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Distilled Spirits Council 2018 Economic Briefing Takeaways
We attended the annual Distilled Spirits Council Economic Briefing today in NYC, where we heard from leaders of the Distilled Spirits Council on trends in the distilled spirits space for 2018, as well as some trends to watch for in 2019. Herein, we provide some of our key takeaways from the meeting: The U.S. Distilled Spirits Category Continues to Deliver Strong Results We heard today that supplier revenue was up 5.1% YoY in 2018, to $27.5 bn (a $1.3 bn gain), while volumes increased 2.2% YoY, to 231 mm 9-L cases (+5.0 mm cases). Meanwhile, spirits grew value market share for the ninth consecutive year, to 37.4% of the total beverage alcohol market in 2018 (up 0.7 pts YoY), with each point of market share representing $740 mm in supplier revenue. Relative to volume market share, spirits captured 35.3% in 2018 (up 0.7 pts YoY), with each point of market share representing 6.5 mm cases. Specifically, the Distilled Spirits Council highlighted that market share gains in spirits came largely at the expense of beer. Many Categories in Spirits Are Experiencing Robust Growth - According to the Distilled Spirits Council, spirits growth by category has been strong across the board. Notably, American Whiskey continues to be a bright spot and delivered sales growth of 6.6%, driven by 5.9% volume growth, to 24.5 mm cases, with strength across all price categories. Within American Whiskey, bourbon was strong (+6.4% volume growth in 2018), as was American Rye (volumes +15.9% in 2018). Tequila also continued to post strong growth, with revenues up 10.2%, although it is a much smaller portion of total spirits. Meanwhile, vodka, which represents 31% of volume in total spirits, showed modest growth, with revenues up 2.9%, driven by 1.6% volume growth. Overall category growth was also driven by strong premium price point sales. In terms of categories that are struggling within spirits, both gin and rum saw each of volume and revenue down in 2018; however, they both saw strong growth at the super premium price point. We Remain Watchful of 2019 Trends - Relative to 2019, we were told about (i) the accelerating rise of American-made spirits, such as American Rye and American Single Malt, (ii) unique innovations such as experimenting with different cask finishes and hybrid crossovers, (iii) personalized drink experiences, (iv) increased use of bitters, some of which bartenders are developing themselves to created tailored flavor experiences, (v) the rising interest in rare spirits (particularly whiskey) as collectible investments, (vi) consumer preferences for brands that have stated values, and (vii) mindful drinking as it relates to sustainability, local ingredients, etc. The U.S. Consumer Continues To Trade Up in Spirits - We heard a lot about how consumers' preference for premium products has driven growth in the spirits category, with the high end premium and super premium price points adding $600 mm in revenue YoY in 2018. Indeed, while the high end and super premium segments combined represent just 33.5% of total volumes within spirits, they represent a much larger 57.1% of total revenues within spirits, which percentage is higher than it has been historically and continues to grow. The council contends that the growth in the higher price point spirits "screams millennial buying patterns," as millennials continue to search for more personalized experiences, which experiences come at a higher price. Notably, the council believes that another contributor to growth in super premium products was the passage of consumer sampling laws, which allow consumers to taste different spirits and develop brand loyalty to premium spirits. Tariffs Targeted as a Detractor of Growth - From an international standpoint, sales are facing headwinds in the form of international tariffs, which are hurting exports of many spirits, namely U.S. whiskey exports. Indeed, looking at the period from July 2018 to November 2018 (which is post-tariffs as the first tariffs were imposed in June 2018), global exports of U.S. whiskey were down 8.2% compared to the same period in 2017 (which represents a significant deceleration relative to the strong +28% growth in 1H18). In an effort to combat theses headwinds, DISCUS is working with small distillers to tap new export markets and is seeing a lot of these small distillers working with state representatives to find a resolution to these tariffs. Notably, however, DISCUS representatives commented that they don't see a resolution to the tariffs coming in the immediate future. Impact of Marijuana Legalization - In light of the increasing penetration and legalization of marijuana in parts of the U.S., DISCUS took a look at several years of per capita consumption rates in three states where marijuana is legal (OR, WA and CO) to determine the impact of marijuana on spirits sales. Overall, in these mature markets (wherein marijuana has been legal since 2014/2015), spirits haven't really seen much of an impact, and in the latest year, per capita consumption even grew in each of the three states. More specifically, in 2018, consumption of spirits was up 3.6% in Oregon (three years following legalization), up 5.4% in Washington (three and a half years following legalization) and up 7.6% in Colorado (four years following legalization).    
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