The rebound of the global spirits sector

Having endured many hits over the past few years, the global spirits sector is fighting to regain its position, but there are challenges ahead.

The global spirits industry endured a bumpy ride in 2021, with the rolled-over impact of Covid-19, ongoing supply chain disruptions, inflation, and travel retail’s slow return to pre-2019 levels, noted Mark Meek, CEO of IWSR Drinks Market Analysis.

And the effects of the war in Ukraine this year have not gone amiss. All the same, alcohol sales were deemed to have recovered on a worldwide basis, according to IWSR.

The data supplier recorded that the market value rose by 12% to US$1.17 trillion, ‘significantly’ outpacing its volume growth in 2021. Comparatively, the value of the global alcohol market dropped by 4% in 2020.

A briefing took place last month, featuring: Meek; Emily Neill, IWSR chief operations officer for research; and Brandy Rand, IWSR chief operations officer for the Americas.

In the coming five years to 2026, agave spirits are expected to see a volume boost in the US and the UK, where they are predicted to grow by 9% and 13.5% respectively.

The category is forecast to increase in global value by 67% by 2026, and in the UK the sector is expected to rise by 88%, “albeit from a relatively low base”, according to IWSR. Neill noted this boost was due to an increased interest in premium spirits as part of cocktail making, as well as the category being boosted by celebrity involvement.

The spotlight is not just being shone on premium agave-based spirits either; generally, premium-plus spirits, priced at US$22.50 and above, are projected to soar: by more than 50% in value in the Americas between 2021 and 2026; by more than 40% in Africa and the Middle East; by more than 20% in Europe; and just less than 20% in Asia Pacific.

One of the standout reasons for premium spirits’ projected unabated performance could be its resilience in times of inflation. Meek explained that while there is inflation in the West at the moment, and “many of us have not lived through inflationary times”, for many markets, such as Africa, inflation has been there for years. “We haven’t seen any downturns in consumption and premiumisation in those markets,” he said.

Meek added: “But the higher the product is up in the value chain, the more resilient it is. So, with high-end products, the impact of inflation will not be material. Where inflation might have an impact is the mainstream end of the market.

“It’s hard to predict how long those increased savings and willingness of consumers to spend at high levels will last.”

The reason the spirits industry performed positively in 2021 is generally “the result of the premiumisation trend”, explained Neill.

This has not only taken place in international categories such as whisky and Cognac, but also the large baijiu category in China, “which has been premiumising as well”. It is even considered to be driving the high-value spirits trend, said Neill.

Positive outlook

Other categories were also predicted to have a positive five-year outlook – whisky is expected to post an increase of 23% in volume and 29% in value by 2026, with a boost in activity particularly in its largest markets – India and the US.

In the latter market, whisky is expected to be bigger than vodka by volume by the end of 2022 for the first time in two decades.

Global volume growth is expected for gin (up by 24%), Cognac (up by 23%) and rum (up by 13%) over the next five years.

Neill added: “The category that was really interesting and took us by surprise was flavoured spirits – this grew very strongly in 2021. People were experimenting with mixing products at home, and aperitivo hour became increasingly popular in the UK.”

Flavoured spirits (including liqueurs, bitters, apéritifs, fruit eaux-de-vie and aniseed) grew by 0.4% in the UK, and by 2% in the US, but it was an unexpected turnaround all the same.

A topic that sparked interest during the briefing was the impact the war in Ukraine is having on the sector, especially given Russia’s position as the world’s largest exporter of grain.

“Could there be a threat to international producers of grain-based beverage alcohol?” one audience member at the briefing asked.

“In terms of the impact of the war in Ukraine in beverage alcohol terms, the direct effect is limited to the two countries and the neighbouring region,” Neill said.

“Other than that, the impact is on global terms, in terms of increased energy costs and ingredients costs.”

With regards to the threat to grain suppliers, it “speaks to the de-risking” of the supply chain, which entails restricting business relationships to manage risks.

“We haven’t seen any indications yet that there’s actually a complete lack of supply, but producers will look to diversify their supply base,” Neill continued. “This will lead that rise in input costs, and [producers will be forced to have a high-cost base], which they will need, ultimately, to pass onto consumers.

“If you have more products that are premium-priced, it gives you leeway to pass on price increases – there’s more resilience at the top end of the market. The effect of grain issues will be that producers have to diversify their supply base and thereby increase their cost base.”

Lack of pace

On consumer behaviour affecting current market trends, Rand said that in the US, the prediction that consumer on- and off-trade trends would resume in 2021 was wrong.

“From consumers being at-home focused, there was an expectation things would rebound really quickly, but the pendulum has landed somewhere in the middle,” she said. “People are shopping online, but not at the same pace.”

The IWSR team, particularly in the US, is also looking to a future heavily focused on the ‘Gen Z consumer’ and their behaviour in the alcohol industry – “the largest generation in the US”, according to Rand.

“In terms of Gen Z’s behaviour regarding moderation, environmental, social, governance (ESG), all these different elements are going to have a big impact on the future of alcohol in the US,” she noted.