Fewer People Crying in Their Beer

Spirits, Booze Marketers Say That Despite Wall Street's Axiom, They Are Not Recession-Proof

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Old-World Media Start to Feel the Pain

One of Wall Street's oft-repeated axioms is that alcohol and other vice companies are good investments when the economy gets shaky, as it appears to be now. The theory -- that people drink when times are good and bad, but for different reasons -- appeals to common sense, but it's wrong.

"It's a myth, and I'm not aware of any evidence to support it," said David Ozgo, chief economist for the Distilled Spirits Council of the United States. "We are not recession-proof, and when the economy slows down, it impacts us."

As the economy has been rocked by fears that a credit crunch will lead to a larger slowdown in consumer spending, both spirits and beer have seen their growth rates drop substantially from where they were a year ago.

Mr. Ozgo predicts that spirits growth likely will finish the year up about 2.7%, compared with 4.1% last year. The Beer Institute said beer sales will rise about 1.3% this year, compared with 2.2% during 2006.

Top shelf stocked
In both categories, pricey, high-end brands -- which tend to be bought by wealthier consumers -- continue to sell robustly. It's sales of the bottom- and mid-shelf brands consumed by the masses that have suffered.

Import beers, for instance, are expected to rise 5.6% this year, compared with 0.6% gains for domestics. Superpremium spirits will post double-digit gains this year, while cheaper bottles will collect dust on shelves. "We've seen weak growth in value brands, but what we haven't seen is mediocre growth in the premium categories," Mr. Ozgo said.

What's less clear is how the slowing growth will impact a share-of-stomach battle that has skewed toward spirits and wine in recent years, cutting beer's dominant market share to about 50% from 55% in 2000, as consumers flush with home equity traded brews for flashier, pricier cocktails.

Paul Varga, CEO of Jack Daniels and Southern Comfort distiller Brown-Forman, recently told Wall Street analysts he thinks the credit situation could lead some cocktail drinkers back to beer, particularly those who buy premium and subpremium brands.

Counter-intuitive
"It's kind of logical to assume that during the times we are looking at right now ... people might trade down into beer," he said. "It's a pretty narrow demographic and socioeconomic group that's providing [superpremium] volume. And they get pinched less by things like gas prices and a raise in the interest rate. So I think it makes sense that some of it could be going to beer."

But Diageo North America CEO Ivan Menezes offered analysts a more optimistic take, at least as far as his stable of premium-and-up brands such as Smirnoff, Johnnie Walker and Jose Cuervo is concerned. "If you segment the marketplace, what's under pressure is [product that sells] for under $10 a bottle. You go above $10, and that's 90% of our business," he said. "The pressure is really at the low end."
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