Western Europe: ‘Premium innovation’ key to spirits

10th May, 2019 by Amy Hopkins

Western Europe has always been a key driver for the spirits industry, but with political turmoil throughout the continent drinks companies are having to be fleet of foot to deal with the upheaval.

With Brexit, trade wars and the ever­-nearing threat of recession, one could mistake the political narrative in western Europe today for a hyperbolic news report from cult satire TV show Brass Eye. The region is an important, if fraught, mature market for spirits, with an unwavering focus on premiumisation. Producers operating in the area –particularly in the Eurozone – have long faced macroeconomic headwinds, but in the past couple of years, these challenges have multiplied and become harder to navigate.

Views from the extreme right and left are gaining momentum and manifesting in action – as evidenced by the gilets jaunes movement that took to the streets of Paris at the end of last year. This shift away from the political centre has, arguably, resulted in greater destabilisation and unpredictability – something economists will tell you is always bad for business. Even Europe’s largest economy, Germany, experienced a shock 0.2% decline in the third quarter of 2018 – its first contraction in three years and one that steers the country in the direction of a technical recession. “Macro-economically, we are well overdue for the next cyclical and inevitable recession,” Spiros Malandrakis, head of alcoholic drinks research at market research provider Euromonitor, says of western Europe. “If we combine that with lingering problems in a number of southern European countries, and the major potential disruption from Brexit, then we have a very toxic cocktail in our hands.”

One of the biggest upheavals in western Europe is of course Brexit. For spirits, the United Kingdom’s impending departure from the European Union, scheduled for 29 March, poses an acute set of challenges. As an industry heavily reliant on imports and exports, it faces market inaccessibility and supply­-chain disruption. Critically, spirits such as Scotch whisky are protected in EU law as geographical indications, which would become void after Brexit.

LAWMAKERS AT LOGGERHEADS

Last month, prime minister Theresa May’s Brexit deal was rejected by parliament – a crushing defeat that marked the largest rejection of a proposal by a sitting government in UK history. At the time of writing, lawmakers were still at loggerheads over the issue, and a new agreement had yet to be approved. Trade body the Wine & Spirit Trade Association (WSTA) called for an extension to the divorce, saying a ‘no-deal’ Brexit would be “hugely damaging” to the UK drinks industry.

At the time, CEO Miles Beale said : “As 55% of wine consumed in the UK is imported from the EU, and 45% of spirits exports are sent to the EU, businesses will need time to adapt to any new future trading arrangements, and time is running out.” The Scotch Whisky Association (SWA) also said a ‘no-­deal’ Brexit would “force cost and complexity into the production of Scotch whisky, and must be avoided”.

For more than a year the WSTA has been advising members to increase their stock by at least 20% in case of a no-­deal scenario. Many have confirmed they are already stockpiling, with Direct Wines importing an additional two million bottles – a 40% increase on its usual stock. Bibendum has also outlined a “robust Brexit plan”, which includes ordering “significant” extra stocks.

NERVOUS FEELING

For Ulrich Adam, director general of trade group Spirits Europe, while Brexit has created a nervous feeling in the market, it is most likely to “affect export expectations outside of western Europe and outside of the EU”. He adds: “From the figures I have seen, even in terms of a no-­deal Brexit, the potential economic impact is relatively minor if you break it down to the spirits sector. Brexit’s effect on the spirits market seems rather to come from a potential clouding in the general economic climate in the UK and in some member states, which will have a knock-­on effect for consumer confidence and purchasing power, as opposed to a direct hit to the sector.”

But Europe is battling more than Brexit. In response to US president Donald Trump’s tariffs on steel and aluminium, last year the EU imposed its own set of retaliatory import taxes, with a 25% hike for American whiskey. China continues to bear the brunt of the so-­called trade war, but as a key market for American whiskey exports, US distillers have also turned their gaze anxiously towards Europe.

