Expect Some On-premise Relief in 2010

FILED NOVEMBER 1, 2009

Dear Client:

With 2009 almost over, people are wondering if 2010 will prove better or worse for the alcohol beverage industry. Consulting firm Technomic doesn’t expect to see growth in alcohol sales at the on-premise until 2011, although they believe 2010 will be a little improved. Technomic vp and director of its on-premise practice, David Henkes, acknowledges that “while next year won't be quite as bad, we don't think we'll begin to see real growth in consumer spending on alcohol again until 2011.”

Technomic projects that alcohol sales at the on-premise will decline -2.5% in 2010 “based on expectations of continued contraction in the restaurant and bar industry,” the firm said in a statement. This is a rather large improvement from 2009: Technomic estimates that alcohol sales will end the year down -4.9%.

ON-PREMISE EXPECTATIONS IN 2010. Wine is expected to take the biggest hit next year, with sales projected to decline -6.7%. Spirits are expected to drop -2.1% and beer is forecasted to decrease -1.8%.

The biggest declines will be seen in casual full-service restaurants and high-end white tablecloth restaurants, while bars and nightclubs will show the most growth. Alcohol sales at fine dining establishments are expected to drop -10.4%; casual dining -6.8%; bars/nightclubs +0.6%; lodging -6.1%; casinos -5%; concessions -2%; and other recreation -4.2%.

Technomic bases their outlook for alcohol sales on “continued weakness in restaurant traffic and further consumer frugality,” said David, while noting that “the overall share of visits that include alcohol has been on a downward slide for several quarters.”

This drop in sales is further supported by current data from the Technomic/GuestMetrics partnership which shows check averages are down -6% through the third quarter of 2009. On top of declining traffic, overall alcohol sales levels have fallen at a much steeper rate than the decline in food.

PERNOD SETS GOAL TO MAKE ABSOLUT THE LEADING VALUE SPIRIT

In its annual shareholders’ meeting yesterday, Pernod-Ricard chief Pierre Pringuet said the company would consider selling some of its brands if they were offered the right price. This does not, however, include its 15 strategic brands, he said. He didn’t offer any indication of what brands they may consider selling.

In fiscal 2009, volumes dipped for the 15 strategic brands but sales remained flat on a global basis. Pernod has particularly high hopes for Absolut and Jacob’s Creek.

“We have a major ambition for Absolut and its quite straight-forward,” said Pierre yesterday. “We want Absolut to be the leading value brand in spirits, I did not say vodka, I did say premium spirits. Mark my words.”

He echoed a similar sentiment for Australian brand Jacob’s Creek, which he hopes will become “the global value leader in the wine business. You see we are very ambitious here too.”

Pierre noted that Jameson is a “definite success story in the US. Growth in the US was in excess of 25% per year including last year in midst of the crisis.”

Malibu rum is “arguably the brand that suffered most” is fiscal 2009, said Pierre. “This is particularly the case in the US where Malibu is extremely strong in middle-of-the-range on-trade markets as it’s geared towards young people most hit by the crisis.” However, the brand “seems to be recovering now,” he said. Pernod has launched a new digital platform for Malibu because it’s “most geared towards young people.”

Pernod expects that next year will remain difficult for its champagne brands, particularly Perrier-Jouet. However, the less expensive Mumm champagne brand “was holding up well in a very tight marketplace, especially in America,” he said.

Pernod Ricard said it expects organic growth in profit from recurring operations to slow to a growth rate of 1%-3% in fiscal 2010, down from last year’s 4%. The company still plans to increase promotional spending relative to sales in the fiscal year ending June 30. Chairman Patrick Ricard told shareholders that the company could spend about 10% on secondary brands and 25%-30% for its priority brands.

CONSTELLATION LOOKS FOR A SOLUTION IN ITS AUSTRALIAN AND UK BUSINESSES

For years now Constellation has outlined problems with winegrape overproduction in Australia, and UK retailers driving down prices to exceptional lows. Then in early September, Constellation cfo Bob Ryder told listeners at the Barclay’s Back to School consumer conference that their businesses in Australia and the UK would now operate as one. And finally, on Sunday night Constellation said it is had held discussions with various companies including Australian Vintage Ltd. about a potential merger or sale for part of its operations in Australia and the U.K.

“These include opportunities which may result in the sale of certain assets and a possible combination of a portion of Constellation’s Australian and U.K. wine operations with Australian Vintage Ltd. (AVL) in exchange for a substantial, but non-controlling, interest in the combined entity,” the company said in a statement.

“If a transaction results, the combined companies would operate as a stand alone wine company, which would be listed on the Australian Stock Exchange (ASX).”

The discussions are preliminary, however, and may not lead to such a transaction.

QUICK BACKGROUND. You’ll recall that UK big box retailers continue to offer extremely cheap private label wines and the government has adopted consistently larger tax increases. Meanwhile, Australian growers are still grappling with oversupply, lower global demand and an increasingly strong Australian dollar.

In September Bob said: “The biggest issue is there are just too much Australian wines on the market. We really don’t see that repairing itself in the near future. You have very aggressive retailers in the UK that really don’t like you bringing up price and they have a lot of leverage in negotiations, again, because there’s a lot of excess supply. And the UK government is funding a lot of their treasury deficits by continually increasing the duty on wine...I don’t think the Australian farmers are very happy right now but they’re very slow to react because the thing that has to self correct here is they have to rip vines out of the ground...that will be slow to come.”

Stay tuned for more updates...


Until tomorrow, Megan

“Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule.”
Friedrich Nietzsche

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