order of five percentage points faster than the other large spirits companies and that still remains the case today. The entire global spirits industry is suffering from the weakness of the US market from the pullback in China and campari continues to deliver low single digits revenue growth at a time that others are at 2 to 3% revenue declines. So on a relative basis I think it looks very attractive over this say over the medium term by that I mean so let's say a 2 to 5 year view it's very hard to see something that's going to take significant share away from them. And in particular they still have areas such as campari's mother brand the campari mother brand you really can't make a nighoni without campari. You can use any gin you like you can use any red for mousse you like you can't really use anything apart from campari if you want to make a nighoni that tastes anything like an agrony. When we look ten years out what do you see as an analog for campari's role in shaping the bio core consumption pattern. But I think but you're from me where could this company be in 10 years? As we touched on earlier I think the broader spritz category is in tune with where consumers are going and apparel is definitely the embodiment of that spritz category. Now it may not be the only element of the spritz category but I think it will continue to be the dominant element of the spritz category. So in a way maybe it's like the rise of sneakers 20 30 years ago it was inconceivable that a sport shoe could be a fashion item. And now we think dramatically differently about the world. Now in this case it was led by it could be two or three brands of Nike Adidas or Puma but you Nike still up there. And I think this is even more powerful because you really have one brand driving the category or be it probably over time it's going to broaden out and become complemented that I said earlier I think apparel still going to dominate this broader spritz category for a long time to come. And it fits that the paradox with the gin and tonic category right is this shift to quality. Yes it's there but I think the big difference is you know the bar call is gin and tonic though you may then specify which gin you want but the bar calls a gin and tonic. Here the bar call is an apparel spritz. So that's us running up on time Trevor thanks again for joining us. Well thank you very much for having me Richard. Normally I'd say cheers but maybe in this case I should say chin chin chin chin. You've been listening to In the Know with Burst Team Research. If you enjoyed the episode please don't forget to like or subscribe. In the Know with Burst Team Research. 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