Shot glass half full

The spirit manufacturing industry in Australia, as with the rest of the main spirit-consuming countries, is feeling the pressures of the continuing global financial crisis.

Yet even though consumer sentiment has declined strongly as a result of this, it is also true that the spirits industry’s products are expected to be less adversely affected than other discretionary spending items, as consumption of alcohol is often given a boost by difficult economic times.

Spirit manufacturers buy ingredients such as grapes, sugar, malt, wheat, maize, barley, rye and oats, which are fermented and distilled to produce beverages that include vodka, gin, whisky and liqueurs. Some of these are also blended to produce the range of ready-to-drink “alcopops”.

IBISWorld estimates industry revenue will grow at an average annualised rate of 1.6% over the five years to 2008-09. Industry revenue has been stimulated by the growing popularity of ready-to-drink mixed spirits (RTDs), partly offset by greater concentration in downstream liquor retailing.

However, the increase in RTD excise late last year is expected to cause lower demand, as will the “alcopop” tax if it passes through Parliament. Apart from this one-off affect however, there is expected to be some moderate substitution away from spirits to cheaper forms of alcohol such as beer.

But despite increased levels of alcohol consumption, the industry is estimated to have grown at relatively low rates. Also, the strong competition between industry players has resulted in the low levels of price growth.

International spirits companies have reported that developed nations have exhibited a change. Diageo reports that its off-premise sales have increased as a proportion of overall sales. This shift has been attributed to an increase in home entertainment and travel retail sales. Other factors helping this shift have been smoking bans in many venues as well as increasing concerns over drink driving.

IBISWorld forecasts that industry revenue will grow at an average annualised rate of 2.1% over the five years to 2013-14. The increase in the tax on RTDs is expected to adversely affect the rate of industry revenue growth.

Industry volumes are expected to grow only weakly over the outlook period, as per capita alcohol consumption remains roughly constant. Price growth is also expected to be weak from 2009-10 through 2010-11.

However, the market will still be relatively competitive as profit levels remain attractive. While new entry is expected to be low, existing players are expected to continue to compete for market share.

A major threat to the industry is the increasing power of Coles and Woolworths in the downstream liquor retailing industry – and the impact of the Costco model on these competing retailers is yet to be determined.

Woolworths has also expanded its exposure to the hospitality industry by investing in seven new pubs during 2008. This will continue to put pressure on profit margins for manufacturers.

One significant trend, which has been observed in overseas markets, particularly the US, has been the rise of super premium products. “Premiumisation”, as it has been dubbed by industry participants, is a shift in consumer preferences towards higher quality products. Consumers have begun to associate their chosen spirits with social status or personality, and are increasingly using them to signal class and sophistication.

The limited extent of price growth in the Australian industry indicates that Australian consumers are as yet trading up to a significant extent, however this may become a factor later into the outlook period.

Key success factors for operators in the industry

• Guaranteed supply of key inputs. Ability to ensure adequate quantities of suitable raw materials.
• Product is sold at high profile outlets. Having products prominently displayed at key bars and hotels provides an advantage. In particular, “first pour” status – when bar staff use a particular brand as a default spirit – provides a distinct advantage over competitors in the same category.
• Effective product promotion. Marketing, and especially brand positioning, is essential to sales success in this highly competitive world market.
• Development of new products. Product innovations can occasionally reap the rewards of increased sales, however, new product launches are expensive and carry a risk of failure.
• Economies of scope. Scope economies through production of other beverages, especially wine, spreads risk since per capital spirit consumption in Australia is far less than for overseas markets.
• Financial structure of the company. The debt level of the firm and the way in which it is financed will affect cash flows.

Industry segmentation

Geographic spread

BISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au