Beer, Wine, & Liquor Retail Trends
Date October 2017
Approximate net recovery on cost
- U.S. retail sales for food and beverage stores increased 2.2% in the first nine months of 2017 over 2016
- Millennials are the largest generation in the U.S., and the youngest consumers within that group will all be of legal drinking age within the next eight years
- Through 2022, revenue is forecasted to increase at an annualized rate of 1.4%
Alternative Packaging Growing: Alternative packaging, such as cans, boxes, and pouches, is on the rise. For wines, glass continues to dominate the container segment, accounting for about 85 percent of the global total in 2015; however, this market share is declining.
Glass bottles are heavy and more expensive to ship than alternative packaging formats. Also, most of the still wine produced around the world is consumed not long after it is made, meaning that while many consumers might prefer bottles, they are not always necessary. Because of these factors, alternatives, including bag-in-box containers, aseptic cartons, plastic bottles, and cans are increasing in popularity.
“Premiumization” Driving Spirits Growth: Spirits are categorized by price (i.e. value, premium, high-end premium, and super-premium prices) or by style. Consumers have experienced increasing disposable income since 2011, and as a result, many have sought out costlier spirits brands that are perceived as being of higher quality. The trend toward premiumization, a drinking phenomenon in which major distillers have introduced pricier ‘luxury’ brands alongside their traditional offerings, has enabled distilleries to charge higher prices while maintaining virtually the same costs to create these brands.
The increasing popularity of lesser known whiskey styles, such as rye and wheat whiskey, have proven extremely popular for consumers and mixologists alike, both of whom have experimented with new forms of cocktails in recent years. Small whiskey distilleries are proliferating rapidly across the country. Although the U.S. economy has largely benefited the sales of the industry’s most dominant companies and most popular brands, emerging craft spirits companies have expanded in regions never before associated with whiskey production.
Whiskey’s growing popularity has benefited the U.S. market but has also established the market as a major global presence. Consumer preference for higher-quality products has remained a key basis of competition for many reputable brands, and this is especially important for the international market for whiskey. Domestic producers and foreign producers alike benefit from premiumization, since foreign markets provide a significant marketing opportunity for their upper-tier brands.
Domestic production of vodka is not enough to support all U.S. demand, and many consumers have demonstrated strong brand loyalty for international brands such as Belvedere and Grey Goose. Foreign distilleries have historically provided U.S. consumers with a significant portion of their high-end vodka products, although increasing premiumization among the industry’s most popular domestic brands has given vodka distilleries an additional competitive tool in recent years.
Microbreweries Continue to Gather Momentum: Brewers and the beer industry have benefited from consumers increasingly opting for the growing variety of craft-style beers made from local microbreweries. Unlike traditional breweries that have bottling operations in facilities throughout the U.S., small-scale breweries have become popular with consumers due to their local color, variety of style offerings, and quality ingredients. The industry’s international reputation has also expanded over the past five years in response to the growing reputation of small-scale U.S. brewers abroad.
While the outlook remains generally good, concerns surround the long-term growth prospects of the industry’s most prominent international brewers. Faced with moderate interest in traditional premium light beer brands, such as Bud Light and Miller Lite, Anheuser-Busch InBev and MillerCoors have looked toward mergers and acquisitions as an alternative method to increase market dominance. In late 2016, AB InBev acquired SABMiller for $104.0 billion, as both companies recognized the limited growth opportunities that U.S. consumers present for major beer manufacturers.
As the market for specialty beers becomes saturated with microbreweries throughout the country, industry revenue is projected to gradually plateau over the next five years. Merger and acquisition activity may intensify among microbreweries and major international breweries alike, resulting in much slower, yet still high, employment and establishment growth over the five-year period.
State Regulation Decreasing: Several states, most notably Washington, are relaxing their liquor sales regulations to increase state revenue via high liquor taxes. Over the past five years, some states have responded to budgetary issues by lifting the monopoly power of state-run liquor stores and permitting grocery stores, convenience stores, and gas stations to sell beer, wine or liquor.
Industry Regulation Determines Sale Parameters: Disposition sale events within the alcohol industry are subject to federal, state, and local government regulations. “Blue laws” in 12 states still prohibit retail sales of distilled spirits for part or all of the day on Sunday. Currently, 38 states permit Sunday sales of distilled spirits products. Most states are also license or “open” states, which allow private ownership of liquor stores; however, in control states, the state government acts as a distributor. Additionally, some control states also operate retail outlets. Regulations can differ significantly from state to state. Seventeen states and jurisdictions in Alaska, Maryland, Minnesota, and South Dakota are control states, and the state government controls the distribution channel. Individual state laws specify what types of retailers may sell alcohol, limit days and hours of operation, restrict types of alcohol sold at particular venues, and may also limit the levels of discounting permitted on certain products. Many states prohibit interstate sales of alcohol. The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) and Federal Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) regulate interstate commerce for alcohol, collect excise taxes, issue licenses, and establish marketing standards. Excise taxes on alcohol generate millions in revenue for state and federal governments, and can represent more than half of the retail price of a bottle of liquor. While collection is primarily the job of distributors, tax rates affect liquor store pricing and profits.
In addition to state restrictions and limitations on distribution, competitors’ impact on sales volume in a given market can have a material impact on sales in the liquor industry. External competition from supermarkets, gas stations, and grocery stores has increased in the past few years. Large warehouse stores with greater market power, such as Costco, are securing favorable supply contracts, allowing these retailers to lower alcohol prices and increase competition for industry operators. Online retail in the beer industry is also expanding through online retailers such as Drizzly, Minibar, and Amazon. External competition is expected to continue to grow over the coming years.
For asset-based lenders looking to lend on liquor assets, partnering with an appraiser that has national experience liquidating alcohol and related products is a key consideration. It is important to note that all appraisals conducted on liquor assets assume all necessary retailer permits and licenses are in place and valid. Gross recovery would be significantly impacted if proper permitting were not in place.