With inflation being a key the word on everyone’s lips right now, Radobank’s analysts have given their insights into the beverage industry in the 2023 Beverage Market Buzz.

Though inflation has been on the rise for some time, savings that consumers built up over COVID have moderated inflationary impacts on retail spending. However, these financial cushions are now depleted, and some markets are seeing negative wage growth.

“Many economists are predicting an economic slowdown, if not an official recession, in the coming year. But even barring an economic slowdown, consumer spending patterns of 2022 may be difficult to sustain in 2023,” said Stephen Rannekliev, Rabobank beverage sector analyst.

Retailers can expect to see changes in the volumes, brands, and products purchased by consumers. The on-premise will be most affected by beverage price increases and rising utility costs.

 USA: Premiumisation on the rise

In 2022, volume declined across all alcohol categories, with wine seeing the largest drop. The floor for this reduction in volume appears to be between four and five percent. Prices also increased for beer, wine, and spirits, but less sharply than non-alcoholic beverages.

The US beer industry underwent two major price increases last year – a customary Q1 increase, and a second increase in the latter half of 2022. In December 2022, beer prices increased by three percentage points. This second increase was driven by perceived consumer resilience and the expectation of competing labels increasing their prices. Rabobank analysts expect that brewers will have to juggle increased ingredient costs and maintaining volume into 2023. Conversely, wine prices remained relatively stable.

“The most likely explanation (and one of the biggest differences with the beer market) is that wine is significantly more fragmented – meaning it is far riskier to unilaterally take price increases than in almost every other beverage segment,” explained senior analyst Jim Watson.

There is a premiumisation trend among US wine consumers, though volume in premium wines has decreased somewhat. However, premiumisation is not as effective in the beer market.

“Craft beer is much more fragmented than the mainstream segment, which more than offsets any benefit from being at a more premium price point,” Watson added.

                Asia: Market recovers after COVID

Asia was experiencing in a strong premiumisation cycle, but the effects of the pandemic on product availability and movement restrictions has changed this.

2021 was a big year for beverage sales in China, with increased marketing spending and numerous new product launches until Q3 2021. However, this began to change at the beginning of 2022. The beer market took a hit as movement restrictions limited access to the on-premise. Even so, off-premise beer consumption increased in H2 2022 due to the heatwave.

January of this year saw average spending price increases across all categories. This increase was timed due to the reliable trade during the Chinese New Year period, as well as retailers frontloading their price increases ahead of summer.

“While the weak consumer confidence and spending power resulting from macroeconomic slowdown and inflation overhang consumption, easing pandemic restrictions are a positive catalyst for beverage demand and recovery in the on-premise and impulse channels,” senior analyst Sudip Sinha outlined.

Unlike China, the Southeast Asian beverage market struggled in 2021. It began to recover in 2022, with new product launches increasing by almost 90 per cent in the first half of the year. Thai beer sales are now equal to pre-pandemic levels, and Vietnamese sales have surpassed pre-pandemic figures. Vietnam and the Philippines are leading price increases in the region, but these price increases are still not enough to match inflation.

“On a 12-month basis, alcoholic drinks price inflation remained subdued in the region, which suggests that brands will look for opportunities to increase prices in 2023 to mitigate higher malt, distribution, and packaging costs,” Sinha said.

Price increases are not the only method to maintain profit margins amidst inflation. Sinha suggests that brands could substitute ingredients for cheaper alternatives, change packaging mix and channel mix strategies, and develop a hedging strategy for bulk materials.

                UK: Pubs feel the pressure

The UK pub sector has had a difficult few years, and unfortunately it doesn’t seem that this will change in 2023. In 2000, the UK was home to 60,800 pubs, but by 2020, there were only 47,200. While 2021 saw a small increase of over 700 new pubs, the numbers fell again to a dismal 44,000 in the following year.

“During this time, the typical pub changed character. Many old, wet-led community pubs closed their doors, but modern gastropubs – serving artisan beer and food – emerged,” said senior analyst Francois Sonneville.

Beer prices increased in 2022, sometimes multiple times within the year, and this does not seem to be abating. On average, keg prices will be 17 per cent above January 2022 levels. However, beer in cans and bottles will only increase by 12 per cent, increasing competition between pubs and beer retail.

