Growing concerns about the threat of an impending recession have led to questions about whether beer and spirits consumption will be resilient during an economic downturn. Moreover, do these companies have pricing power in the face of rising inflation?
According to an analysis by Goldman Sachs, the volumes of beer and spirits in the United States showed little correlation with economic growth. The general trend of per capita consumption of alcoholic beverages appears to have a greater impact on volumes than on the economy. Despite this, during economic weakness, consumers tend to drink at home where it is cheaper than in a bar or restaurant and trade in more affordable products.
For advanced economies such as the United States, purchases of alcoholic beverages are becoming a smaller part of public spending as households become wealthier. This decrease in the percentage of spending on alcohol is like looking at spending on food. Beer and spirits are affordable luxuries or even staples in the United States and other mature economies. The primary focus is on the United States as the world’s most lucrative driver of beer and spirits. However, demand in emerging markets is more discretionary and influenced by economic growth. In addition, weakness in the local currency can affect the affordability of imported alcoholic beverages.
The pricing power of alcoholic beverage producers slipped from overall prices in the 1970s and early 1980s. Detailed pricing for spirits is not available during this period, but brewers have raised prices a little more than liquors.
The most recent data shows that beer price inflation is very similar to total consumer prices (CPI) until the most recent spike in inflation. It is likely that Beer’s relatively low price point and industry consolidation will provide an advantage in raising prices. According to Goldman Sachs, the three largest brewers now control more than 70% of the beer market. Brewers are also likely to come under more pressure to raise prices to defend profit margins as production costs rise sharply. Spirits production is much less concentrated, with the top six distillers having just over 50% of the market. Additionally, distilleries have focused on selling to customers rather than outright price increases.
Three other topics are essential for consideration in the alcoholic beverage industry. First, consumers of distilled spirits tend to be wealthier than consumers of beer, so economic decline should have less impact on consumption. But more spirits are consumed relatively far from home, and drinking in bars and restaurants tends to suffer as families tighten their belts in tough times. Goldman Sachs notes that 25% of spirits versus 19% of beer are consumed away from home.
Second, differentiation has been an important trend in the liquor industry, as consumers trade for more expensive products. While beer and spirits have benefited from this trend, distillers have been more innovative with new flavors and products. In addition, since spirits have a wide range of prices, distillers can benefit more from premium-priced offerings. Installment is one explanation for why the lag of souls in overall inflation is because producers have focused on the economic outcome of a more profitable mix of products rather than overall price increases. During economic weakness, consumers are more likely to trade on the sidelines in both spirits and beer.
Finally, according to Quinn, distilled spirits as a percentage of the total US alcohol market have gained ground since the early 2000s and recently reached a share of 41.5%. Beer was the main loser in this rise of spirits. Excellence, cocktail culture, health and wellness (drinking less but more creatively), and innovation are underpinning the secular trend toward lasting spirits for some time. Brewers used hard carbonated water to drive growth. Spirit makers have expanded into ready-to-drink (RTD) cocktails as another growth path. Economic downturn could interrupt this trend as some consumers have historically gone beyond trading to cheaper liquor and then switched to consuming more beer because it carries a lower cost per serving.
In conclusion, consumption of alcoholic beverages should be resilient even during future economic downturns. Beer and spirits are an affordable luxury and represent a small enough portion of total spending, so volume is not likely to drop dramatically. While brewers and distilleries are likely to see some earnings pressure due to less favorable product mixes from lower trading during economic turmoil, the declines in earnings should be moderate for most companies. The industry, in general, is attractive with brands holding significant value and significantly higher profit margins than the S&P 500.