Beer, Wine, & Spirits Retailers
Date February 2019
- Chinese trade tariffs will raise prices for consumers on some alcoholic beverages
- The industry is expected to benefit from continued reductions in both retail alcohol regulations and excise taxes
- Per capita expenditure on alcohol has increased over the past decade, and is expected to continue through 2025
Approximate net recovery on cost
Tariffs hit the industry: In late 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. Following the United States’ implementation of 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. Consequently, many industry groups expressed concern over the harm increased taxes may cause to American beverage manufacturers and fear over potential retaliatory actions.
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.
State regulation and taxes decreasing: Over the past five years, states have generally moved toward relaxing liquor sales regulations in an effort 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, 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 and high-point beer and wine can be sold in liquor stores, convenience stores, and other retailers. Other states such as Pennsylvania and Tennessee (for wine only) have relaxed long-standing restrictions to permit liquor sales on Sundays. Pennsylvania expanded its state-owned hour restrictions in 2016; additionally, as of 2018, residents could 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. Oklahoma also 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 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.