Will Trump's Trade Policies Hurt Jack Daniel's Sales?

By Rich Duprey Markets Fool.com

President Donald Trump began carrying through on his tough talk on trade once he took office last month, and though it's argued his policies are being fashioned to give American workers a better deal, many others may be hurt by his actions.

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One of Trump's first actions after being inaugurated was to exit from the Trans-Pacific Partnership, a trade agreement with Pacific Rim nations, as well sign an executive order stating his intention to renegotiate the North American Free Trade Agreement with Mexico and Canada. While there are always problems with such multinational contracts -- despite their name, "free trade" is never really quite so laissez-faire as critics and proponents would have you believe -- there are worries that erecting isolationist trade barriers may do more harm to U.S. businesses than good.

For example, a surprising victim of a tougher trade posture could be the spirits industry, which enjoyed a banner year last year.

Image source: Brown-Forman.

Toasting continued growth

According to the Distilled Spirits Council of the U.S., American whiskey has never been more popular with sales of bourbon, Tennessee whiskey, and rye hitting $3.1 billion in 2016, a near 8% jump from the prior year, with volumes rising 6.8% to 21.8 million cases. Those gains were driven in large part by a surge in export volumes as American whiskey jumped more than 10% for the year.

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That growth is echoed in the results of distiller Brown-Forman (NYSE: BF-A)(NYSE: BF-B), which reported in December that fiscal 2017 second-quarter underlying net sales grew 5% year to date, with sales to developed countries up 2%, and emerging markets down 1%, though Mexico was up by "robust double-digit" rates of 18%. Notably, its Jack Daniel's Tennessee whiskey saw particularly strong growth south of the border as well as in Japan.

Japan's Beam Suntory also saw near 9% gains through last October, based on market analyst data from IRI, as brands like Knob Creek and Booker's rally.Although that would suggest Brown-Forman would have the most to lose in any clampdown on trade that might result in retaliatory actions, Beam's Jim Beam, Maker's Mark, and George Dickel brands are all made here in the U.S., in Tennessee and Kentucky, and they could suffer from any retaliatory trade actions, because although the distiller is foreign-owned, its whiskies are made in the U.S.A.

A trade spat could help other distillers gain market share at their expense. For example, in its own six-month financial report last month, London-based spirits distributorDiageo (NYSE: DEO) said organic net sales were up 4% on a 2% increase in volume, with sales to Mexico up 21% year over year, but that was largely driven by Scotch whisky and tequila.

Red, white, blue, and brown

Although DISCUS says other spirits are enjoying larger growth spurts than American whiskey, with cognac up 13% and Irish whiskey jumping almost 19%, they're much smaller segments, with sales totaling $1.5 billion and $795 million, respectively. The Council, though, says overall U.S. retail sales of distilled spirits hit $78 billion last year, and more importantly, represent some 1.4 million jobs in the hospitality and manufacturing sectors.

According to a study conducted by the Urban Studies Institute at the University of Louisville and the Kentucky Distillers' Association, the state's bourbon industry is responsible for $8.5 billion in total economic output -- up $1 billion from the last time the biennial survey was taken -- and between 15,000 and 17,500 jobs.A U.S. Chamber of Commerce study says Tennessee's whiskey exports account for 65% of all whiskey shipped out of the U.S. in 2015, and they have nearly doubled between 2005 and 2015, rising from $361 million to $691 million.

Image source: Kentucky Distiller's Association.

Brown-Forman has been using the popularity of brown spirits to drive further sales of brand extensions of its Jack Daniel's family of whiskey. Its honey-flavored Tennessee Honey brand was largely responsible for the 5% growth in underlying net sales the distiller saw in the U.S. and 2% growth overall.

Open markets can certainly have an impact as industries strive to meet the challenges of the new conditions, but actions have consequences, and while restrictionist trade policies might benefit one industry, they could have repercussions that severely damage another.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.