American whiskey at start of the runway not end, as tariff barrier comes down – comment

When we scan the post-Millennium landscape of the global spirits industry, it’s easy to be distracted by the skyrocketing sales of Tequila and gin – the first largely reliant on the US market for its spiralling growth, the latter achieving remarkable momentum without it. American whiskey has had a pretty good time of things over the past two decades or so too. According to the Distilled Spirits Council of the US (DISCUS), US spirits exports have more than trebled from US$493m in 2001 to $1.6bn in 2021, largely driven by American whiskey and big-money names such as Jack Daniel’s and Jim Beam, plus an increasingly diverse supporting cast of smaller brands. The long-term picture is overwhelmingly positive, but that $1.6bn figure is a cool $200m below the record high of $1.8bn recorded in 2018. And the reason, largely, is trade wars and the tit-for-tat imposition of punitive tariffs. Disputes between the Trump Administration and the EU (then also including the UK) led to a succession of new tariffs, most notably the 25% retaliatory tariff on US whiskey imports announced by the EU in June 2018, linked to disputes over trade in steel and aluminium. Those tariffs are no longer in place, but their aftershocks persist. At the end of October 2021, the EU announced a two-year suspension of the 25% tariffs from January; belatedly, the UK followed suit in late March, announcing their removal from June. Cue much celebration from DISCUS, other trade organisations and brand owners such as Brown-Forman and Beam Suntory, alongside bullish predictions of spectacular renewed growth. The reality, however, may well be more complex and problematic. First, the damage has been considerable. Despite a partial recovery last year, American whiskey exports to the EU have fallen by 20% in value terms since 2018 to $440m; in the UK, the decline has been steeper: -42% to $88m over the same timescale (all DISCUS figures). Making up so much lost ground will require effort and patience. Three - nearly four - years is a long time in beverage alcohol. Export strategies are reconfigured, with large brand-owner companies devoting closer attention to more enticing export destinations – and smaller distillers avoiding the EU and/or the UK altogether. Just Drinks has already heard from Never Say Die Bourbon co-founder Martha Dalton of repeated delays for the brand’s UK launch, because of the increased costs of operating in the market. Prior to the lifting of tariffs, Michael Langan, head of distillery at Texas-based Yellow Rose Distilling, part-owned by Spain’s Zamora Co, said that the UK was “not registering on our radar”, simply because it was a market heading in only one direction: down. Meanwhile, Brown-Forman, which in 2019 estimated the total annualised costs of tariffs in the UK and the EU to its business at more than $125m, has the heft to be able to absorb some of the extra costs itself, but has not managed to avoid passing on extra costs to distribution partners and the final consumer. The company has also been exploring increasingly attractive emerging markets, which delivered “strong double-digit organic net sales growth” in the first nine months of its current fiscal year (to the end of January). Turkey, Chile and Brazil all received plaudits for their increased thirst for Jack Daniel’s Tennessee Whiskey, and flavoured spin-off Tennessee Apple. It would be tempting to say that the lifting of tariffs changes all that, but I’m not so sure it’s that simple. Of course, Brown-Forman will be eager to rebuild UK and EU sales – but the group will equally be aware of the potentially greater headroom for growth in those emerging markets too. And, given that smaller distillers have already allocated resources and stock to other markets as a result of the tariffs, how easy - or worthwhile - will it be for them to direct their gaze back to Europe? There are a couple of other factors that might also influence the rebuilding of American whiskey sales in the EU and UK. First, there is Russia, and the cessation of exports there. Bear in mind that much of the premium spirits trade was previously routed via the Baltic states and Latvia in particular – all part of the EU. American whiskey exports to Latvia were up 23% to $49m in 2021, making it the category’s ninth-largest global market. Not huge by any means, but responsible for an 11% slice of EU shipments - and a fast-growing one at that. Now, pending dramatic political change in Russia, it’s pretty much vanished overnight. Then there are the current and ongoing challenges surrounding the supply chain, including increased costs for raw materials, dry goods, energy, transportation - the list is exceedingly lengthy, and the impacts have only been exacerbated by the war in Ukraine. Of course, the whole world is affected by these issues, so one could argue that the suspension of tariffs improves the relative market position of American whiskey in the EU and UK anyway. Nonetheless, such dramatic cost increases are very unhelpful at a time when, ideally, distillers would like to be lowering their prices in these markets. However, there are upsides too. The transformation of American whiskey over the past couple of decades has been partially built on a strong trend of premiumisation, and higher-value products - both from established brand owners and the small and growing army of craft distillers - are less vulnerable to the impact of price movements, and more able to absorb extra costs. Looking at long-term international trends for American whiskey, there is good reason for brand owners to be optimistic, to celebrate the suspension of EU and UK tariffs, and to see the past three years or so as an unfortunate blip in an otherwise relentless upward curve. It’s just that getting past that blip, and resuming that positive trajectory, may not be quite as simple as it seems.

American whiskey at start of the runway not end, as tariff barrier comes down – comment

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