Category: general

Recent news reports indicate that the US and EU may be nearing a trade deal that would impose a 15% tariff on EU goods entering the US. A few reports suggest that Spirits, and possibly wine, might be excluded from these tariffs. This means that the uncertainty continues.

Much work has been done across the industry on how individual brands will address tariffs. Understanding the impact on volume sales due to price changes is challenging to calculate. The below assumes that a 15% tariff is imposed on EU wines. The wine category can be described as:

• Extremely fragmented. TTB approves over 100,000 wine labels a year. Labels only need to be submitted for new products or labels that have material changes. This implies that there are likely between 300,000 and 400,000 wines available in the US at any given time.
• There are no must-have brands in the Wine category. When examining the back bar in a restaurant, one will find a few brands that are commonly featured, such as Jack Daniel’s and Tito’s, among others. When one looks at the Wine List, there are no brands with distribution anywhere near that of key Spirits brands.
• The key determinant of the impact of price changes is not the consumer, but rather the market. In the Off-Premise, the buyer will make decisions on continued distribution, frequency of promotions, or displays. In the On-Premise, the buyer has 1000’s of options for substitution. They can easily make decisions about alternative products to maintain a price point for the consumer while maintaining their margins.

BW166 has archived wine scan data for almost twenty years. We have examined scan data from food stores to estimate the volume impact of price changes. Food store data was used, as we have the largest archive of food store data. In addition, most food store data is sourced from actual scan data as opposed to sample store data extrapolated to a market.

• Data from 2012 to present.
• Reviewed price changes and volume changes for each SKU included.
• Only included SKUs that sold 10,000 9L cases in the year evaluated. This resulted in a dataset of just over 4,000 individual data points.
• Only table wines priced between $10.00 and $50.00 per 750ml equivalent were included.

The result is shown in the following scatter diagram. Most items have not experienced a material price change during the period. This results in a mass of data at the center of the chart.

The black line represents a linear regression of the percent volume impact based on the price change. Given the fragmentation of the Wine segment, one cannot definitively say that a specific price change will deliver a particular percentage change in volume. The analysis provides the directional risk.

Based on the directional risk, the table below indicates the binary choice an EU wine producer may face between absorbing the tariff or passing it on to the market. Certain assumptions have been made, including:

• An item selling for $20.00, per 750ml wine bottle.
• Assumes an annual volume of 5,000 cases, although the results are proportional depending on actual volumes.
• Assumes retailer margins of 33%, distributor margins of 25%, and importer margins of 25%. These margin rates will vary significantly for multiple reasons.
• Freight, tax, and duty are assumed to be $10.00 per 9L equivalent case, may be understated depending on whether the product is brought in D.I. versus being warehoused in the US.
• The analysis examines the gross profit margins of two different producers, at 50% and 25%. These rates will vary significantly.
• For domestic margins, we have assumed that 100% of the volume is sold Off-Premise. The domestic margin will be higher for the portion sold On-Premise.

The table shows the following:

• In this model, the tariff will be $12.38 per 9L case. If 100% of the tariff is passed on, the retail price will increase to $22.69 per bottle.
• Using the regression line above, the $2.69 price increase for a bottle will result in a 52% decline in volume. This is a directional result; however, the outcome may vary.
• If the producer has a 50% gross profit margin:
  • Passing the tariff on will result in a theoretical 52% reduction in gross profit, or from $206K to $99K (52% decline). The producer will need to decide what to do with the existing inventory. Additionally, the margins may be reduced due to the need to allocate fixed overhead across fewer cases.
  • If the producer absorbs the tariff, the gross profit margin will decline to 43%. Total gross profits will decrease from $206K to $152K (26% decline).
    • The result is better than passing on the tariff, but the 26% drop in gross profit may cause the producer to transition from a profitable entity to a loss-making company.
• If the producer has a 25% gross profit margin:
  • Passing the tariff on will result in the same 52% drop in volumes. Total gross profit will decline from $103K to $50K. While this is still a52% decline, it is likely far more impactful on the viability of the business.
  • Absorbing the tariff has a similar impact on total gross profit as passing on the tariff.

