As moderate and declining spirit trends in the U.S. continue in 2023, what are some of the factors of the slowdown and what does that mean for the evolution of certain categories and major portfolios?
Many of the larger spirit players have echoed recent data reports showing a normalization of market trends following rocket growth during the pandemic. Twelve-month rolling data places total spirits sales down just over one percentage point, but numbers from the first six months of the year show even greater losses, with spirits dropping -4.2%, according to the Wine & Spirits Wholesalers of America (WSWA)’s SipSource mid-year report.
Now, the rate of consumption is expected to slow at rates exceeding prior forecasts due to economic uncertainty and inflation, and increased focus on “drinking less but better,” according to a recent IWSR report.
After quarterly earning calls from spirit groups, we’ve gathered analysts’ takes on some of the problems and bright spots to watch in the industry, including how at-home consumption will continue, tequila’s evolution, and obstacles for leading brands.
Home Bar Destocking
Market conditions for on-premise are expected to remain challenging, making it less expensive for consumers to eat and drink at home. The channel is yet to return to the levels of 2019 and, according to IWSR consumer research, 59% of alcohol consumers in the U.S. say they are going out less, voicing a strong preference for at-home consumption. Asked about the last time they drank alcohol, 62% of consumers referenced the home, versus 32% who mentioned the on-trade.
But while Nielsen numbers can track frequency of purchases, gathering data on how much consumers are drinking through their own inventories is tricky.
“What is the extent of the inventories that consumers themselves in their own cabinets at home have built, versus what historically has been the norm?” asked luxury portfolio manager Javier Gonzalez Lastra of Tema, an investment advisor and management firm.
The pandemic created a build up initially of home bars, meaning the destocking reported by spirit companies this quarter by retailers could translate to destocking at home too, said Gonzalez.
Whiskey Challenges for Pernod Ricard, Brown-Forman
For Pernod Ricard, which outlined low expectations for U.S. sales in its last earnings report, Gonzalez flagged the group’s flagship whiskey as a structural problem for the French spirits company.
“Beyond the destocking that they’re facing like everybody else, Jameson is no longer able to pull from the rest of the portfolio in terms of growth,” he said. “So I think it’s debatable whether Jameson is a double-digit growth brand at this stage – it is something more like high or mid, and even low single digits at some point in the future.”
That natural slowdown is expected with a larger brand, and sheds insight on the group’s recent focus behind other fast-growing craft names, such as Skrewball Whiskey or the Mexican spirits portfolio developed with Casa Lumbre.
“Unfortunately, that part of the portfolio— that is growing at double-digits—is not large enough yet to let’s say, pick up the slack,” he said.
At Brown-Forman, the president and CEO blamed flat net sales for ready-to-drink cocktails on the switch-out in markets where Coca-Cola is “taking the lead” with the new cola and whiskey cocktail launched this year. But Bonnie Herzog, managing director and senior consumer analyst at Goldman Sachs, has an eye on the partnership’s impact.
Brown-Forman leads on production, marketing and distribution in just three markets (U.S., Germany, and Australia) where Brown-Forman will enjoy the full benefits of ownership, according to a report from Herzog.
“However, KO [The Coca-Cola company] will lead the sale/distribution for Jack & Coke RTD in all other markets which means BF [Brown-Forman] will provide KO’s bottlers with bulk liquid whiskey and therefore lose the benefit of shipment volume, although this is a very high percentage margin biz for BF,” said the report.
Moving forward, with the new Jack & Coke RTD already in 11 markets and set to enter a further 30 by the end of 2024, Goldman Sachs anticipates some level of volatility to persist with regard to volume and topline as the Jack & Cola business continues to leave Brown-Forman’s books and Coca-Cola will lead in most of these markets.
The Tequila Evolution
One bright spot for another major spirits company in the U.S. was Diageo’s tequila portfolio. Tequila now accounts for about half of the company’s U.S. spirit growth, illustrating the category’s rise.
“They have had an overproportion to exposure to this growing segment and that’s been the right strategic decision,” Gonzalez said. “That’s been fantastic, and now we’re entering into this funny period where we’ll see how tequila as a category behaves.”
Other analysts are also speculating on the category, including whether the agave spirit is having a “Tito’s moment.” Once the now top-selling vodka entered the market in the late 90s positioned as a premium, affordable brand, other luxury brands like Grey Goose and Kettle One started to plateau. With early signs of downtrading in tequila, investment banking company Jefferies Group indicated some lessons from vodka’s cycle might be relevant to tequila.
The report saw limited risk of downtrading towards the cheapest mixto tequilas at less than $20, but noted some early signs of risk of trade down from the luxury $40-50 price point to the premium $20-30, according to NielsenIQ. The downtrading could be due to the democratization of tequila: as category appeal is broadened, the incremental consumer may come in at a lower price point. Tequila also has room to grow in the flavored segment compared to vodka, meaning there’s room for volume or value share growth.
Overall, it’s still too soon to point to any tequila fatigue in America, concluded the report— and if the downtrading is indicative of a weaker macroeconomic environment, premium priced brands will likely bounce back.
Meanwhile, a structural tailwind for the category brightened some earnings conversations: the key input for tequila is falling in price. The decrease in agave prices in particular impacts groups like Campari that aren’t vertically integrated, Gonzalez said.
In comparison to Campari’s Espolon tequila, groups like Cuervo have more agave supply in-house and don’t feel the gross margin impact as much. That price fall will also benefit players like Diageo, but may be delayed as the group’s portfolio has a higher share of aged tequilas.
“This has really big implications for tequila players,” said Gonzalez.