High inflation has made life more difficult for most of the world – but some people still smoke expensive cigarettes and take shots of fancy tequila.
From British American Tobacco to gin maker Diageo in Tancray, cigarette and liquor companies are citing strong demand for high-end products that people can’t seem to be shaken by when they announced results this week. Far from buying cheaper alcohol and tobacco, shoppers are starting to trade.
“In difficult times, I think people just want that little moment of celebration, you know, to relax with family and friends with colleagues,” Diageo Chief Financial Officer Lavanya Chandrashkar told Reuters.
This trend is contributing to a pattern of affluent consumers spending large amounts of money on luxury goods in the wake of the COVID-19 pandemic. The shutdowns pushed up average bank balances and benchmark stock markets boosted the investment portfolios of the wealthy.
Diageo, the world’s largest maker of spirits, on Thursday beat full-year sales expectations, buoyed by demand for “premium” brands such as Don Giulio Tequila, Johnny Walker Blue Label and Paulette Bourbon. Don Julio bottles start around 40 pounds ($49) on Amazon and run into the hundreds, as do many Johnnie Walker Blue Label special editions.
Food and personal goods companies such as Procter & Gamble and Kraft Heinz have seen increased competition from lower-cost private brands as consumers retreat in the face of a cost-of-living crisis.
However, people who smoke cigarettes, buy luxury products, and drink alcohol tend to remain loyal to their brands even if they are expensive.
“There is a fundamental difference in how consumers think of something like baked beans versus a cocktail when you celebrate a special occasion,” Chandrashkar said.
She said Diageo does not face much competition from supermarket-owned brands, highlighting the United States where the private label accounts for less than 2% of the spirits market.
Stick to their brands
Alcohol consumption increased worldwide during the pandemic as people stuck at home had limited options for recreation.
Many are now trying to drink less, but better, said Tineke Frikkee, fund manager at BAT and investor in Diageo’s Waverton Investment Management. But the cost-of-living crisis and rising energy bills this winter mean trading may not continue.
“As consumer budgets are under pressure, we may see some decline, so we’ll still buy a bottle of spirits, but maybe the next price level will be lower,” Fricke said.
AB InBev, the world’s largest brewer and maker of Stella Artois and Budweiser, on Thursday reported higher-than-expected earnings, with the help of several brewers who switched to premium beers.
Since the start of the Russo-Ukrainian War, US sales of premium spirits have risen nearly 3% to $3.76 billion, according to NielsenIQ. Globally, sales of fine wines, champagne and spirits are expected to rise about 6% to $155.2 billion in 2022, according to Euromonitor.
Meanwhile, sales of premium tobacco products — cigars, cigars and smoked tobacco — are expected to rise 7.5% to more than $95 billion, according to Euromonitor.
British American Tobacco CEO said in an interview that British American Tobacco has raised prices more than its competitors in some categories and is investing more in its Newport and American Spirit brands. He highlighted the growth in the organic American spirit group BAT.
Price increases and luxury brands helped BAT beat revenue and margin expectations in the first half on Wednesday.
“Consumers hang on a lot with their (cigarettes) brands and that is why we haven’t seen a drop. We are seeing a premium growing in a lot of places,” Bowles said.
Aside from alcohol and tobacco, Thursday’s earnings continued the trading pattern of wealthy consumers.
Stellantis said strong pricing strength and sales of higher-margin vehicles including electric vehicles helped it achieve its highest profit forecast in the first half, despite rising energy and raw materials costs and a shortage of semiconductors.
While production problems hampered Volkswagen’s mass market business, premium brands boosted the automaker’s finances, with Audi seeing a 51% jump in operating profit and Porsche rising 22%.