Calm seas: the US spirits market slows down

After the heady days of the Covid-19 pandemic, when consumers bought high-quality spirits as a fillip, the US scene has settled down.

*This feature was originally published in the July 2023 edition of The Spirits Business magazine. 

After an extraordinary three years in the US, there are signs the party is slowing down for spirits. In its latest SipSource report, the Wine & Spirits Wholesalers of America put spirits depletions down by 0.3% in the year to the end of March 2023. That decline has sped up, with depletions falling by 5.1% in the first three months of this year compared with the same period in 2022.

What US analysts have dubbed “the Covid super cycle” saw a surge in retail demand, particularly at the top-end, during lockdown, followed by a rebound in the on-premise last year. In the second quarter of 2022, on-premise spirits sales were up by 12.2%, despite the news in early June that US inflation had hit a four-decade high of 8.6%. After months inside, Americans were desperate to get out and socialise, and they had money to spend from all those un-booked holidays and meals at home.

Return to normal

How much of those Covid savings remain is unclear, but one thing is certain – the US spirits market is returning to more normal times. Speaking in late March, Ann Mukherjee, chair and CEO of Pernod Ricard North America, put the “historic growth trend” for spirits at 4%-5% before it almost doubled during the “super cycle” period. The company’s value depletions rose by 3% in the US in the second half of last year, so there is a little catching up to do.

Mukherjee mentioned with glee February’s historic announcement by the Distilled Spirits Council of the US (Discus) that the category was now more valuable than beer after 13 years of uninterrupted growth. In 2000, brewers enjoyed a 55.5% share of supplier revenue, compared with 28.7% for spirits. Last year spirits squeezed into the lead, with a 42.1% share compared with beer’s 41.9%, while wine has spent the entire period on around 15%-16%.

The woes of the big American brewers are well known, and they are all scrabbling for new markets in the US. In June, the country’s Beer Institute launched its new ‘stand with beer’ website, which wasted no time in attacking the spirits category for all the alleged “unfair kickbacks” it receives. In response, Chris Swonger, Discus CEO and president, pointed out that brewers enjoy a tax rate that is more than two times lower than spirits, and said: “It’s clear the beer industry is desperate after years of losing market share to distilled spirits.”

Both sides are involved in the burgeoning ready-to-drink (RTD) category that lies in between, being made up of malt-based and spirits-based versions. The latter accounted for just 13% of the total in 2022 but is catching up fast. It was the fastest-growing category of all spirits last year, with volumes up by 37.4% to 50.3 million nine-litre cases, according to Discus. “With spirits-based RTDs, all the signs are that consumers love the taste, authenticity and convenience of them,” says Swonger. “All the data suggests that there’s no ceiling for these products.”

As well as proving a great way to recruit new consumers, RTDs have helped broaden the market to “occasions, where typically distilled spirits weren’t feasible, whether at a baseball game or at a picnic”, Swonger says. Their success is in spite of hostile tax regimes in states like Maryland, where they are taxed 17 times more than malt-based RTDs with the same alcoholic strength. It is an unfair playing field that Swonger and his team are doing their best to level.

Spirits-based RTDs and pre-mixed cocktails brought in an extra US$588m in supplier revenues last year. For Discus they were one of the key industry growth drivers, along with American whiskey, which grew by US$483m, up by 10.5% on 2021, and that mighty force of Tequila and mezcal, which delivered an extra US$866m in 2022 – a rise of 17.2%.

Surge in demand

As brand director, Tequilas at Brown-Forman, Jesus ‘Chuy’ Ostos looks after Herradura and El Jimador. He believes the surge in demand reflects what happened in Mexico 30 years ago. In the US he says: “It was fuelled by the pandemic, with people treating themselves to premium Tequilas, and saying ‘I’m going to learn how to prepare a good Margarita’. The other reality is the presence of celebrity-driven brands, which spreads awareness.”

Exposure to good 100%-agave brands has bred loyalty and discernment, in his view. “We’ve learned that once a consumer has experienced a new, high-quality Tequila, it’s difficult for them to trade down,” he says. “They’re not going back to a ‘mixto’, even in a more relaxed environment like a summer barbecue.” He points out that on-premise venues “have realised that if they offer a good, well-prepared Margarita, consumers will order another one, and that they are willing to pay a bit more for a better brand. So they know they can make more money.”

