US: Spirits industry bullish despite tax threat

By Chris Mercer | 3 February 2012

The incoming chairman of the US Distilled Spirits Council has told just-drinks that spirits sales are in a sweet spot and will continue to thrive, if distillers can fend off the taxman in the country.

In contrast to shrinking beer sales and a mixed wine market, spirits are motoring amid tough economic times in the US. Earlier this week, the Distilled Spirits Council (DISCUS) reported domestic sales up by 2.7% in volume and 4% in value for 2011, based on 11-month figures.

John McDonnell, who will combine the chairman's seat at DISCUS with his COO post at Patrón Spirits, is particularly pleased about spirits taking market share from beer. "Since 2000, we've picked up five percentage points, which is phenomenal," he told just-drinks today (3 February). 

Beer still accounts for 49.3% of US alcoholic drinks sales by value, versus spirits' share of 33.6%, but the momentum is with the distillers. "More women and millenials prefer spirits over beer and more drinking occasions are going to spirits" said McDonnell. "Spirits are more aspirational than beer." 

McDonnell conceded that spirits have outperformed beer in recent years partly because of distillers' ability to attract higher earners less hit by the recession, but he added that spirits have also gained more legitimacy in the US. Currently, 37 states sell spirits on Sundays, whereas, historically, many states only allowed beer and wine sales. At the same time, spirits have become part of a regular drinking repertoire for younger consumers.      

With 4m consumers entering legal drinking age in the US every year, McDonnell said he believes the future is bright for spirits producers. "I think we could have a nice road ahead," he said. "If the economy continues to show improvements, spirits is going to benefit big time."

Confidence in the supply chain appears to be strong. A DISCUS survey of all major US wholesalers, conducted last month, found that 71% believed their spirits volume sales will increase in 2012. Wholesaler optimism is at its highest for four years, DISCUS concluded.

However, tax could yet dampen distillers' mood. With many states facing significant fiscal deficits, there is concern about tax grabs on spirits. "Already, we've had 12 leglislative proposals on spirits tax in the first month of this calendar year," McDonnell said. 

According to DISCUS, spirits tax in the US yields around $5bn annually, compared to $4bn on beer, which has a higher market share. "It's clear that we are already discriminated against," said McDonnell. 

Nevertheless, he said that he is "still bullish" about the future, particularly given the US demographics. Exports are another reason for cheer, with US spirits shipments abroad reaching a record $1.34bn in 2011, up 16% on 2010.

Around half of spirits exported are destined for the European Union, in value terms, but McDonnell sees opportunities via lower tariff barriers. Import taxes on US spirits are already set to fall in South Korea and Philippines.   

"The US needs more free trade agreements, especially in Latin America and Asia," said McDonnell. If that can happen, distillers will take care of the rest. "Americana still sells," he added.

Sectors: Spirits

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