US spirits buying boosts drinks companies
God Bless America, Land That I Love. That is surely the song drinks company chief executives would take to their desert island after buoyant consumption in the United States enabled them to produce startling results for the final months of 2020.
Diageo, Rémy Cointreau and LVMH all issued figures last week that both surprised and cheered investors. And all made much of dynamic trading in the past few months despite bars and restaurants being locked down in the face of coronavirus.
As reported by the drinks business, sales through restaurants in the US fell by 44% last year. But Uncle Sam’s consumption is heavily slewed to the ‘off’ sector, which accounts for 80% of sales. That more than made up the on-trade deficit with an 18% rise.
And it was spirits that led the way with American consumers adapting their repertoires to drink more and better products, notably in cocktails and especially in the super-premium categories with the largest profit margins.
In the year Scotch sales in the US rose by 37%, Cognac by 21.3% and Tequila and mezcal combined by 17%.
Within that pattern there was a significant increase in e-commerce purchases, aiding the bigger groups with deeper data on consumer patterns and larger teams able to adapt their supply chains and marketing messages. Craft distillers have suffered as a result.
Diageo, for instance, claims that in the six months to Christmas its net sales by value in the US via e-commerce routes rose by more than 200%. It took 21% of business in sales of spirits through the Drizly ‘online liquor store’ where five of the top 10 alcohol brands sold in the year were from its portfolio, including two of the top three.
Can that growth rate persist? There has been much switching to less traditional purchasing routes caused by the pandemic but the off-trade was already predominant before the pandemic struck. Covid-19 has magnified that picture
Producers expect a partial reversion to previous patterns when some form of normality returns. But as Diageo’s Ivan Menezes puts it: “Some of the new growth will stick”. The big question is, how much?
Rémy Cointreau was first off the blocks last week with a 25% bounce in group sales during the October to December quarter following a 16% slump in the first six months of its financial year.
Cognac sales (the bedrock of the business) soared by 33% in the autumn quarter, wiping out the 18% loss between April and September. The company pointed to “very strong” US demand for home consumption, which remains “very buoyant”.
Although LVMH saw organic group sales fall by 16% in 2020, the wines and spirits division’s revenues did better, falling only 14% down. That was largely due to the “remarkable resilience of Cognac” which rebounded in the second half of the year “driven by demand in the United States”.
Both Rémy and LVMH also noted burgeoning demand in China, notably for Cognac.
Diageo made no bones about the significance of US demand in generating overall organic sales growth of 1% since the summer. North American sales grew by 12% compared with the six months to the end of June compared with a 10% slump in Europe and Turkey, a 3% decline in the Asia Pacific region and a loss of 1% in Latin America and the Caribbean.
Without its own Cognac, Diageo’s big winner in the US in the second half of last year was Tequila. Sales soared by 80% with Don Julio putting on 56% and Casamigos a remarkable 139%, with both gaining spirits market and Tequila category share.
Six years ago Tequila produced a mere 1% of Diageo’s sales after the company ended its distribution deal with José Cuervo to concentrate on developing its own brands. Today the category accounts for 7% of group sales with both Don Julio and Casamigos at the high end of the profitability spectrum.
What happens from here? Emerging markets and Europe are in the doldrums but China is surging –five years ago China generated 2% of Diageo’s net sales: today it is 5% and growing. Similarly China has become Pernod Ricard’s second largest individual market.
But the key battle ground (and profit-generator for the winners) will remain the US, the world’s largest premium alcohol market.
With the swing to spirits consumption, premiumisation and innovation will continue. Menezes says Diageo accounts for 6% of US spending on alcohol but only 2% of volumes, “so there is a long way to go”.
How confident are the players? In public, caution is the watchword while Covid-19 keeps bars and restaurants closed and travel retail avenues off limits. There are also anxieties about Donald Trump’s parting imposition of 25% penalty tariffs on Cognac especially. That will not disappear in the near future and a so far unquantified hit to volumes is inevitable.
Neither Diageo nor LVMH have offered forecasts for the next few months but there are signs of optimism in the boardroom. 2020 was one of the most difficult years in living memory – by April everyone had withdrawn forecasts for the year and had no idea of the likely impact of the pandemic – yet Diageo has had the confidence to increase its interim dividend by 2% and there are rumours of it resuming its share buyback scheme.
Meanwhile, Bernard Arnault points to “the remarkable resilience of Cognac” and says LVMH, “is in an excellent position to build upon the recovery for which the world wishes in 2021.”
Rémy’s finance chief Luca Morotta says he is, “very confident over our outlook and well on track for a strong topline performance in the second half [to the end of March].”
He went on to say that he was “comfortable” with consensus forecasts that Rémy Cointreau would see its full year profit increase by 5% against a disappointing 2019.
With pandemic numbers predicted to decline as vaccinations are rolled out, sales volumes and profits, especially in the US, should rise. But when the groups unveil their next figures, bear in mind that they have little to beat in terms of annual comparisons. The first six months of 2020 were a wasteland.