POTENTIAL FOR DAMAGE

Brown-­Forman confirmed its plan to raise the prices of its Jack Daniel’s, Woodford Reserve and Old Forester brands by 10% in EU markets where it owns distribution. It will become clearer in the coming months how severe the impact of the tariffs has been, as drinks groups release financial statements. Last year, the Kentucky Distillers’ Association said the potential for “long­term damage is real”.

Malandrakis says: “The anecdotal information I have received is that the trade war with Trump has had detrimental effects on imports, and particularly American whiskey, which was one of the growth segments in Europe. There are a number of people in power around the world who are not easy to predict, and these kind of shocks will keep on coming – they haven’t been resolved. I know a number of small Bourbon distilleries from the US are really struggling to enter the market or face huge declines in exports to the EU at the moment.”

However, Spirits Europe’s Adam says he is “quite hopeful” that the tensions will ease. “The EU has put an executive working group in place, and there’s a lot of European effort in Washington DC to ensure we are not seeing a further escalation in EU­-US trade relations.”

Trade representatives have also expressed concern over growth in conservative alcohol policies. Despite a protracted legal challenge from the SWA, minimum unit pricing came into force in Scotland last May, with Wales poised to follow suit this year. Ireland is scheduled to introduce its Public Health (Alcohol) Bill in November, much to the chagrin of industry members. The law seeks to reduce alcohol consumption in Ireland by restricting alcohol marketing and visibility in shops. Such anti-alcohol measures are, however, at odds with the UK government’s decision to freeze duties on spirits, beer and cider in the last autumn budget.

PREMIUM INNOVATION

According to the IWSR Vinexpo Report 2012­-2022, spirits volumes in western Europe will “continue to grow slightly” over the next three years. Between 2017 and 2022, volumes are set to register a compound annual growth rate (CAGR) of 0.12%, compared with a CAGR decline of 0.32% in 2012-­2017.

Premiumisation remains the key trend and, as such, higher price brackets will see the greatest percentage growth in volumes – with super premium predicted to increase by 6.2%, ultra premium by 9.25%, and prestige by 5.25%. According to the report, the figures are indicative of the drinking less but better trend, with “premium innovation now a key component in the European spirits industry”.

A Vinexpo spokesperson explains: “European companies continue to drive the market worldwide, with the giants of the industry, such as Diageo and Pernod Ricard, continuing to diversify their range of products to provide the consumer with a range of spirits drinks, and combination drinks, that would have not have been dreamt of 30 years ago.

“The industry drive to create and market new products year on year is a direct response to the continually changing habits of the consumer. People are drinking differently from the way they drank five, 10 and 15 years ago. Consumer habits have changed even in the past two to three years as part of a trend towards drinking less but better and ‘mindful drinking’.”

Premiumisation means prospects for intense volume growth are limited, and producers will be focusing on value. As such, the allure of emerging markets with a burgeoning middle class is strong. But according to Mark de Witte, CEO of Dutch liqueurs and spirits maker De Kuyper, this does not mean producers will be turning their backs on western Europe.

He says: “As a company, we are preparing for substantial growth, so extra investment will go more towards Asia, but we will definitely continue to focus on Europe – it’s a strong foothold we definitely want to defend. Also, we are still pretty optimistic about the economy – some countries are in decline but others are picking up, so there will be some refocus in Europe, but it definitely remains a key area for De Kuyper. The economy is still healthy, and we feel there are serious opportunities to grow further.”

However, such a broad skew towards premium spirits means Malandrakis is concerned over “complacency” in the market. In the face of an impending recession, he believes more companies should be offering consumers the opportunity to trade down.

“At the moment it feels like everyone is on the same side of the boat, and when that happens boats tend to capsize,” he says. “I think one of the main areas that there should be a larger focus on is affordable, mainstream products that will allow consumers to trade down within a family of brands, without being forced to travel outside of it. I don’t think anyone is doing this at the moment, and that should raise alarm bells.”

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