As the fiscal and social maelstrom of the Great Recession started to show signs of abating, projections in October 2009 for the alcoholic drinks industry were relatively positive as most leading economies returned to growth. Nevertheless, while a relative resurgence was indeed witnessed in a number of markets and categories, financial clouds are still ominously dotting the horizon in the form of spiralling country deficits, plummeting consumer confidence and unemployment rates stubbornly stuck in the high single digits. Euromonitor International’s latest global briefing ‘Alcoholic Drinks: Changing Growth Scenarios and Corporate Responses’ serves as a compass in the still troubled international operating landscape, pinpointing opportunities and pitfalls amidst the post-recessionary clutter. Spiros Malandrakis investigates.

A fragile recovery

According to Euromonitor International’s Countries and Consumers database, global real GDP growth is predicted to start recovering in earnest from 2010, with the current nascent recovery expected to consolidate each year to 2014. However, the recovery is not going to be uniform, far from it. Asia-Pacific will be the primary dynamo underpinning global economic performance, bolstered by growth in Latin America and recovery in Eastern Europe. Meanwhile, economic growth in North America and Western Europe is predicted to be far lower than that being seen in emerging regions, although from a much larger base.

While reducing the fiscal deficit is viewed as a top priority in most European countries, particularly those that are members of the EuroZone, there is one school of thought that an early withdrawal of stimulus packages could hamper economic recovery in the short to medium term, and even lead to the dreaded 'double-dip' or 'W-shaped' recession scenarios that could very well have global repercussions.

Regional discrepancies abound

In line with forecast global growth in GDP, the first and second quarter results in 2010 of leading alcoholic drinks companies are on the whole stronger than the previous year, although in part, notably for spirits, this is due to the comparison being drawn with such a low base. Declines in certain regions indicate a recovery will not be without issues, which will negatively impact previous forecasts. Given the impact of the recent sovereign debt crisis in Europe, certain companies could see a worsening performance in the second half of 2010.

Vividly illustrating this, A-B InBev and SABMiller’s 2010 quarterly results indicate that the recovery in North America and Western as well as Eastern Europe remains sluggish, and that continued economic uncertainty will see global forecasts revised downwards. Likewise, the results reflect that opportunities still remain in emerging markets, namely Asia-Pacific, Latin America and Africa.

Moreover, the type of financial crisis seen in Greece, caused by collapsing public finances, is now affecting many other countries in the region, a fact which will inevitably hamper growth. The countries affected are Portugal, Italy, Ireland, Greece and Spain (known as the PIIGS) and the UK.

These markets accounted for 43% of the total alcohol consumed in Western Europe in 2009. At the time of writing, all these countries had introduced tough austerity measures that will hamper consumer spending in the short to medium term. The austerity measures in the other PIIGS markets and the UK are not as severe as those seen in Greece. Nevertheless, they will see their alcoholic drinks markets affected.

Conversely, Latin American economies have proved more resilient and have quickly returned to growth after the economic crisis of late 2008/early 2009. This offers good opportunities for producers with more premium products. The volume forecasts made by Euromonitor International in October 2009 still hold true, although it is possible that growth in value terms will be more robust as the premiumisation trend defiantly continues to be relevant.

China is the key growth market for Asia-Pacific. In 2009, China accounted for a 66% volume share (36% by value) of the alcohol consumed in Asia-Pacific, a figure which will rise to 70% (45%) in 2014. However, future growth could be underestimated. The continued strong economic growth in 2010 is not likely to increase the overall rate of volume growth in alcoholic drinks but lead to some switching between categories, and also increased trading up.

Eastern Europe has been amongst the hardest hit by the economic crisis, leading to declines in volume and value for all the major categories in 2009 and 2010 as consumers are forced to retrench. The growth reported by key international players in the first half of 2010, notably Pernod Ricard, indicates that international spirits are recovering, although this will have little impact on the overall market because of the dominance of local vodka.

North America is a tale of two markets in the recent economic crisis, with its largest element, the US, being one of the countries hit hard, whereas its smaller neighbour Canada has weathered the storm well. The sheer scale of the US dominates and dictates category performance for the region. Whilst spirits and wine forecasts are not expected to change significantly, high unemployment has seen beer forecasts revised downwards.

Although growth across Africa and the Middle East as a whole is likely, it appears that the strong growth predicted in 2009 and 2010 was over optimistic as the impetus from the World Cup in South Africa, especially in beer, did not materialise to the degree anticipated. Additionally, as a region which has a diverse ethnic, religious, political and economic make-up within its boundaries, it has proved to be a melting pot of humanitarian, political and natural disasters in recent history, and there is no guarantee that this will not affect future growth in its key markets yet again.

Geographical and price diversification are vital

While all companies are impacted by macro fluctuations, in the recent economic downturn certain companies have performed better than others and are in a stronger position to manage any future volatility. In many instances, this has been the result of prudent historical strategies, but in addition to this there are decisions that can be made in response to market dynamics. Euromonitor International identifies two key factors in a company’s success - its exposure to diverse regional markets and its ability to offer products at differing price levels.

Or, in other words, retaining focus and preparing instead of pulling back during the ongoing storm makes sailing all the more easier once the sun of recovery eventually rises.