Passing on or absorbing the tariff will create significant challenges for the producer. In both cases, the result might be a business that is no longer viable for the long term.

In addition to the impacts on the producer, the tariff changes can have a significant effect on entities in the US. In this model, the producer has a gross margin from $103K to $206K. The domestic margins for importers, distributors, and retailers combined are at a minimum of $737K, 2.6 to 6.2 times the margin at risk in the EU.

A 15% tariff will have a significant impact on many entities in the wine business. Ideally, the recent indications that wine may be excluded from the 15% tariff become a reality.

Queries on custom analysis can be directed to admin@bw166.com

BW166 tracks the total beverage alcohol market in the US by analyzing 100% of the domestic tax-paid shipments into the US market, as well as all imports into the US market. We maintain monthly or annual data files back to prohibition. This is the only way to truly track the entire market as opposed to other services that may only represent 50% to 60% of the market.

The table below presents key facts from the past five years in the US market. Spirit-based RTDs have been the key driver of growth in the industry. Other than RTDs, the market has been flat to down in the low single digits on an annual basis over the past five years. The rate of growth of Spirits-based RTDs is slowing. Volume growth over the past 12 months has been 6.4 million cases compared to 25.6 million cases in the prior 12 months.

The chart below shows the rolling 12-month growth rates from June 2015 to June 2025. Prior to the Pandemic, growth rates varied from negative in the low single digits to positive in the mid-single digits. The pandemic disrupted supply chains, causing significant fluctuations in market trends. Tariffs are now disrupting trends, but the market is likely finding a new equilibrium. Overall trends for beverage alcohol are expected to be down in the low single digits moving forward.

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There is much commentary in beverage alcohol trade publications on the trends in the US beverage alcohol market in 2024. Much of the news is negative. BW166 has just issued the Total Beverage Alcohol Overview for December 2024 with a special addendum. The report tracks 100% of the total beverage alcohol entering the US market based on TTB, customs, and other government sources. Different data sources portray their information as a view of the total US market but often only account for about 50% to 60% of the total market.

The reality is that 2024 was a rough year, but there are some bright spots. Looking across the market at Beverage Alcohol and Economic trends, the following highlights some of the key metrics.

Consumers increased spending on Beverage Alcohol to $408.8 billion (+3.2%) across both off-premise and on-premise channels. The data is sourced from the Bureau of Economic Analysis (BEA), which reports on significant economic data such as GDP and Personal Consumption Expenditures (PCE), which account for over two-thirds of GDP. The BEA data demonstrates the premiumization of Beverage Alcohol growing from 1.80% of PCE to 1.96% of PCE over the past decade. This is a material shift, but it is interesting to note that in 1960 spending on Beverage Alcohol accounted for 3.44% of PCE.

The BEA relies on survey data from the Census Data, which performs an economic census of businesses across the US every five years. They supplement this with monthly surveys of various Key channels. Trends for all consumer spending in channels important to the Beverage Alcohol industry in 2024 were:

• Supermarkets and Grocery Stores – $853,8 billion (+0.9%)
• Warehouse Clubs and Supercenters – $667.2 billion (+5.0%)
• Beer, Wine, and Liquor Stores – $73.8 billion (+2.4%)
• Full-Service Restaurants & Drinking Places – $566 billion (+5.3%)

Sales of Beer, Wine, and Spirits Wholesalers totaled $185.3 billion, -1.0%. Many sources have reported increased inventories at wholesalers compared to pre-pandemic levels. BW166 estimates that the carrying cost for inventories has tripled over the past five years due to higher inventory levels and interest rates. The carrying cost has increased from 5% of operating profits to 16% over this period.

All Wine shipped into the US in 2024 totaled 362 million 9L cases, a decline of 4.2%. Domestic bottled products were down 8.7%, while imports were up +6.6%. A bright spot in the Wine market were flavored Wine Beverages, +28%. Imported Sparkling wines and Imported Still Wines were also bright spots, +7.5% and +2.2%, respectively.

