Brexit and Total Beverage Alcohol – A Quick Primer

After the United Kingdom voted on Thursday to exit the European Union, there has been considerable commentary on the long term economic implications for the global economy including the total beverage alcohol industry. Ultimately, for the beverage alcohol industry, Brexit’s largest effect is likely to be foreign exchange (FX) rate fluctuations in both the near and long term.

Since the vote to leave the European Union, the GBP has dropped in value against the US Dollar (USD). Conversely, the Euro to USD exchange rate has remained relatively stable over the past 18 months. While the majority of trading is speculative, it appears unlikely that the GBP/USD rates will revert to historical norms in the near term.

Presuming these rates signal a new normal, there are some general assumptions that can be made relevant to the beverage alcohol industry:

  1. Overall exports from the UK to the US will be more profitable for UK-based exporters.
    • Scotch Whisky is the biggest potential beneficiary. However, many of the major Scotch brands are owned by international corporations and these companies will protect brand positioning so it is unlikely that pricing will be reduced to gain market share. That said, incremental margin may be used for marketing spend to drive greater consumer awareness.
    • The UK is not a major exporter of Wine or Beer into the US so there are likely to be minimal impacts related to exchange rate fluctuations.
  2. The UK is a major importer of beverage alcohol and a weakening GBP against the local currencies of most major producing countries will make the UK a much less profitable market
    • For US based producers, this means that either prices will necessarily increase in the UK market, or export margins will be reduced
    • Regarding pricing specifically, the UK market has traditionally been resistant to price increases. However, these FX shifts may make it possible to protect exporter margins over the medium term.
  3. As the potential profitability of the UK export market declines, international producers are likely to look to other markets to achieve growth objectives, including the US.
    • To the extent that the Euro shows on-going weakness against the USD, this will make it possible for Euro-denominated producers to increase more on price relative to US domestic producers.

Overall, for the US Beverage Alcohol market there are two points to be made:

  1. With a strong USD and a weak Euro, it is a good time to buy barrels and equipment from Europe.
  2. With a strong USD and a weak GBP it is a great time for a vacation to the United Kingdom; and, if you plan to make it a sales visit, be prepared for pricing discussions.

To be able to track Beverage Alcohol imports and exports on a monthly basis for volume, value in USD, and value in local currency for all major trading countries, please see the bw166 Import and Export reports for Beer, Wine, and Spirits.

Observations on the 2015 Preliminary Grape Crush Report

The wine grape crush declined from 3.9 million tons to 3.7 million tons (excluding raisin and table grapes), a 5% decline from last year. Generally, there were declines in coastal areas while the central valley had another strong harvest. Despite the decline in coastal areas, with the three preceding strong harvests, current forecasts do not predict any shortfalls of supply. As such, this harvest has brought supply back into balance with demand.

In analyzing the report, bw166 has identified two key metrics of interest for this harvest. The first concerns the concentration of winery owned/operated vineyards relative to open market purchases. On a statewide basis wineries owned or controlled 15.1% of all wine grapes crushed in 2015, down from 17.0% in the preceding harvest. This decline is mirrored in individual districts but of interest is the larger concentration of winery owned/operated vineyards in the coastal areas. For example, District 3’s (Sonoma) concentration was 34.5% in 2015 and District 4’s (Napa) was 40.9%. This dichotomy in concentration of vineyard ownership by wineries demonstrates that as coastal fruit gets more expensive, wineries are finding it more acceptable to control their grape sourcing and costs through outright ownership.

The second concerns the value and average price per ton for this year’s harvest. The total market value of all wine grapes crushed dropped to $2.88 billion from $3.43 billion, a 16.0% drop in value. This drop was driven both by quantity (3.70 million tons in 2015 from 3.89 million, a 4.9% decline) and market value per ton ($777.96 in 2015 from from $881.24, a 11.7% decline). The higher decline in market value per ton versus tons was caused by lower overall yields in the higher priced coastal areas. In other words, higher priced coastal areas represented a smaller share of overall tons in 2015 versus 2014, bringing the total value per ton down. In fact, prices within the coastal areas saw pricing increases. District 3 (Sonoma) saw average market value per ton increase to $2,465 from $2,343. District 4’s (Napa) increased to $4,417 from $4,071. District 7 (includes Monterey) was stable moving at $1,239. Lastly, District 8 (includes San Luis Obispo and Santa Barbara) saw market value per ton increase to $1,609 from $1,533.

The complete detail of the 2015 and 2014 harvests by district and key varietals can be downloaded from here.

Report Timing

Question: Why do you wait so long to release your reports?

Answer: Our reports are dependent on various government data sources and we minimize the use of any estimates. Our goal is to release each report within three business days of the receipt of the last data sets required for any report.

bw166 Publication Advantages

Question: Why have you started publishing beverage alcohol industry data?

Answer: There are 3 key factors that our reports address:

  • As we watch consumer interaction with the beverage alcohol category we are seeing much more cross-over of consumption. Most industry data focuses on either beer, wine or spirits. We are producing industry data across all three segments with a consistent and comparable methodology.
  • Having run divisions of public companies and private beverage alcohol companies for over 20 years I know there are numerous times when industry information is necessary. Some examples of requirements for industry information include; retailer presentations, wholesaler presentations, banking discussions, investor presentations, board presentations etc. Too often this requires working on periods that are not a calendar year or trying to put in perspective partial data, such as scanner data. The bw166 reports are structured to fill multiple needs across beer, wine and spirits.
  • We are inundated with published reports every day about trends in our industry. Often times these deal with a portion of the market or a very short period of time. The bw166 publications allow users to put partial reports from other sources in context with the total industry.

Shipments vs. Depletions

Question: Why do you focus on volume entering distribution?

Answer: The source of our data is varied government reports at both the federal and state level. These reports primarily focus on tax collections which tend to occur when goods are shipped from a producer to a distributor. We believe this is a good measurement of demand in the marketplace. As everyone who has been involved in the industry knows, over time, shipments equal depletions which ultimately equal consumer take-away. Any discrepancy between shipments and depletions results in a change to inventory in the market. Obviously there are fluctuations on a month to month or quarter to quarter basis but generally on a rolling twelve month basis the overall inventory in distribution channels varies minimally.