This article was initially published in the October issue of Global Drinks Intel magazine. For details on how to subscribe, click here.
From the cost of raw ingredients and energy to transportation and staff wages, the alcohol industry is being hit with price rises all round — and it won’t be long before this is passed onto the end consumer.
In the US and the UK, inflation is at a 40-year high and is already affecting business. While one major UK-based brewery has seen its production costs soar by 62% this year, Estonia’s Saku Brewery, which has been around for 200 years, has had to, for the first time in memory, increase its retail prices by 10% twice in 12 months. Indeed, inflation in Estonia is at 25%, which might be a taste of what’s to come for the rest of the world.
Elsewhere, eToro’s ‘Beer Index’, which tracks the spot price of raw materials for the category, found the production, packaging and transportation of beer have leapt by just under two-thirds of the total costs since August 2020.
Alcohol pricing
Many beer, spirits and wine brand owners will be worrying about their brands’ price elasticity and whether increasing prices will have an effect on volume. The short answer is yes. Published research from 2002, 2003, 2006, 2009 and 2010 all found that increasing prices of alcohol resulted in reduced demand.
A study in Sweden found that a 10% price rise would result in a 1.7% sales dip in alcoholic beverages, when the increase was applied to all alcohol. However, when the price increase was applied only to cheaper beverages, this led to a 4.2% decline in total sales. This study shows us the effect of price, with the biggest impact hitting those consumers who already choose to buy the cheapest alcohol. So, if your on- and off-premise price point has historically been at the lower end, then you’re most likely going to have the biggest downside.
Other studies have found that price increases especially impact young consumers, who drink frequently and are more sensitive to price changes than either older, infrequent or light young drinkers.
Surprisingly, there’s no strong data to suggest it is those on the lowest incomes that will reduce consumption. Moreover, it’s changes in people’s salaries that affect their spending.
Over in Australia, meanwhile, consumers are spending hard despite real wages falling, most likely due to having built up savings during COVID-19 restrictions. So, while rising inflation tells one story, countries that have fared better during the pandemic may be somewhat insulated from (hopefully short-term) inflationary factors. France’s inflation, for example, actually fell to 5.8% in August, from 6.1% in July. This, in part, could be linked to the fact that France was one of the first countries to cap energy prices; the rest of Europe looks like it will soon follow.
In some markets, consumers are being ‘encouraged’ to drink more alcohol to boost the economy. Last month, Japan’s Government ran a campaign to find ways to up alcohol consumption and combat a slide in tax revenues. The ‘Sake Viva!’ activity asked 20-to-39-year-olds to share business ideas to revitalise the popularity of alcoholic drinks that have fallen out of favour due to lifestyle changes. (Annual per capita alcohol consumption in Japan fell from an average of 100 litres in 1995 to 75 litres in 2020, according to the National Tax Agency). In part, ‘Sake Viva!’ showed the Government understands that the drinks industry can help stimulate a country’s overall positive outlook.
With so much changing, here are four predictions on how the industry will respond and how brands can flourish.
- The consolidation
Independent brewers, typically characterised as ‘craft’, will be hit the hardest, creating a consolidation freeze, with the big players buying up brands in debt-for-equity deals. Craft will further extend into more physical availability, increasing consumers’ choice, and leading to a return to the more familiar power brands to help navigate this increased choice. On-premise accounts will also be consolidated, bought by the biggest players in the market, and then used to test and launch new brands ahead of major product launches. - At-home
At-home drinking will become even more important as consumers dodge more expensive meals and drinks out. Brands will need to move from targeting key selling moments to owning consumption occasions. The seasonal effect of events such as Christmas will allow consumers to experiment as they broaden their in-home repertoire to ward off boredom. - The multi-brand approach
With advertising costs often the easiest thing to pull, brand budgets will be under strain — we’re likely to see more consolidated multi-brand approaches, including collaborations between brands. - No- & low-
With the margins often better in no- & low-alcohol, brands will switch efforts to more profitable lines, meaning advertising will need to generate demand ahead of the curve. Brands will be in a hurry to build awareness, and similarly show an immediate return on investment, leading to more integrated work.
This article was initially published in the October issue of Global Drinks Intel magazine. For details on how to subscribe, click here.
