High levels of inflation have prompted analysts to raise questions about whether beverage companies can continue to retain customers as the price of premium spirits continues to rise.
Covid-19 lockdowns led to a shift in consumer behaviour, involving growth in the ready-to-drink products and a surge in door-to-door delivery services selling products like beer, wine and spirits.
British drinks retailer Diageo PLC (LSE:DGE), which posted revenue of £8bn for the half year to 31 December, benefited from this change in customer behaviour during the pandemic, but analysts have warned that both it and other spirits producers may struggle to get repeat business in the coming months.
“We think that benefited from an unforeseen (by us and – we think – by Diageo) upsurge in North American at-home demand over the COVID period,” RBC said in its report ‘Consumer Staples: Guiding for a Fall’, adding: “We do not expect that to recur.”
The investment bank warned that it expects the premium spirits sector will suffer more than other products in the consumer staples bracket in the event of a consumer recession brought on by high inflation.
“Indeed, if our fears of a consumer recession are realised... we think premium spirits will suffer more than other constituents of the consumer staples sector: a business model based around consistent and significant price-mix growth looks vulnerable to us,” RBC said in the analyst note.
The US market is widely forecast to be on the brink of a possible recession, defined by two-quarters of consecutive contraction in gross domestic product, following negative growth of 1.5% in the first quarter of 2022, according to data from the Bureau of Economic Analysis.
In the UK, consumer confidence has meanwhile fallen to all-time lows, figures from the Office for National Statistics and consultancy GfK show.
Consumer confidence is weak amid a climate of high inflation, with the Consumer Prices Index rising 9% for the year through to April 2022 in the UK market and a similar rise of 8.6% for the year in May in the US.
Whether cash-strapped customers will continue to choose to spend money on premium alcohol, particularly in the US market, is unclear.
Specialist wine delivery service Naked Wines PLC (AIM:WINE, OTCQX:NWINF), which is based in the UK, posted a return to profit on Thursday for the year through to 28 March, along with a 9% increase in its subscription service and customer sales retention of 80%. However, some analysts queried whether it can sustain that growth and its shares tumbled.
“Naked Wines’ success in the first months of the pandemic is gradually trending towards being just a COVID bump, with the company again struggling to attract quality new customers, in particular in the US, over the last 18 months,” broker Liberum said in an analyst report on Thursday.
At the start of June, Credit Suisse was bullish on the future value of spirits but expected the value of beer products to plateau, reporting “strong growth” in ready-to-drink products.
According to its data, the value of spirits sold off-premises in the US was up 31% this May on a three-year basis, though it observed that the pace of the spirit frenzy has slowed.
The value of spirits was just 1% higher than the same period of last year, while the value of beer products stayed flat, it said.
Consumer staples tend to do well in a recession, making them good defensive stocks, whereas discretionary or non-essential goods that consumers can ill afford in a downturn typically perform poorly.
Earnings among consumer staples dropped by just 5.2% at the height of the impact of the pandemic in 2020 and 4.1% at the time of the financial crash from 2007 to 2010, according to data published by UBS this week.
By comparison, earnings for consumer discretionary items fell 63.5% during the financial crash and 43.5% in 2020.
Whether premium spirit purchases will continue to be viewed by customers as discretionary spending while inflation is at a multi-decade high remains to be seen.