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Woolworths invests further in home-brand beer

Supermarket behemoth Woolworths (ASX: WOW) is leaving no stone unturned in its quest to keep the profit growth rolling in.

Just four days after receiving the all clear from the Australian Competition & Consumer Commission (ACCC) to buy milk directly from farmers, Woolies has also upped its investment in the Western Australian-based Gage Road Breweries (ASX: GRB). Gage Roads undertook a $7.4 million capital raising in which Woolies participated, thereby retaining its 25.25% interest in the contract brewer. Currently, Gage Roads brews around 1 million cartons per year for the supermarket giant under the Woolies-owned brand Sail & Anchor.

With Fosters, Little Creatures, Lion Nathan and numerous wineries all disappearing from the stock exchange over the past decade, there are certainly fewer options for investors wishing to participate in the growth of the alcohol industry. Treasury Wine Estates (ASX: TWE), which was spun off from Fosters and owns wine brands including Seppelt and Wynns, is one of the few remaining ways investors can get direct exposure to the industry. Investors in Treasury Wine have enjoyed a superb return, with the stock up 72% compared with a 4% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) since the spin-off and listing in 2011.

Meanwhile Coca-Cola Amatil (ASX: CCL) has been positioning itself to capture an increasing share of the alcohol market. This has involved negotiating distribution rights for spirits including Canadian Club, Maker’s Mark and Jim Beam and for beers including Heineken, SAB Miller and Asahi. More importantly, Coca-Cola Amatil is actively preparing to re-enter the brewing market in 2014, which could have wide ranging implications for competitors.

Foolish takeaway

The business of beer is primarily a volume game. This means the breweries with the best distribution sell the most volume. However, there is also the nostalgia and importantly taste which are critical to success. Whether Woolies can convince consumers it can provide these key ingredients to its brew remains to be seen.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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