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Is the alcohol industry "recession proof"?

With so many industries feeling the negative impact of the economic downtown, how does the alcohol industry compare?

Historically and anecdotally, in bad economic times people do not decrease their alcohol consumption and in fact there may be an increase among some consumers. While customers may not be eating and drinking as frequently in on-premise establishments such as bars and restaurants, off-premise consumption of alcohol does not seem to be impacted as much. Changes that occur in drinking cycles are attributed to a change in the consumption of a consumer, not that there are fewer or more consumers who begin or stop drinking. Most research shows that any decreases in consumption occur among heavy drinkers, with "light" drinkers typically increasing alcohol consumption. ("Does Drinking Decrease in Bad Times", National Bureau of Economic Research, 2001).

Growth and decline of the market

Though other segments of the business industry have seen sharp declines, the alcohol industry appears to be adapting well to the current economy. The off-premise locations seem to be less impacted by the economy than the on premise locations which have reported "significant declines", but the industry in general is faring far better than other business sectors.

Off premise vs. On-premise

A recent report from the Neilsen Company (June 2008) indicates that the economy appears to be having only a "mild impact" on consumer alcohol purchases. Nearly half of consumer respondents to the survey stated that the economy has had no influence on the amount they spend on beer, wine and liquor. On premise sales have declined 2.2 percent, but on premise sales have increased by nearly three percent.

"Although consumers have less money to spend due to rising gas prices and other economic pressures, our research shows the economic slowdown is having only a modest impact on alcoholic beverage purchases," said Danny Brager, vice president, Client Service, Beverage Alcohol, The Nielsen Company. "Alcoholic beverages are withstanding the economic slowdown very well, compared to other categories that might be considered indulgent or non-necessities. To many consumers, alcoholic beverages are an affordable luxury."

Beer

Beer is the most widely consumed alcoholic beverage, accounting for more than half of the alcoholic beverage market. According to the Beer Institute, more than 16 million barrels of domestic beer were sold in the United States in July 2008, and annual sales through that month were up 1.4 percent, the largest increase since 1990 which is the last time the economy was headed toward a recession.

Economist Donald Freeman's 1998 "Beer and the Business Cycle" report indicates throughout recent history spanning from the 1950’s to the late 1990’s that the economy has had little impact on the beer market. Convenience store sales of "below premium" beers, which are one quarter of the beer market, saw a 3.3% increase in sales in 2008. So called "budget beer" sales saw an almost 5% increase in sales for 2008. Even though the price of beer has increased at least 7% because of higher grain and production and delivery costs, consumers are still drinking beer.

Wine

The wine market has seen tremendous growth over the past decade and despite the current economy, the growth in the core wine drinking population has seen unprecedented growth. According to John Gillespie, president of the Wine Market Council, wine consumption has increased for the past 15 years. Although the increase in wine sales of 1.5% was lower than the projected 2% in 2008, Gillespie said the growth was still higher than in 1991, the most recent year of recession. In total, wine sales increased by 6.8% last year, despite tailing off slightly towards the end of the year, according to Neilsen. Constellation Brands Inc., the world's largest wine company, reported a 35 percent rise in wine sales in North America in the first quarter of 2008.

In a 2008 study by the Wine Market Council, 2/3 of respondents reported spending the same amount of money per bottle of wine and 43% stated they were still ordering the same amount of wine in restaurants. Since 2000, "core" wine drinker (those respondents who report drinking wine at least once a week) has increased by sixty percent. The report considers the greatest growth and the most optimistic outlook to be the "Millenials" who are ages 15 to 32. Gillespie described the "Millenials and Genrations Xrs" as "stunning growth in the core wine-drinking population." In 2008, almost half of the millennial segment reported a net increase in wine consumption of 23% which is double that of generation-Xers (compared to the decline of wine consumption in "Baby Boomers"). There is a "trade off" effect in place, according to Gillespie where more than 10 percent of wine drinkers, mostly "Generation Xrs", are increasing total wine consumption while decreasing their wine and spirits consumption. These factors provide a promising and positive outlook for the future of wine sales and consumption."

Consumers may not be purchasing as many high end bottles of wine, but they are purchasing as many or more bottles of less expensive wine. According to a New York Times article from December 2008, the average price of a bottle of wine sold in December 2008 at a large on line wine retailer was 17 percent below the average price of a bottle sold in December 2007 — but the number of bottles sold was 15 percent higher.

Liquor

While "white" liquor (vodka, gin, etc.) has enjoyed the most growth in the market, in 2008 "brown" liquors (whiskey, rum, bourbon) began to experience steady growth. Whiskey dollar sales have increased nearly $85 million in 2008, or 4.4%. In 2007’ whiskey sales saw only a 2.3% increase, making the increase in 2008 substantial (Neilsen, 2008).. Many states, including Pennsylvania, Michigan, and Ohio experienced record growth in liquor sales in 2008.

Although lower than the average annual growth rate of six percent, revenue reported by liquor suppliers rose 2.8 percent to $18.7 billion in 2008 (compared to 2007), according to the Distilled Spirits Council of the United States. Spirits accounted for 32.9 percent of revenue in the alcohol market in 2008. London-based liquor manufacturer Diageo expects to see growth of at least 8 to 9 percent annually in whiskey sales. Much of the demand still comes from Europe and the United States, where despite challenging economic times, consumers are not discouraged in their buying habits.

Even investment advisors indicate that "sin stocks" are "a safe bet as the economy slows" Diageo, AmBev and Anhuser-Busch stock prices continue to trade well above average price earnings (Kiplinger Personal Finance Magazine, February 2008

Conclusion

In short, people are still drinking; they are just making different choices in what they are drinking and where they are drinking it. So while the alcohol industry may not be "recession proof", it is proving to be "recession resistant", continuing to see growth patterns in consumption and the consumer base. As one beer distributor in California stated "Remember, a bad year for the beer industry means we're down 4 percent; a bad year for high-tech means losses of 30 percent."