The scotch whiskey distilling industry is most likely in which stage of the industry life cycle? Further, what type of earnings multiple and payout ratio should be expected from firms in this industry?
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A. B. C. D. E. F.Explanation
The industry life cycle is divided into five distinct stages. Specifically, the industrial life cycle progresses from the development stage to an accelerating growth stage to a mature growth stage to a market maturation and stabilization stage. Finally, the fifth stage of the industrial life cycle is characterized by decelerating growth and sales decline. During the mature growth stage, sales are still growing, albeit slowly. During the last stage of the industrial life cycle, however, is characterizes by a decline in annual sales.
As an industry or company progresses through the industrial life cycle, sales begin to grow rapidly (accelerating growth) then slow considerably as the product or service begins to reach critical mass (mature growth). During the mature growth stage, the industry or company grows at a slower pace, until eventually growth begins to slow considerably (market maturity and stabilization) as the market for the industry or company's products becomes more completely defined. Finally, the industry will begin to decline, as it advances to the last stage in the industry life cycle.
The market for scotch whiskey is mature, and very defined. Companies who are in the scotch whiskey distilling industry should be expected to have slow to mediocre annual sales growth, and thus should warrant a lower earnings multiple. In this same light, firms in the scotch whiskey industry are likely to have inferior investment opportunities, holding everything else equal. So said, shareholders of these firms will likely require high dividend payments to compensate for the slow anticipated earnings growth.