Beer and cider shipments into the US totaled 2.62 billion cases (2.25gals), a decline of -1.8%. Domestic Beer drove the decline, with a decline of -3.5%. Imported beer was another bright spot, with volumes of 579 million cases, +4.8%. Cider declined from 19 million cases to 18 million.

Spirits shipments into the US totaled 307 million cases, an increase of 5.7%. The key driver of growth was RTDs packaged in the US. The TTB reporting included RTDs in both Cordial and Cocktail segments. These two segments for products packaged in the US totaled 115 million 9L cases, +21.1%. This was an increase of 20 million cases in 2024 versus a growth of 26 million cases in 2023. Excluding these two segments, all other spirits packaged in the US totals 110 9L cases, a decline of -3.3%. Packaged imports totaled 82 million 9L cases, which was basically flat compared to 2023. A bright spot for imports was 29 million cases of Tequila, a growth of +5.3% versus 2023.

BW166 has an index of total servings of beverage alcohol entering the market. A serving is 12 ounces of Beer, 5 ounces of Wine, 12 ounces of Flavored Wine Beverages, 1 ½ ounces of traditional Spirits, 3 ounces of Cordials, and 6 ounces of cocktails. The calculation may slightly overstate the total servings given the growth of Spirits RTDs at 6% to 8% alcohol content. The index is based on 2003 = 100. At the end of 2024, the index stood at 118.04, a decline of -1.10% from 2023.

BW166 also has an index of servings per legal drinking-age adult. The base is also 2003 = 100. At the end of 2024, the index stood at 93.5, a decline of 1.98% from 2023 and a 6.5% reduction from the average between 1995 and 2022.

These two indices demonstrate a decline in the volume of beverage alcohol in the US market, although, as noted at the beginning of this post, consumers continue to increase their spending. Unfortunately, some recent Gallup survey data support the reduction in the market.

• Gallup reports that over the past two years, the percentage of adults who believe that moderate consumption of alcohol is not healthy has increased from 30% to 45%. This is driven by people under 30.

In addition to consumer attitudes toward beverage alcohol, the category has become more expensive. Over the past 30 years, average annual pay has been up 127%. The Off-Premise cost of Beverage alcohol per serving has increased by 200%, and the on-premise cost of beverage alcohol per serving has increased by over 300% during this same period.

The attitudes of younger consumers, coupled with the elevated costs, do not bode well for a broader adoption of Beverage Alcohol, especially with younger consumers. Couple these points with the pressure put on alcohol with claims of cancer risk, and the industry has some strong headwinds to deal with. The industry needs to address how to change perceptions and consider how to make products more affordable for younger consumers while contemplating the risk of class action lawsuits.

The industry has not faced these types of challenges since the 1980s. The solutions are more complicated today.

Recently, the Bureau of Economic Analysis released its fourth quarter estimate, reporting GDP growth of +3.3% – demonstrating the good news that the U.S. economy is still expanding. And, importantly, highlighting that a key component of the increase was consumer spending.

Consumer spending in calendar year 2023 for off-premise beverage alcohol was $225 Billion (+3.7%) while on-premise beverage alcohol reached $162 Billion (+11.3%) (note: neither of these amounts is adjusted for inflation, which was significant, especially in the on-premise) This is very good news that consumers continue to increase their spending on beverage alcohol.

On the downside, total servings of beverage alcohol entering the market were down -4.6%. BW166 has tracked servings of Beverage Alcohol entering the market monthly on a rolling twelve-month basis back to 2003 and annually back to the repeal of prohibition. The calculation of average servings is as follows:

• Beer & Cider – 12 ounces.
• Wine – 5 ounces, Wine Coolers – 12 ounces.
• Spirits – 1.5 ounces, Cordials – 3 ounces, RTDs – 6 ounces.

