Are Alcoholic Beverages Recession And Inflation Resistant?
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Growing concerns about the threat of an impending recession have led to questions about whether beer and spirits consumption would be resilient during an economic downturn. Further, do these companies have pricing power in the face of rising inflation?

According to an analysis by Goldman Sachs, beer and spirits volumes in the U.S. have shown little correlation with economic growth. The general trend of per capita consumption of alcoholic beverages seems to have a more significant impact on volumes than the economy. During economic weakness, though, consumers tend to drink at home where it is cheaper versus at a bar or a restaurant and trade down to more affordable products.

For developed economies like the U.S., alcoholic beverage purchases have become a smaller part of overall spending as households have become wealthier. This decline in the percentage of outlays for alcohol is similar to looking at food spending. Beer and spirits are considered affordable luxuries or even staples in the U.S. and other mature economies. The primary focus is on the U.S. because it is the most significant profit driver in the world for beer and spirits. Still, demand in emerging markets is more discretionary and impacted by economic growth. In addition, weakness in the local currency can affect the affordability of imported alcoholic beverages.

Pricing power for alcoholic beverage producers lagged overall pricing in the high inflation 1970s and early 1980s. Detailed pricing for spirits isn’t available during this period, but beer manufacturers raised prices slightly more than alcoholic beverages.

More recent data shows beer price inflation very similar to overall consumer prices (CPI) until the most recent spike in inflation. Beer’s low relative price point and industry consolidation probably provide the edge in raising prices. According to Goldman Sachs, the top three brewers now control more than 70% of the beer market. Brewers are also likely under more pressure to raise prices to defend profit margins since their costs of production have risen sharply. Spirits production is much less concentrated, with the top six distillers slightly above 50% of the market. In addition, distillers have focused on upselling customers rather than outright price increases.

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

Second, premiumization has been a significant trend in the alcoholic beverage industry, with consumers trading up for more expensive products. While beer and spirits have benefitted from the trend, distillers have been more innovative with new flavors and products. In addition, because spirits have a wider range of pricing, distillers can benefit more from premium-priced offerings. Premiumization is one explanation for why spirits inflation lagged overall inflation since the producers focused on the economic outcome of a more profitable product mix rather than blanket price increases. During economic weakness, consumers would likely trade down on the margin within both spirits and beer.

Lastly, according to Cowen, distilled spirits have been gaining as a percentage of the overall U.S. alcohol market since the early 2000s and recently reached a 41.5% share. Beer has been the primary loser in this ascendency of spirits. Premiumization, cocktail culture, health and wellness (drinking less but more creatively), and innovation reinforce the secular trend toward spirits continuing for some time. Brewers have used hard seltzer to drive growth. Spirits makers have expanded into ready-to-drink (RTD) cocktails as another growth path. An economic downturn could interrupt this trend as some consumers have historically gone beyond trading down to cheaper liquor and moved to more beer consumption since it carries a lower cost per serving.

In conclusion, alcoholic beverage consumption should be resilient even during a future economic recession. Beer and spirits are an affordable luxury and are a small enough portion of total spending so that volume is not likely to decline significantly. While brewers and distillers would likely see some earnings pressures due to a less favorable product mix from the trading down during economic turmoil, the earnings declines should be moderate relative to most companies. The industry, in general, is attractive as the brands carry significant value and profit margins are typically significantly higher than the S&P 500.

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