Ostos believes Tequila is perfectly placed in the US. “It sits right in the middle,” he says. “It has the versatility of vodka, and the heritage and character of American whiskey and Bourbon.” With its range of styles, from unaged blancos through to añejos and reposados, Tequila has been recruiting from all sides, and from beer brands through its raft of RTDs and pre-mixed cocktails. When it comes to price, he says: “Herradura is very nicely positioned on the premiumisation journey of the consumer, as it sits in the US$40-US$60 range.”

He is confident the US Tequila boom has a good 10 years to run, and, so far, the figures look good. Volumes were up by a healthy 6% in the control states from February to April, while total spirits were down by 2.7%.

Ivan Hidalgo, Beam Suntory’s vice-president marketing for North America, says: “Premium Tequila continues to grow, while the super-premium and ultra tiers have cooled, somewhat reflecting the current macro-economic conditions.” Beam owns Hornitos, which sells itself as “a high-quality, premium Tequila that celebrates everyday shot-takers and change-makers, without pretension or a celebrity price tag” to quote Hidalgo.

Moving to that other growth driver – American whiskey, he believes there is a long way to go there too, saying the “category has been growing for a number of years, but Bourbon volumes in the US are still a fraction of their historical peak in the 1970s”. He cites “three key factors” that “we believe will support continued growth”. These are: Bourbon’s “heritage and authenticity”; its “unique taste profile and versatility”; and its level of “innovation and premiumisation”.

The ‘p-word’ remains a mantra for every industry player in America, but can it endure in these tough times? Hidalgo insists it will. “We may see a short-term dip, given the current economic challenges, but we’re still bullish about premiumisation as a long-term trend,” he says. “In the long term, there is no reason not to believe in the US as an incredibly strong spirits market. The economic headwinds mean it’s more important than ever to ensure that every touchpoint with a consumer is one that provides value, one that they truly feel earns their dollars.”

With whisky, age statements are a classic way to trade people up, and with this in mind Beam has just elevated its standard Knob Creek rye expression to a seven-year-old.

The two worst-performing spirits in those control state figures are Scotch and brandy, both down by 9% in the three months to April. “What we’re seeing is a correction in terms of some of the level of inventories being held,” says Jamie MacKenzie, Beam Suntory’s director of Scotch and Irish whisk(e)y North America. “It’s been a challenging year for the spirits market in the US, full stop. Scotch, I believe, will continue to be a very resilient category.”

But for now, its consumers seem to have paused in their trading up. “Premium Scotch is still growing in low single digits,” he says. “Super-premium and ultra-premium have taken a little bit of a decline.” In 2022, Scotch sales fell by 0.3% in the US, Discus noted, and while blends rallied slightly to 7.3m cases, their sales are well below the 8.3m of 2008. Undaunted, Beam Suntory has just launched its first blended Scotch whisky – Ardray – in New York and Los Angeles “to stimulate the reappraisal of blends”, says MacKenzie.

The heady days of pandemic spending may be over, and, as Swonger says, “the economic uncertainty brought by higher interest rates and inflation has slowed down the entire industry”. But it is the big US beer brands that are bearing the brunt in their native homeland. If you are a premium-plus spirit, your prospects in the US are much better, especially if you happen to be Tequila.

Can you give me an example of a challenge/challenges facing liqueurs in the US, and how is B2B manufacturer Creamy Creation creating solutions?

Matthew J Benny – executive vice-president, the Americas, Creamy Creation: “One of the challenges facing the cream liqueur subcategory is busting through the stereotype that cream liqueurs are all indulgent and consumed in the winter months. Although that is the biggest percentage of consumption, it’s also limiting the possibilities of the category. Often times, brands pigeon-hole creams as only limited releases or ways to boost holiday sales, but plenty of products have balanced year-round demand. Summer-inspired products with fruity and tropical flavours can target consumers looking for a lighter mouthfeel and drinking experience. We advise our customers on different ways to create products with a more balanced demand, whether that is a lighter product that can be used in cocktail creations or consumed as a ready-to-drink.”

As living costs rise, how are you connecting with consumers to ensure they choose your brands in an increasingly competitive market?

Chris Egger – CMO and co-founder, Portofino Dry Gin: “Portofino Dry Gin differentiates itself through an authentic narrative that highlights its heritage, craftsmanship and passion for the Italian Riviera. By focusing on quality and a distinct Mediterranean flavour profile, we build trust and loyalty with consumers looking for a superior gin experience.

“Despite rising costs, Portofino Dry Gin offers a compelling value proposition by striking a balance between affordability and outstanding quality. Consumer engagement is fostered through social media interaction, tasting events, and collaborations with like-minded brands to creating unique experiences, extend reach and generate curiosity.”