This is not a perfect science, especially with RTDs, but it gives a directional indication of overall trends normalizing for beverage type. Putting the 2023 decline in perspective, between 1996 and 2019 the number of serving grew annually at a rate of 1.21%. The Legal Drinking Age (LDA) population grew annually at a rate of 1.20%. This means that per capita consumption has been flat during this period. Looking further back historically to prohibition, there have rarely been material differences in servings and LDA growth. The last significant change was a decline in servings of -3.9% in 1991 when a significant F.E.T. increase occurred.

To look at inventories, one measure of calculating potential inventory build is to look at growth in servings versus LDA growth. Between 2019 and 2023, the average annual LDA growth was +.93%. The change in servings was:

• 2020: +1.20%
• 2021: +3.06%
• 2022: +1.22%
• 2023: -4.61%

Assuming that per capita consumption has remained relatively stable, these numbers indicate a buildup of inventories at wholesale, retail, or within consumer pantries through 2022, with some correction in 2023.

Another metric that indicates an inventory buildup at the wholesale level is the U.S. Census monthly survey of Beer, Wine, and Spirits wholesalers. From 2000 to 2019, wholesale inventory has been roughly 10.5% of trailing twelve-month sales. Some recent Metrics

• December 2019
  • LTM revenues – $158.8 Billion
  • Inventory – $17.1 Billion
  • Inv % of LTM Sales – 10.8%
  • Estimated days Inv (20% GP Margin) – 49 Days
• November 2023
  • LTM revenues – $187.0 Billion
  • Inventory – $24.6 Billion
  • Inv % of LTM Sales – 13.2%
  • Estimated days Inv (20% GP Margin) – 60 Days

The data shows distributor inventories have grown significantly. Historically, the typical reaction of wholesalers would be to reduce inventories to a par level of 45 days; however, several factors need to be considered:

• Pandemic supply chain disruptions.
  • Whether ocean freight or domestic freight, there were significant increases in inventory given the uncertainty of supply.
  • With stay-at-home orders, consumers were not spending on travel and out-of-home dining. These savings, coupled with government programs, increased consumers’ spending on goods for home consumption. Examples are more premium spirits purchases for amateur home mixologists or increased spending from Wine Clubs. Some of this was consumed, but the volume remains in consumers’ homes.
  • Factors such as these have created difficulties with traditional demand planning tools, so it is likely both wholesalers and retailers had an elevated assumption of future sales of higher-priced items. This results in higher inventories at wholesale and retail stores, especially of higher-priced items.
• Inflation and interest rates.
  • From December 2020 to December 2023, food and beverage costs for at-home consumption are up +19.1%. Average hourly wages are only up +14.1%. Consumers are feeling squeezed as inflation has exceeded compensation growth. One reaction to this has likely been the destocking of consumers’ pantries of beverage alcohol built up during the pandemic.
  • The higher interest rates are driving wholesalers and retailers to reduce inventories as well. This is more difficult with higher-priced items that were ordered when the demand signals were higher than reality.
  • One estimate of how higher interest costs impact wholesalers follows:
    • 2019
      • Assume 30-day terms from suppliers and a 3% annual interest cost. The yearly interest cost for inventory was about $199 Million.
      • Since wholesale is a low-margin business, assuming a 3% operating profit margin, wholesalers were making $4.8 Billion operating profit. Carrying cost on inventory was 4.1% of operating profit.
    • 2023
      • Assume 30-day terms from suppliers and an 8% annual interest cost. The yearly interest cost for inventory is now about $984 Million.
      • Since wholesale is a low-margin business, assuming a 3% operating profit margin, wholesalers were making $5.6 Billion operating profit. Carrying cost on inventory is now 17.6% of operating profit.

The inventory problems have not been fully corrected, and we will see continued adjustments to inventory in 2024. Assuming a return to the norm on a per LDA consumption basis, we see the upcoming trends to be:

• We assume wholesalers will try to get inventories down to 30 days on average to reduce their carrying costs significantly. Unfortunately, this may be significantly more high-priced inventory they cannot quickly sell and reducing other supplier inventory to 15 days. This will lead to out-of-stocks and lost depletions for some suppliers.
• Since servings shipped into the market were well below estimated consumption, we should see about a 1% increase in shipments in 2024. It’s impossible to project exactly how this splits between Beer, Wine, and Spirits, but all parties will be fighting for a share of the market.
• The 1% growth in 2024 versus 2023 will decrease inventories, and shipments into the market should be back to 2019 levels in total shipments.
• In 2025, after inventories have been stabilized, shipments into the market could rebound in the 3% to 4% range. This is simply the effect of normalizing shipments and consumption.
• In 2026, shipments of servings into the market would revert to an increase of 1%, in line with LDA population growth.

