Warnings of a looming economic crisis are causing jitters in many consumer markets, and the drinks industry is no exception.  Chris Losh assesses the mood among key players in the US, the UK and elsewhere.

There is no doubt what the big story is as we crawl into 2008, the economy. Bad news and doom-laden forecasts fill the press, the airwaves and blog sites as bean-counters warn us that we're heading for an almighty financial crisis.

The situation is worst in the US, where the whole 'toxic mortgages' affair has imploded in spectacular fashion. With current odds on a full-blown recession at around 50/50, there is understandable nervousness in the drinks industry that such a powerful market could be about to hit the buffers. 

"Reports I've heard suggest there's been a degree of downtrading, which you've not seen there in years - it's all been about upselling," says Alec Smith of International Wine and Spirit Record (IWSR). "The sub-prime thing in the US is a big deal. So much of economics is about confidence; the next six months will be crucial."

However, Constellation Brands, such a powerful force in its home market, is more positive. Beer and spirits are flat, it says, but recent industry data suggests that wine continues to grow. Moreover, it claims that there is no suggestion of downtrading. "We continue to see consumer trade-up trends and a shift towards higher-end wines, beers and spirits in the US," says a spokesman.

Doubtless this is reassuring for a company that invested some US$885m in buying Fortune Brands' premium wine portfolio at the end of 2007, but there are those who feel the full impact is yet to be felt.

"America is a worrying market right now," says Francois Walewski, export manager of Chilean winery Valdivieso. "People aren't downtrading yet, but they will. It's going to be tougher for the more expensive wines, like the Californians."

There is indeed a strong feeling, within the wine world at least, that there is inevitably going to be a certain amount of downtrading, from $20 bottles to $10. Viewed optimistically, with swap-selling, this will create new market opportunities. But might it also bring an end to the inexorable trend of trading up?

Nick Rose, Diageo's CFO, thinks not. The company is not revising its profit forecasts prior to its results in February, and he remains tentatively optimistic.

"The current view from the North American team is that the market is holding up and will continue to do so, partly because [the trend to premiumisation] is a very strong consumer trend right now, and things would, in their view, have to get very dire to reverse that," he says. "You might not buy your Mercedes, you might buy your Ford, you might not go to the Bahamas for your holiday, you might go somewhere else. But to stop drinking your Johnnie Walker Black Label, at least the historical evidence is, you have to feel pretty squeezed before you do that."

Affordable luxuries, in other words, are precisely that: affordable, but few are as sanguine in their assessment.

The US, of course, is not the only Western economy feeling the chill wind of market reality. The UK, too, is suffering, with similar factors at play: high energy and fuel prices, a plastic-addicted population, and an over-inflated housing market, based on 'pick a number' mortgages.

Despite these destabilising factors, the wider economic is not disasterous. But nor is there a great deal of optimism about the next six months, and big retailers such as Marks & Spencer and Tesco recorded gloomy January figures.

Dan Jago, beers, wines and spirits director for Tesco, is blunt in his assessment. "No-one is in any doubt that we're going to see a very tight and competitive market in 2008, and it's started off that way already," he says. "It won't be easy for suppliers, retailers or customers."

This might suggest that retail contracts will be tougher rather than more lenient. But this year drinks producers, it seems, are ready for a fight. "As the credit crunch bites, and oil prices rise, this might make it a bad time for Chile to raise its export prices, but rise they may," warns Michael Cox, director of Wines of Chile UK, who feels that the combination of rising costs and duties has pushed the industry to a tipping-point.

Constellation, which has also been hit by harvest issues in Australia, agrees.
"In the UK, the economics do not provide an opportunity to drive value back to the wine category. Prices must increase," a Constellation spokesman says. "The industry must take the opportunity not just to recapture lost margin from the incessant duty hits, but re-invest into consumer education in order to premiumise the category. We have an opportunity to build a premium category or risk reinforcing the reliance on price and promotion currently in the market."

The supermarkets, of course, are unlikely to want to lessen the promotional culture that has allowed them to gain their position of retail dominance, particularly at a time when consumers are looking for reasons to save money. And the apparent irreconcilability of these divergent viewpoints, coupled with a sluggish trading environment, should make for negotiations that are even more heated than usual.

Interestingly, while two such key markets as the UK and US are in trouble, there is optimism elsewhere. "Just because the US is in trouble doesn't mean the same is true for India and China," says Alec Smith, "and figures for Europe were positive for 2007.'"

Valdivieso's Walewski agrees. "The only problem with the non wine-producing countries in Europe is tax increases," he says. "But we've got round that by cutting down the business we do in the supermarkets."

So, doom and gloom for 2008? Probably not for those who have put the effort into creating brand equity. Operators selling largely on price, however, could be in for a bumpy 12 months.