Spirit makers face a sobering cocktail of challenges — from tariffs to teetotalers
Global spirit makers are staring down a sobering cocktail of challenges as tariffs and brand boycotts threaten to exacerbate wider shifts in drinking habits.
French cognac maker Rémy Cointreau on Wednesday became the latest spirits maker, following Diageo and Pernod Ricard, to withdraw its sales targets on increased economic and trade uncertainty.
"Given the continued lack of macroeconomic visibility, the geopolitical uncertainties surrounding U.S.-China tariff policies, and the absence to date of a recovery in the U.S. market ... the conditions required to maintain [Remy Cointreau's] 2029-2030 targets are no longer in place," it said in a statement.
The move came as full-year sales at the group's cognac business, which includes its namesake Remy Martin brand, fell 22% on an organic basis on slowing U.S. consumption and "complex market conditions" in China.
The popular brandy variety, which hails from the French region of Cognac, has been particularly caught in the crosshairs of ongoing U.S.-Sino tensions. LVMH similarly saw a 17% drop in its Hennessy cognac in the first quarter.
But the specialty drink is far from alone as trade barriers weaken already drying demand for spirits. LVMH's wine and spirits remains the French luxury group's worst performing division, while Diageo spirits including Tanqueray, Gordon's and Smirnoff saw the steepest declines in the first quarter as sales of Irish stout Guinness rallied ahead.
"Distilled spirits in the U.S. are going through a correction, and U.S. tariffs add another layer of uncertainty," Jefferies said in a note last month.
The prestige — and often legal requirements — associated with spirits and wines mean that they are heavily dependent on local production and thus heavily exposed to U.S. import levies. Champagne must be produced and bottled within the Champagne region, for instance.
"With spirits and wines you have terroir caches, and that means you're producing locally and exporting. Hence it's much more vulnerable to geopolitical tensions," Sanjeet Aujla, analyst at UBS, told CNBC via video call.
Remy Cointreau estimated that tariffs as they currently stand could serve a 65-million-euro blow ($55 million) to its business after mitigating measures. Diageo, meanwhile, said about 25% of its business is set to be impacted by duties.
The same does not apply for beer, which relies on local production and has been flagged as an unlikely winner from brewing trade divisions. Notably, the world's largest brewer AB InBev, as well as Dutch and Danish beermakers Heineken and Carlsberg all maintained their full-year guidance in the first quarter.
As a result, wines and spirits are potentially more exposed to brand boycotts too, with consumers more likely to swap out a particular product on political grounds in favor of a locally-made alternative.
The tariff hit comes as the industry has slowed over recent years following a strong decade of growth, particularly during the Covid-19 pandemic. Locked-down consumers forked out more on alcohol in 2020 and 2021, fueling a simultaneous surge in premium brands.
"During the pandemic, not only did people drink more, they premiumized more," Aujla said.
Spirits are often seen as an affordable luxury, especially in good economic times. But they nevertheless tend to be an occasional purchase, with many Covid-era stockpiles remaining in liquor cabinets across the world.
As economic conditions turn, however, consumers may be less inclined to cough up $100 for a good bottle, instead downtrading or opting for lower-cost ready-to-drink (RTD) alternatives.
"Spirits-based RTDs are weighing on distilled spirits growth alongside the impact of cumulative inflation," the Jefferies note said, adding that downtrading was most visible in vodka and rum products, while demand for premium whisky, tequila and gin remained more robust.
"That [premiumization] is on pause today, given the cyclical headwinds we have in the industry," Aujla added.
The drying demand comes as health and wellness trends spark a shift in consumer habits, with more people becoming "sober curious" and experimenting with lower alcohol consumption. Indeed, many drinks makers have sought to embrace that shift with new ranges of low and no alcohol products.
Meanwhile, the proliferation of weight loss drugs — and early evidence of their role in suppressing alcohol cravings — pose another potential challenge for the industry.
Nevertheless, analysts remain divided over the severity and permanence of the downturn.
"There is considerable debate over the extent to which currently anemic demand is cyclical or structural," James Edwardes Jones, analyst at RBC Capital Markets, said in emailed comments.
Cyclical pressures refer to economic headwinds and hangover supplies from the Covid-era, while structural shifts refer to changing consumer patterns.
"It's a bit of both, and more cyclical than structural," Aujla said. "But when the cyclical headwinds dissipate, we think US Spirits industry growth will be 1-2% lower than the 4-5% historical growth."
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