Peter Cressy: "It's been a Heck of a Year"

FILED FEBRUARY 1, 2010

Dear Client:

“It’s been a heck of a year, heck of a decade for spirits,” Discus chief Peter Cressy told analysts and reporters at the group’s annual briefing this morning. “It’s been a resilient year from my perspective,” he continued. Overall volumes for the spirits industry at the on- and off-premise grew 1.4%, while dollar sales were flat at $18.7 billion for 2009. The average growth of spirits volumes over the past decade was 2.6%, while the average growth of dollar sales was 5.2%.
In 2009, spirits market share versus beer and wine grew 0.5 points by volume to 30.2% and declined -0.2 points by revenue to 32.9%. Peter attributed the slower growth to a lack of consumer confidence, which caused consumers to trade down and trade over from the on-premise to the off-premise.

The off-premise was certainly more favorable for all alcohol categories, including spirits. Volumes of spirits grew 2.2% at the off-premise, which includes 75% of the industry, as Americans entertained more at home in 2009. That was offset by the on-premise sector—restaurants, bars, hotels and nightclubs—which continued to suffer with volumes declining -3%. New data from December suggests a 22 month high at the on-premise, “so there may be a bit of a turnaround,” said Peter.

VALUE BRANDS TAKE SHARE IN 2009. “This was obviously the year of value brands,” said Discus chief economist David Ozgo in his presentation. Not surprisingly, value brands have the largest share of volume, 40.6%, of the US spirits industry, followed by premiums (36.4%), high-end (16.5%) and super-premiums (6.5%). Meanwhile, premium brands have the largest share of revenue, 36.4%, followed by the high-end (26.7%), value (21.9%) and super-premium (15%).

Value brands grew strongly from 0.6% in 2008 to 5.5% in 2009. All other price categories saw declines last year, with the biggest drop coming from super-premium brands. Premium brands slowed from 3.7% in 2008 to 0.6% in 2009. The high-end saw declines from -0.6% in 2008 to -3.5% in 2009, and super-premiums slowed from +1.7% to -5.1%. High-end and super-premium brands lost 0.7 market share points by volume in 2009 to 23% of total US spirits volumes.

One of the main reasons value brands took share in 2009 is that consumers increasingly moved away from the on-premise, which is where high-end super-premium spirits have the largest presence. David pointed out that although “a lot of the companies did a very good job of shifting their marketing focus from the on-premise to the off-premise...it’s a difficult task to pull off in a year and a half time.” At the same time, spirits companies were able “to offer quality value products in a recession,” which helped their bottom line.

VODKA is the largest part of the spirits industry in the US, with 30% share of volume and 25% of revenue. As you might know, vodka saw trading down in 2009 with its high-end and super-premium brands suffering the most. Value brands volume grew 10.7% and dollar sales gained 6.7%. Premiums grew 5% in volume and 4% and sales. High-end brands, meanwhile, saw volumes decline -2.3% and sales fall -1.2%, while super-premium vodkas dropped -5.8% in volume and -1.9% in sales.

RUM volumes grew 1.2% and revenues gained 0.8%. Like vodka, value rum brands grew the most in volume, up 4.4% and sales, up 6.7%. Premiums grew 1.4% in volume and 1.6% in sales. High-end rums saws the biggest declines, with volume down -9.6% and sales declining -7.8%. Volumes of super-premium rums fell -1% in volume and -0.8% in sales. It’s interesting to note that the losses experienced by high-end and super-premium rums were “almost equal” to the growth by premium brands, said Discus.

TEQUILA value brands also saw “really fast growth,” said David, but that growth came off a small base. Overall tequila volumes grew 5.2% and dollar sales gained 3%. Value tequila brands grew 21% in volume and 20.1% in dollar sales. Premium brands grew 1.5% in volume and 1.3% in sales. High-end volumes declined -0.3% and sales fell -1%. Meanwhile, super-premium tequila actually gained 1% in volume and 1.3% in dollar sales. “Despite the fact that we’re going through a recession, we still saw growth in the super-premium category for tequila,” said David.

WHISKEY, which has dollar share of 28% and volume share of 25% of the US spirits industry, saw value brand growth in all its categories aside from blended Scotch. Volumes of the whiskey category (including blended whiskey, bourbon, Canadian, blended Scotch, single malt Scotch and Irish whiskey) fell -0.7%. Dollar sales declined -1.1%. In terms of volume, premium priced brands were flat, while high-end whiskeys fell -2.7% and super-premiums declined -5.3%. Volumes were boosted by Irish whiskey (up 10.2%), single malt Scotch (2.5%) and blended whiskey (3.4%). Dollar sales were also boosted by Irish whiskey (12.3%), single malt Scotch (4%) and blended whiskey (3.1%).

SHOULD SEE SLIGHT GROWTH IN 2010. Although Discus didn’t provide an outlook for 2010, they believe “there is light at the end of the tunnel. The question remains, how long is the tunnel?” In looking at past recessions since the 1970s, consumers historically trade-down when times are tough and then return to premiumization once they regain confidence. This typically results in premium spirits brands gaining share after a recession ends.

Peter thinks the spirits industry will see “some return to growth and I think we’re going to see a slight return to premiumization this year. I think 2010 will be a solid year for us but we don’t want to project that it’s going to be a great year. We might be surprised but I think it’s going to be a steady year...the industry was well positioned to handle a recession...we have a chance for some very solid growth towards the end of 2010.”

POLICY ISSUES AND TAX INCREASES. In his presentation, Peter supplied an overview of Discus’ initiatives to modernize alcohol laws across the country. Television advertising has opened up for the spirits industry, for example, while Sunday sales, tasting laws and other regulatory challenges have also been reformed. Peter said the industry remained committed to social responsibility, which helped increase “appreciation of moderate drinking” among consumers over the past decade.

State level taxes, however, remain a major concern and Discus plans to “fight like heck.” “I think this is the biggest challenge for the industry,” said Peter. “We want that on-premise trade to come back,” he said, but it won’t happen with bigger taxes. The hospitality industry “lost something north of 300,000 jobs in this recession...there’s not a town, not a village that hasn’t had a restaurant or on-premise place close.”

Peter noted that state budget deficits are breaking $180 billion, which means legislators will be looking for opportunities to raise taxes in 2010. “We are concerned. We see a threat for a nickel a drink tax in San Francisco. We think that would be terrible for that economy. It’s a tourist economy, hospitality economy,” he said. “We’re going to work very, very hard to convince public officials this is not the way to go...we’re getting a lot of grassroots support from retailers and wholesalers.”

“It’s a misnomer to tax the products like it’s going to cure a problem. It doesn’t,” Peter continued.

EXPORT GROWTH. Spirits have seen strong revenue export growth over the past decade, although exports were down -5.6% in 2009. The industry is projected to surpass $1 billion for the 3rd consecutive year in 2009. The most popular export categories are bourbon and Tennessee whiskey, while Canada and the UK have grown into the top two export markets.

WSD BRIEFS:

WA SENATOR ISSUES BILL TO HALT SPIRITS TAX INCREASE. State Senator Curtis King has introduced SB 6744 that would prevent the Washington State Legislature from forcing an increase in the markup on distilled spirits, according to Discus. Stay tuned...

KENTUCKY DISTILLERS ASSOCIATION has named Chris Morris, master distiller for Brown-Forman, as its chairman. He will serve through December 2010.

THE CHARMER SUNBELT GROUP has named Joseph Davolio evp, capability development. Greg Baird, the current evp of sales, was appointed evp, sales and marketing.


Until tomorrow, Megan

“The habit of giving only enhances the desire to give.”
Walt Whitman

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