The hedges that protected beverage companies from input cost inflation have run out, and consumer savings have been drawn down, and e-commerce now faces a mix of high cost of capital, easing demand and tight labor markets.
But what, you ask, about those positive sales and earnings, such as Diageo, posted? Those are backward looking metrics, responds Stephen Rannekleiv, lead beverage analyst for Rabobank. The challenge for beverage companies is simple: Consumers built up their savings during the pandemic and now are drawing them down, real wage growth (corrected for inflation) has turned negative in some markets, he says.
This year not only will the dramatic rise in input costs continue to pressure margins, but inflation "is leading consumers to make pronounced changes in their choice of products, brands and channels in order to make ends meet. What your competitor does this year is likely to have a bigger impact on your firm than usual, Rannekliev warns.
Beer, wine and spirits have all raised prices and seen their volumes ease a little less than 5%, says analst Jim Watson. Of all the different categories of beverages, only sports drinks and energy drinks have been able to raise prices and see volume increase. None of the volume declines exceeded 5%, suggesting there's a limit on how much volume they are willing to give up to cover increased costs.
When it comes to beer pricing, the tension between covering margins and avoiding volume declines hasn't abated at all. While Rabobank believes further price increases will be necessary, many companies have adopted a wait-and-see strategy, Watson says.
Over the 12 weeks ended Dec. 11, beer prices increased an additional 3 percentage points, but wine prices remained flat. Why are wine prices staying flat? The industry is significantly more fragmented than beer, which makes it hard for wineries to increase prices than almost any other segment, Watson notes.
But there are exceptions. Take direct-to-consumer. Wines from the Napa region had price increases in the low teens, "showing the staying power of the most premium alcohol consumer." To be sure, volume decline for Napa, but no more than any other region. "Much of the direct-to-consumer (DTC) sales reflects wine clubs, where cross-brand elasticity is less of an issue (the consumer is somewhat locked in to your
brand)," Watson says, adding the high-end beer segment has the opposite problem: "Craft beer is much
more fragmented than the mainstream segment, which more than offsets any benefit from being at a more premium price point."
Turning to eCommerce, Rabobank analyst Bourcard Nesin noted there's really no precedent that would give an insight into how online grocery operators might change their strategy and how that might affect online beverage sales.
Most retailers lose money when their customers shop online, especially when delivery is involved. For companies such as UberEats, DoorDash, etc., the fee charged online shoppers simply does not cover the cost of fulfilling the order. So, why play the online game at all if you're losing money on every order? The objective, Nesin says, is customer acquisition.
But what would happen if the online retailer started focusing on profitability? You can expect to see retailers instituting or raising delivery fees, pushing people toward curbside pickup and shopping for their own groceries.
First, online beverage sales in the U.S.and Europe are likely to rise in the range of 0% to 5%. Second, expect retailers to push consumers to curbside pickup rather than delivery to the door. This is likely to lead wine and spirits to outperform beer in 2023.