Are Alcoholic Beverages Withstanding Recession and Inflation?

Growing concerns about the threat of an impending recession have led to questions about whether beer and spirits consumption will be resilient in the event of an economic downturn. Moreover, do these companies have pricing power in the face of rising inflation?

According to analysis by Goldman Sachs, US beer and spirits volumes have shown little correlation with economic growth. The general trend in per capita consumption of alcoholic beverages seems to have a greater impact on volumes than on the economy. In times of economic weakness, however, consumers tend to drink at home where it is cheaper than at a bar or restaurant and opt for more affordable products.

For developed economies like the United States, purchases of alcoholic beverages have become a smaller part of overall spending as households have become wealthier. This drop in the percentage of alcohol expenditure is similar to that of food expenditure. Beer and spirits are considered affordable luxuries or even staples in the United States and other mature economies. The focus is primarily on the United States, as it is the world’s largest profit driver for beer and spirits. However, demand in emerging markets is more discretionary and impacted by economic growth. Also, the weak local currency can affect the affordability of imported alcoholic beverages.

The pricing power of liquor producers was less than overall pricing during the high inflation of the 1970s and early 1980s. Detailed prices for spirits are not available during this period, but manufacturers beer rose in price slightly more than alcoholic beverages.

More recent data shows that beer price inflation is very similar to overall consumer price inflation (CPI) up to the latest inflation spike. The relative low price of beer and industry consolidation probably provide the advantage to raise prices. According to Goldman Sachs, the top three brewers now control more than 70% of the beer market. Brewers are also likely to come under more pressure to raise prices to defend their profit margins, as their production costs have risen sharply. Spirits production is much less concentrated, with the top six distillers holding just over 50% of the market. Additionally, distillers focused on upselling to customers rather than outright price increases.

Three other themes are essential to consider within the alcoholic beverage industry. First, consumers of distilled spirits tend to be more affluent than consumers of beer, so an economic decline should have less of an effect on consumption. But relatively more spirits are consumed away from home, and consumption in bars and restaurants tends to suffer as households tighten their belts during tough times. Goldman Sachs notes that 25% of spirits compared to 19% of beer are consumed outside the home.

Second, premiumization has been a significant trend in the alcoholic beverage industry, with consumers purchasing more expensive products. While beer and spirits have benefited from the trend, distillers have been more innovative with new flavors and products. Additionally, since spirits have a wider price range, distillers can benefit more from premium priced offerings. Premiumisation is one reason why spirits inflation has lagged headline inflation as producers have focused on the economic outcome of a more profitable product line rather than overall price increases . In times of economic weakness, consumers would likely trade lower on the spirits and beer margin.

Finally, according to Cowen, distilled spirits have gained as a percentage of the overall alcohol market in the United States since the early 2000s and recently reached a share of 41.5%. Beer has been the big loser in this spirits boom. Premiumization, cocktail culture, health and wellness (drinking less but more creatively), and innovation are driving the age-old spirits trend that has been going on for some time. Brewers used seltzer water to stimulate growth. Spirits makers have expanded into ready-to-drink (RTD) cocktails as another avenue for growth. An economic downturn could interrupt this trend, as some consumers have historically moved beyond trading cheaper alcohol and shifting to drinking more beer because it carries a lower cost per serving.

In conclusion, consumption of alcoholic beverages should be resilient even in a future economic downturn. Beer and spirits are affordable luxuries and represent a small enough share of total spending that the volume is not likely to decline significantly. While brewers and distillers would likely experience earnings pressures from a less favorable product mix due to declining markets during the economic turmoil, the decline in earnings is expected to be moderate compared to most companies. . The industry, in general, is attractive because brands have significant value and profit margins are generally significantly higher than those of the S&P 500.

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