US spirits boom could be short-lived
A recent report from investment bank, Merrill Lynch, attributes growth in the US spirits market largely to short-term fashion-driven trends and casts doubt on its long-term sustainability. Ben Cooper takes a look at the report asks if fads and fashions are part and parcel of the spirits business.
The idea, put forward in a report from investment bank, Merrill Lynch, that strong growth in the US spirits sector is based by and large on "cyclical" short-term changes in demand - fads in other words - is not necessarily that surprising. The spirits sector has after all always been subject to fashion. However, the idea also posited by Merrill Lynch that current growth rates are unsustainable is arguably more worrying.
"Consumers and retailers surveyed agreed that there has been a consumer preference shift in US society towards a so-called cocktail culture," the Merrill Lynch report states. "We question the sustainability of this 'fad', feeling it is possible that the extraordinary consumption growth the US spirits industry has enjoyed over the last four to five years could revert back to the industry mean, which in turn would put company growth assumptions at risk."
Along with the publication of its report - which included a survey of consumers and retailers conducted across eight cities - Merrill Lynch issued some relatively conservative though unchanged investment recommendations for European spirits companies operating in the US market.
One of the prime factors behind the current growth trend has been the switch consumers are making from beer to wine and spirits, and market analyst, Datamonitor, points out that if the growth in spirits is a relatively short-term cyclical shift, that could be good news for struggling US brewers.
What is clear, however, is that the US spirits market has grown strongly in recent years, and the consumer shift from beer to wine and spirits is also borne out by the statistics. The US spirits market grew by 14.2% in value terms between 1999 and 2004, against just 4.3% growth for beer.
The fact that spirits have performed so much better than beer suggests that favourable demographics - namely the growth in the 20-29 age bracket - are not the prime driver behind the spirits growth. Merrill Lynch suggests that while demographics have played a part in spirits growth, the impact of demographics should not be over-estimated.
"We do not argue with the suggestion that some of the growth in US spirits consumption is being driven by an increasing population and the growth of the 20-29 age group in particular," the report states. "What we would question is the size of the impact. Our analysis suggests that only around 27% of the spirits industry volume growth over the 1999-2004 period can be attributed to a growing adult population, leaving the majority of 73% to be explained by other factors." In Merrill Lynch's survey, fashion came out as the prime reason given for the growth in spirits, a considerable way ahead of demographic considerations. And it is concern over sustainability of these "other factors" which leads Merrill Lynch to take a cautious view of the spirits market going forward.
Merrill Lynch's cautious view of the European-based spirits companies' ability to sustain current growth in the US also stems in part from the unique three-tier structure of the spirits market in the US. The report contends that the legally enforced split between producers, wholesalers and retailers means that the scale which is such an advantage for spirits producers in other markets is of less value in the US, particularly in the area of marketing. "Scale doubtless does provide some additional purchaser power, but we are not convinced that size necessarily generates additional distribution or marketing advantage," Merrill Lynch states.
If scale does not provide the same advantages within the three-tier system as it might elsewhere, it follows that smaller players may have more opportunities. This is also supported by the Merrill Lynch report which suggests that low-cost "viral" marketing, which uses alternative forms of brand development from traditional above-the-line advertising, has become far more common and influential in the US spirits sector. Naturally, it follows that this form of brand marketing is more accessible to smaller producers which are already gaining from the equalising effect of the three-tier system. Once again, this is not perhaps all that encouraging for the large European-based spirits producers looking for further sustained growth from the US.
However, notwithstanding the possible development of this form of marketing - and the impact on this area of new media - it is worth bearing in mind that less formal below-the-line marketing has always played a key role in launching and developing spirits brands. How to build a brand by establishing it through subtle means in the on-premise sector, using association with trend-setters, early adopters and stylish outlets might be the first sentence in the spirits marketer's manual if such existed. If this has always played a role in the spirits market, it may be overly pessimistic to suggest that its continued or even growing importance is necessarily indicative of a short-term trend.
As Datamonitor points out: "Expensive, premium and overtly image-based products such as alcoholic drinks are always likely to be influenced by fashions emanating from popular culture, so it is important not to be overly dismissive of fads. Fads are a good way to maintain interest because they can provide short-term sales boosts and keep brands fresh."
Moreover, Datamonitor contends that the growing acceptance of spirits by US consumers and a more general trend among American drinkers towards premium products, could indicate that the surge in demand for spirits is more than a passing phase.
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