The global drinks industry is expected to grow profits by up to low-double-digits over the next 12 to 18 months with premium spirits continuing to outperform entry-level products, according to a recent report.
A new report from credit rating agency Moody’s on the global beverage industry predicts that the sector will grow operating profits by high-single-digits to low-double-digits over the next 12-18 months following “unprecedented declines” in the first half of 2020 due to the pandemic.
The report said growth will “accelerate” in 2021 if on-trade venues are open, however earnings before interest, taxes, depreciation, and amortisation (EBITDA) for drinks companies are not expected to return to 2019 levels until 2022.
Furthermore, Moody’s noted that recovery will be stronger for firms that operated in markets that witnessed steep declines in the first half of 2020 as a result of on-trade closures.
The report noted that European-based companies and those with large European operations suffered more than US-focused firms because bars and restaurants are of greater importance for alcohol consumption in Europe.
The companies with a full supply chain shutdown will see “stronger growth in a post-pandemic environment”, the report continued.
The report also noted that off-trade demand for spirits was strong at the peak of the virus, most notably in the US. Sales were up by double digits in off-trade channels in March and April.
Companies with a big presence in global travel retail suffered because international travel dropped abruptly. The report said travel retail exposures vary from less than 5% of sales for companies like Brown-Forman, Diageo and Bacardi to high-single-digit and low-double-digit percentages for Pernod Ricard and Rémy Cointreau.
‘Better premium spirits innovation’
In addition, demand for premium offerings will remain strong, according to Moody’s. The report said: “The industry’s premiumisation trend has been particularly pronounced in spirits, which have been gaining market share from wine and beer, partly because of better premium spirits innovation.”
Premium spirits have “far outperformed” lower-priced products and Moody’s expects this trend to continue “despite overall volume declines” this year.
The report noted that premiumisation “opens the door for more innovation” pointing to the example of hard seltzers, which saw growth rates of around 220% in 2019 and will nearly double in 2020.
However, the hard seltzer sector has become more crowded and the producers that are likely to be more successful are those with “first mover advantages, unique offerings, strong brand names and strong distribution”, the report said.
Moody’s also noted the challenge of tariffs with trade tension expected to be an “ongoing source of uncertainty” for the alcohol industry. Furthermore, the threat of excise and sugar taxes “is heightened” and increased pricing passed onto the consumer could depress volumes for a year or less.
“However this depends on the level of the price increase because larger increases could shift consumption patterns to more affordable products, or to categories with lower taxes,” the report said.
Via The Spirits Business