Industry

DISCUS - Robust trend in US spirits

By Ian Shackleton February 4, 2015
Nomura
2014 - US spirits industry growth still robust
DISCUS spirits data showed a continued robust trend, with US industry revenues +4.0% (vs 2013 +4.4%, 2012 +4.5%). Industry volume growth accelerated in 2014 (+2.2%) vs 2013 (+1.9%), with some moderation in price/mix +1.8% (vs 2.5% in 2013). With lower gas prices, as well as scope for premiumisation and innovation, we see potential for a modest acceleration in spirits industry revenues in 2015.

2014 - stronger volumes, more modest price/mix
We attended the annual presentation in New York by DISCUS, the spirits industry trade body in the US, yesterday. DISCUS data, which covers the full industry, shows 2014 industry volume accelerating to +2.2% (vs 2013 +1.9% and 2012 +3.0%). Industry supplier revenues grew +4.0% (vs 2013 +4.4%, 2012 +4.5%), owing to some moderation in price/mix +1.8% (vs 2013 2.5%, 2012 +1.5%). We believe that this is largely attributable to an acceleration in growth in the premium segment (+3.1% vs 2013 +1.6%), with more moderate growth in high end (+5.8% vs 2013 +7.2%) and super premium (+5.1% vs 2013 +6.3%).

Tone - remains robust
The overall tone of the presentations was robust, with 2014 another good year for the industry. Looking ahead, the presentation pointed to macro drivers, including the potential for wage levels for 21-34yr olds to trend back towards 2007 levels (if 2007 is indexed to 100, wage levels for 21-34yr olds was 94 in 2014 vs c101 for the 35+ demographic). Lower gas prices could provide a further boost once consumers get accustomed to these levels. We continue to see a robust outlook for US spirits in our medium-term spirits profit pool modelling, which now assumes medium-term US EBIT growth of 6.6%, up from our previous estimate of 6.1%.

Still confident on regulation
The number of states allowing Sunday purchases of spirits remains 39 (it was 38 in 2012, 39 in 2013). Modernization trends continue, with Texas a focus state for liberalizing sale of alcohol (64 of 81 wet-dry alcohol elections were passed during the year in Texas). In 2014, major hospitality tax threats were defeated in 11 of 11 states. However, the presentation flagged that 2014 was a low tax threat year, given elections in several states. The industry continues to witness expansion in spirits-tasting laws, with 46 states now allowing some form of spirits tasting (this helps with premiumisation of spirits). DISCUS sees less threat from an increase in federal excise tax, with beer, wine, spirits and the hospitality industry working together to fight this.

Spirits continues to gain market share of total alcohol
US spirits continued to gain market share of overall alcohol revenues, with US spirits accounting for 35.2% of total alcohol revenue in 2014 (2013 34.7%, 2012 34.3%, 2011 34.1%). Volume share was 32.9% (vs 2013 32.5%, 2012 31.9%, 2011 31.7%).

Growth by price segment - acceleration premium segment growth
Value brands declined -1.3% (2013 -1.2%), premium +3.1% (2013 +1.6%), high end +5.8% (2013 7.2%) and super premium +5.1% (2013 +6.3%). Whilst high end and super premium continue to show strong growth, their rate of growth has slowed vs 2013. Premium accelerated during 2014. This partly explains the weaker industry price/mix in 2014, we believe.

Craft spirits seeing rapid growth
The presentation flagged the rapid growth of small distillers from 92 in 2010 to over 700 in 2014 (many of whom are entering the whiskey category). Total craft volume is 3.5 million cases, up from 700k in 2010. There are 17 craft distillers in the 50-100k case range, up from only two a few years ago. We believe this reflects consumer interest in heritage and premiumization; however, given spirits' lower fixed cost base, we believe that this "small is beautiful" trend can be captured by both large and small distillers.

Major categories
Vodka - (c32% industry volume, still the largest category). Volume growth accelerated to +1.6% 2014 (2013 1.1%, 2012 +4.0%) with price/mix +1.7% (2013 +1.1%, 2012 +1.1%). This was driven by growth in the high end and super premium. Flavored vodka volumes were down, but traditional vodka volumes were up +3.7%.

Bourbon/Tennessee Whiskey - volumes +7.4% (2013 +6.8%, 2012 +5.2%) and price/mix +2.2% (2013 +3.4%, 2012 +2.1%). Within this, premium volumes was up +8.8% and super premium volumes  +19.2%.

Whiskey category - 85% of total spirits industry volume growth was driven by the overall whiskey category, which grew volumes at 7.2% in 2014 vs 6.2% in 2013 and 3.8% in 2012.

Tequila - volumes grew +5.0% (2013 +6.6%, 2012 +2.9%) with price/mix -1.0% (2013 +1.3%, 2012 +1.7%).

Flavored spirits - Total market size for flavored spirits is 24.6 million cases (11.7% of overall market; 2014 split is 53% vodka, 20% rum and 27% whiskey). The growth is dominated by flavored whiskey, which grew +74%, while flavored vodka/rum combined declined -5% (flavored whiskey defined as > 60 proof/30% ABV, else classified as cordial).