Beer, Wine, & Spirits Retailers
Date November 2018
Approximate net recovery on cost
- The ongoing U.S./China trade tariffs will raise prices for consumers of alcoholic beverages
- The industry is expected to benefit from continued reductions in both alcohol retail regulations and excise taxes
- As of 2018, the youngest millennials have reached the legal drinking age in the United States; based on data from the Collage Group, millennials drink more liquor than their predecessors did at the same age
Tariffs hit the industry: In late September 2018, tariffs, which have been rolling out over the past year across various industries on a wide variety of products, went into effect for the alcoholic beverage industry. After the United States implemented additional trade sanctions on $200 billion worth of Chinese goods, Beijing responded with retaliatory tariffs on $60 billion of imported U.S. products, which included a 10-percent tariff on beer, wine, and spirits. As reported by Global Trade, “Tariffs rarely benefit anyone and the alcohol industry, along with Americans who enjoy a glass of their favorite beer, wine, or spirit, is no exception,” said Jackson Shedelbower, communications director of the restaurant trade association American Beverage Institute. “U.S.-imposed trade penalties are an extra tax on American businesses and consumers, while retaliatory tariffs instituted by foreign governments cripple expansion into foreign markets.” This round of tariffs follows those imposed by the U.S. government on imported steel and aluminum in early 2018.
In addition to the Chinese tariff on alcohol products, the metals tariffs also negatively impact many U.S. industries including domestic beer producers that fill and sell approximately 36 billion aluminum cans and bottles (also called bottlecans) annually. To the extent that retailers can pass along these additional costs to the end consumer, their product gross margins could remain consistent. For those companies that depend heavily on products or raw materials sourced from China, how much of a price increase the consumer can (or will) tolerate before seeking alternatives or limiting purchases remains to be seen.
Craft breweries versus industry giants: 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 United States, small-scale breweries have become popular with consumers due to their local color, variety of style offerings, and quality ingredients. Based on a 2017 survey by the Collage Group, younger consumers (21-39) are not only drinking at a higher penetration rate, they prefer beer more than consumers over 40. The industry’s international reputation has also expanded in response to the growing reputation of small-scale U.S. brewers abroad. According to the Brewers Association, which represents approximately 4,000 small and independent craft brewers in the United States, its members’ share of the market has slowly increased over the last five years. However, despite the apparent domination of the market by microbreweries and craft breweries, beer giants such as Anheuser-Busch still control the market. According to Forbes, Anheuser-Busch alone constitutes 46 percent of the beer industry’s U.S. sales.
While the outlook remains generally good for craft and microbreweries, 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.
State regulation and excise taxes decreasing: Over the past five years, states have generally moved toward relaxing liquor sales regulations to increase state revenue via high liquor taxes. Excise taxes on distilled spirits consist of federal and state taxes levied on distilled spirits. Excise taxes on wine represent federal and state taxes levied on wine by volume; on beer they represent the sum of the federal and median state tax per gallon. Excise taxes on distilled spirits, wine, and beer have gradually fallen over time, including in 2018, which could reduce pricing to the consumer.
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. For example, a voter-approved overhaul of Oklahoma liquor laws became effective October 1, 2018. Under the constitutional amendment known as State Question 792, liquor stores are permitted to sell cold beer; high-point beer and wine can be sold in liquor stores, convenience stores, and other retailers. Other states such as Pennsylvania have relaxed long-standing restrictions to permit liquor sales on Sundays. Pennsylvania expanded its state-owned hour restrictions in 2016; additionally, as of January 2018, residents can legally participate in beer-of-the-month clubs that ship beer directly to homes. Although online liquor sales are banned in some states, various exemptions have gradually been introduced. As of October 2018, Oklahoma became the 45th state to permit vintners to ship wine directly to consumers as part of State Question 792, which allows wineries to legally ship up to six nine-liter cases per consumer, per year. As wine becomes increasingly popular to purchase online, retailers are quickly expanding their platform to include online sales. In the event of a liquidation of liquor inventory, it is critical to understand when, in what areas, and under what thresholds sales are legally permitted.
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. The balance of states permit Sunday sales of distilled spirit 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 and Federal Bureau of Alcohol, Tobacco, Firearms, and Explosives 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.