The inventory issues are unusual in the history of the beverage alcohol industry in the U.S. It should also be noted that the servings entering the market do not account for potential shifts in Baby-Boomer consumption as they age, the apparent differences in perception of beverage alcohol by Gen Z versus older generations, or the negative pressure on beverage alcohol by the WHO or other government entities.

At this point, from a supplier perspective, there is another year of challenges ahead in 2024. One thought to address the challenges is to increase terms for domestic supply to 60 days if a wholesaler agrees to maintain stocks of 45 days for the extended terms. This might reduce the risk of out-of-stock and lost depletions, but the bankers and CFOs may not like it.

If misery loves company, there was plenty of misery to go around for Beverage Alcohol in 2023. The total servings of Beverage Alcohol shipped into the US market in 2023 declined by 5.1%. The data used by bw166 measures the total amount of Beer, Wine, and Spirits shipped into the US market; it is not a limited sub-segment such as syndicated data or SipSource. The final data can take between 30 to 90 days to be published, so the following estimates are based on bw166’s proprietary algorithms to project the nine to eleven months of data that have been published.

The declines include Beer shipments, 191.2 million barrels, down -5.5%; Wine Shipments, 394.6 million 9L cases, down -8.8%; and Spirits shipments, 289.1 million 9L cases, only up +3.0%.

Looking deeper into Spirits shipments, the TTB shows significant growth for Cordials and Cocktails, and it appears that some of the growth reported for Cordials includes a significant amount of RTDs. Cordials and Cocktails are trending up +30.8% in 2023. The other Spirits categories, such as Whiskey, Vodka, Tequila, etc., are trending down -8.9% in 2023. RTDs per 9L are not the same number of servings as a 9L case of 80-proof Spirits, so total servings of Spirits are down -2.5%. Also, from a margin perspective, it is probable that margins for RTDs are significantly lower than traditional 80-proof Spirits.

A driver of declines in 2023 is likely inventory reductions. These reductions are a result of several factors. A few examples are:

• With elevated interest rates, both wholesalers and retailers are reducing working capital by cutting inventories.
• The Census Bureau tracks the value of sales and inventories of Beer, Wine, and Spirits wholesalers. For the five years before the Pandemic, wholesale inventories on a monthly basis averaged 11.4% of annual sales. In 2023, inventories have averaged 13.7% of annual sales. This is a significant increase in a high-interest rate environment.
• During the Pandemic, consumers appear to have increased purchases of Beverage Alcohol. This was seen in Wine DTC numbers in 2020 and 2021. Likewise, this was seen with significant expansion of NABCA volumes, especially in 2020. These trends can be considered pantry loading, and consumers have likely been destocking their pantries.
• Consumer spending, especially for lower-income consumers, has been pinched. Since January 2021, grocery inflation is up 22%, while the average hourly wage for all workers is only up 12%.

A note of good news in 2023 is that consumers continued to increase spending on Beverage Alcohol. Total spending was $398.9 billion. Off-Premise beverage alcohol spending was $238.7 billion, up +2.7% versus 2022. On-Premise spending was $160.2 billion, up +10.2% versus 2022. The faster growth in the On-Premise was driven by higher inflation continuing in the On-Premise, likely driven by the need for higher markups in these channels to offset higher costs.

While some of the declines have been driven by inventory reductions there are other troubling issues. Based on Gallup survey data, a higher share of younger consumers have a less positive view of Beverage Alcohol. In addition, there are troubling signs from various government bodies with a more negative view of alcohol. The industry needs to work together to overcome these issues to make sure 2023 is not the new norm.