Rising beer costs is less of a concern for gastropubs than for traditional drinks-led pubs, according to Sonneville.

“The modern gastropub spends relatively less on consumables and has a higher gross margin. Its wage costs are, however, significantly higher. At the start of 2022, both types of pubs spent a similar percentage of revenues on utilities and had fairly equal operating margins,” Sonneville explained.

Even so, food costs are on the rise, albeit more slowly than beer costs. Additionally, statutory minimum and living wages were both increased by about 7 per cent. Rabobank analysts expect wage costs to rise again this month. Due to the labour shortage, actual wage costs in the hospitality industry may increase even further. This labour shortage is exacerbated by Brexit and COVID, as pubs can no longer rely on foreign staff as they once did.

Utility costs look to be another continuing pressure. At its height, electricity prices in January 2023 were 3.5 times the January 2022 level and 10 times the January 2021 level. This is particularly concerning, as the UK government have announced plans to cut energy support.

To mitigate rising operation costs, pub owners can opt to sacrifice their profit margin so as to not pass the cost on to their consumers. While this option is viable for most manage pubs, it will be more difficult in the independent sector, which are struggling the most. In Q4 2022, around 90 per cent of UK pub closures were of independent pubs. Another option is to cut costs, such as staying closed on unprofitable days to reduce wage costs.

“The hospitality sector could also appeal to the government for further support, especially as the industry is an engine for employment and tax revenues. But with public finances stretched and unemployment low, this will be an uphill battle,” suggested Sonneville.

While UK pub owners can work to manage the difficult situation, further closures appear inevitable.

                eCommerce: Changing the model

One of the biggest changes over the pandemic is the explosion of ecommerce. As there is no precedent for online sales making up such a large portion of the retail market, it is difficult to determine how ecommerce will fare amidst inflation.

Adoption of online sales may be abating, with enthusiasm waning among retailers. Most retailers have seen minimal growth in online sales since Q1 2021, and supply chain disruptions, fuel costs, and labour costs are cutting into retailer margins. Wage costs are particularly significant, as fulfilling online orders is more labour intensive than in-store retail. Online beverage sales in the US and Europe are not expected to grow any more than five per cent.

The online beverage consumer tends to be far younger, wealthier, more educated, and more likely to live in densely populated areas than average shopper. The good news for online retailers is that this category tends to be less affected by inflation.

Even so, retailers operating both online and in brick-and-mortar establishments may have to change their business models, as these businesses often prioritise online customer acquisition over profitability. One option is to introduce fees to cover delivery and wage cost, but this is difficult in a competitive market.

“If one retailer tried to cover costs by raising fees or cutting back services, a competitor would happily step in with discounts and/or free delivery,” said analyst Bourcard Nesin.

Furthermore, introducing fees will affect the willingness of consumers to finalise their purchases.

“Even at the best of times, fees present a major psychological barrier for consumers (they really, really hate them!) causing conversion rates to plummet. Combine consumers’ hatred of fees and the impact of inflation and a potential economic downturn on their spending power and you’ve got very strong headwinds for e-commerce growth in the year ahead,” continued Nesin.

As a result of rising costs, quick delivery is on the decline. Instead, retailers are incentivising consumers to utilise in-store and curbside pickup services. Customers using these services are usually older, have families, and are more likely to live in suburban areas. As a result, small package products will suffer.

The premiumisation trend is also expected to continue in the ecommerce sphere. Rabobank expects premium wine and spirits to outperform beer, as the former is over-indexed on older, wealthier shoppers.

“The e-commerce landscape is moving toward a business model that will be more sustainable in the long term. While the transition may be painful and sales in 2023 may be muted, we will soon return to a world where the growth of e-commerce sales, driven by population change and improving infrastructure, will easily outpace the industry overall. Thus, the current landscape should have little impact on beverage brands’ e-commerce strategy,” Nesin concluded.

Needless to say, inflation will be a major challenge in the beverage industry, as operating costs increase and consumer spending changes. Even so, there are promising trends in 2023. These include increasing premiumisation, particularly in the wine and spirits categories, and a stable ecommerce sector.

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