The threat of a global trade war is casting a long shadow over the liquor industry, leaving industry giants like Brown-Forman and Diageo staring down the barrel of potentially devastating tariffs.
With former President Trump threatening a staggering 200% tariff on European wines, champagnes, and spirits in retaliation for the European Union’s proposed 50% tariff on American whiskey, the stakes are undeniably high.
The EU’s retaliatory move is a response to the US’s own tariffs on steel and aluminum, setting the stage for a complex and potentially damaging trade standoff.
Jack Daniel’s on the rocks?
Brown-Forman, the venerable producer of iconic American whiskeys like Jack Daniel’s and Woodford Reserve, stands to lose a significant chunk of its earnings if the EU’s tariffs materialize.
According to Yahoo Finance, Evercore analyst Robert Ottenstein estimates a potential $0.36 per share hit if the tariffs on whiskey go into effect.
The company derives approximately 20% of its sales from the EU and UK, split 80/20 between the two regions, making them particularly vulnerable.
But the challenges don’t stop there.
Tariffs of 25% applied by Mexico and Canada could further erode Brown-Forman’s bottom line, potentially impacting earnings per share by an additional $0.07.
These countries account for 7% and 1% of the company’s sales, respectively.
A Brown-Forman spokesperson told Yahoo Finance:
We are pleased that [European Union] President von der Leyen and Trade Commissioner Šefčovič expressed a desire to negotiate with the US and are hopeful the two sides will reach a constructive resolution before the tariffs take effect on April 1. The tariff conversation is bigger than Brown-Forman and our industry, and it’s evolving rapidly.
For Diageo, the maker of Johnny Walker scotch and other globally recognized brands, the trade war threat adds another layer of complexity to an already challenging landscape.
The company has been grappling with fundamental issues, and the prospect of escalating tariffs only exacerbates the situation.
According to Ottenstein’s estimates, scotch accounts for approximately 9% of Diageo’s US sales.
Furthermore, European-produced spirits like Ketel One vodka and Tanqueray gin represent an additional 5%.
For every 25% tariff imposed, the company stands to lose an estimated $0.04 per share.
A full-blown 200% tariff on European-made alcohol could wallop Diageo to the tune of $0.28 per share.
Similar to Brown-Forman, Diageo’s exposure extends beyond Europe.
Approximately 45% of the company’s US sales originate from Canada (primarily Crown Royal whisky) and Mexico (tequila).
Even with potential mitigation strategies like supply chain adjustments and price increases, Ottenstein anticipates a $0.04 per share hit to Diageo’s earnings.
Beyond the numbers: the intangible impacts of a trade war
Ottenstein’s analysis highlights factors beyond the direct application of tariffs that could further impact these liquor giants:
- Consumer boycotts: The potential for boycotts or the removal of non-domestic brands from shelves could create significant headwinds. Reports from Canada suggest a growing trend of consumers avoiding American-made alcohol.
- Fragile pricing: The “fragile” pricing environment in the spirits market could make it difficult for companies to offset the impact of tariffs through price increases.
- Competitive shifts: Beer, with its relative affordability, could gain market share as the prices of tariffed spirits and wines rise.
- Market sentiment turns sour: Investors Anticipate Tariff Pain
The financial markets have already begun to reflect the potential for severe tariff-related consequences.
According to Yahoo Finance data, shares of Brown-Forman and Diageo have declined by 21% and 17%, respectively, over the past three months.
This decline underscores the uncertainty and concern surrounding the potential impact of a trade war on these leading liquor producers.
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