This Economy Appears to Turn Old Rules on Bev/Al Stability Upside Down
We warned you months ago that the economic squeeze being face by middle- and working-class American families would take a toll on the alcohol beverage industry as well as nearly every other consumer goods category. It's worse than we expected.
The old line that when times get tough, people keep drinking – and may drink even more. That's generally been true, even though it's also true that people trade down: The Knob Creek drinker, for instance, buys Jim Beam instead. They may spend less, but the quantity remains pretty steady.
Not in this economy, apparently. The latest data from Wine & Spirits Wholesalers of America's SipSource survey finds current 12-month rolling volume trends (October 2022-September 2023) down -3.5% for Spirits and -7.4% for Wine. Year-to-date (January 2023-September 2023) data shows Spirits down -5.1% and Wine down -8.4%.
To be sure, Premixed Cocktails, up 8.6% and Tequila/Agave Spirits, up +2.8%, remain growth areas for Spirits in the latest 12-month ending data. But remove the fast-growing Premixed Cocktails segment and the picture for Spirits is noticeably worse with 12-month trends of -5.2% and year-to-date dropping to -6.7%.
Interestingly, the growth profile for Tequila/Agave Spirits has reversed in the last year with products over $50.00 down -2.7% and those under $10.00 up +5.9%.
Why the gloomy trend? Understandably, SipSource analysts say, price inflation continues to take its toll on the consumers’ spending power, impacting Premiumization across all Spirits categories. Currently, Spirits over $25.00 are outperforming those under $25.00 by only 90 basis-points in trend compared to last year at this time, when the gap was 500 basis points.
But we think it's more than simply price inflation. Middle- and working-class workers continue to fall behind, with wages failing to keep up with inflation. That's one huge reason Donald Trump was elected president in 1986, and it's also a major reason why President Biden's poll numbers are so poor;
Indeed, the warning signs that tougher days are ahead are all around us. U.S. retail sales fell 0.1% in October from a month earlier, the Commerce Department reported Wednesday. Hiring has slowed, American downtowns are in distress as workers continued to work partially remotely.
The Commerce Depaertment's report showed sales declining at department, hardware and furniture stores. Christina Hennington, chief growth officer at Target, said “Consumers are feeling the weight of multiple economic pressures and discretionary retail has borne the brunt of this weight." She noted consumers are facing newly emerging headwinds, including higher interest rates and the return of student-loan payments.
To be sure, the Commerce Department reported sales and bars and restaurans advanced. But the advance was slower than in recent months.
On-premise has remained a growth segment for Spirits; consumers consistently choose Spirits as their primary beverage when out at a restaurant or bar. Spirits continue to be resilient in the on-premise with a growth rate of +4.4% compared to Wine which is down -2.2%. While not quite back to their pre-COVID level, Spirits continue to perform well in the on-premise channel.
Most segments of Wine continue to struggle, however Prosecco remains the darling of the Wine category up +3.9% in the 12-month ending data. Analysts expect to see this trend continue as the industry heads into the important holiday season. Growth on Prosecco is very balanced by channel with on-premise up +3.0% and off-premise up +4.1%.
We don't think it's just the economy that is retarding bev/al growth currently. The growth of no/low alcohol products. the trend of young drinkers to avoid alcohol or to reduce consumption, and the constant drumbeat of negative health news linked to alcohol are also major factors, we think.
As SipSource analysts noted the three most recent holiday seasons were "challenging." This, they said, provides the industry with softer comparative numbers from last year. Comparable trends from the last three months of 2022 are more friendly with Spirits at +0.7% and -5.5% for Wine. This should provide some tailwinds for the categories, and while SipSource analysts do not expect either to get back to positive trends, we do expect to see improvement, they said.
Footnote: WSWA announced SipSource will be updated and enhanced in 2024, including integration of NABCA data and addition of wholesaler data from Winebow, Horizon and Opici. SipSource will also provide new demographics, including age, gender (percent female), education levelof consumers, among other factors.
SipSource will also include six new wine regions.