DF&TR alcohol revival ‘a slowburner’ as wait for Chinese intl pax goes on

By Luke Barras-hill |

Aelia Duty Free spirits at Nice Airport.

Global travel retail beverage alcohol is unlikely to revert to pre-Covid trading levels before 2024/2025 at the earliest, market authority IWSR Drinks Market Analysis has updated.

During a virtual press briefing held on Tuesday (7 June), CEO Mark Meek exercised caution on short term forecasting in the context of the global pandemic, supply chain volatility, rising inflationary pressures, the Russia-Ukraine war and paucity of Chinese international travellers.

This combination presents one of the most uncertain and challenging trading environments for global beverage alcohol in recent years, heard attendees.

BRANDS: SHREWD INVESTMENT CHOICES

“Our view, and it seems to be supported by what we are hearing from brand owners and the travel industry, is we don’t see travel retail and travel returning to normality or pre-Covid 2019 levels until at least 2024 or even 2025,” commented Meek in response to a question from TRBusiness.

“In value terms, Chinese passengers in spirits and across beverage alcohol account for the bulk of spend in travel retail for beverage alcohol and they are not travelling at the moment. Until they start travelling internationally again – and that doesn’t now look likely until the end of 2022/beginning of 2023 – travel retail and spirits, and travel retail in general, won’t go back to anything like normal.

“Simply, we need the Chinese to start travelling internationally and once they do we will see – although off a low base compared with historic norms – a relatively big spike in terms of spend globally for travel retail and spirits in particular.”

CEO Mark Meek said the industry has entered ‘uncharted waters’, with the pandemic, conflict, high rates of inflation and supply chain volatility meaning any forecasting is ‘fraught with danger and difficulty’. 

IWSR said as recently as November that a ‘real step change’ towards recovery in DF&TR would not be expected until 2022, though these comments were shared prior to the emergence of the Omicron variant in earnest coupled with the aforementioned challenges.

Meek pointed out that while Hainan island has offset some of the downturns in the lack of spending by Chinese consumers, the offshore duty free island ‘has by no means completely alleviated’ the spending challenge.

Nonetheless, he acknowledged Hainan’s status as a destination of choice for Chinese travellers and travel retail spending and as such the destination will continue to play an important role in the recovery.

Given the number of China’s population that have access to passports, those who cannot travel internationally will likely continue to visit Hainan to purchase at the upper and premium end of beverage alcohol for the foreseeable future, continued Meek.

When Chinese travellers begin to resume international trips that level of visitation to Hainan will likely fall but it won’t be a ‘cliff drop’, he added.

Meanwhile, brand owners in the global DF&TR market continue to carefully study where they allocate promotional investment and choose to list their products.

“They might list at fewer airports than they have historically,” commented Meek. “We saw in the pandemic in the Americas a big increase in travel retail in the border stores, so they might look at diverting there. Because of Brexit, the ferry passenger trade routes will also show a spike.

“How [brands] allocate promotional dollars and where they list their products will look different between border stores, ferries and airports. What we do think we will see, in spirits in particular, is an increase in premiumisation.”

VALUE OUTPACES VOLUME GROWTH

During the data-rich briefing, Meek addressed sections of the international media alongside Brandy Rand, Chief Operating Officer Americas, and Emily Neill, Chief Operations Officer, Research and Operations.

They analysed the impacts of the current global headwinds on beverage alcohol and how these are likely to shape longer term customer trends.

Emily Neill, Chief Operations Officer, Research and Operations flagged that the global beverage alcohol market is expected to surpass 2019 volumes within the next two years. Click to enlarge. While beer, wine, and international spirits are yet to reach those levels, all have met or surpassed 2019 levels in value terms.

Despite the fragility of the present climate, tailwinds are being witnessed with global beverage alcohol increasing in value terms by 12% in 2021 to total US$1.17 trillion*, making up for Covid-driven losses in 2020.

However, global alcohol volumes posted more stunted growth of +3% in 2021, equating to a roughly 3% jump after suffering losses of -6% in the year prior.

In the wine segment, global volumes declined by 2% in 2021, though value was up 5%, with noteworthy gains as consumers embrace a ‘less but more’ approach.

Champagne recorded growth of +24% last year, while other sparkling wines were up by 7.5%.

Spirits in particular grew its volumes by 3% in 2021, though the segment jumped 15% in value terms.

Encouragingly, in 2021 all categories including beer, cider, international spirits and wine met or surpassed 2019 levels in value terms.

Consumers’ propensity to reward was an influencing factor, revealed the IWSR insights, as more consumers displayed a comfortability with at-home mixology during the pandemic lockdowns.

“Consumers are still treating themselves to higher end products and treating themselves at home when they were unable to go out,” said Neil. “That behaviour is becoming learned.”

Total global beverage alcohol rebounded by 12% in 2021 year-on-year to reach US$1.17 trillion in value terms. Registering +3% compared with 2020, the growth in volume was more muted. Click to enlarge.

Looking ahead, IWSR is optimistic that spirits will grow by 5% in volume terms and by 15% in value terms to 2026.

Interestingly, by the end of 2022 US whisky is tipped to supplant vodka by volume for the first time in almost two decades.

Global volume growth is also set to continue in other sub-categories, such as gin (+24%), Cognac (+23%) and rum (+13%).

In a market view across 160 countries across the world, IWSR projects a CAGR of just above +1% in total beverage alcohol volume growth in the coming five years, as Covid restrictions continue to ease.

The global wine category is forecast to continue to tread a volume decline of -1% to 2026, but will see value gains of +5%.

The global beverage alcohol market is tipped to surpass 2019 volumes in the next two years; while beer, cider and international spirits have yet to reach 2019 volumes, as mentioned above all have met or surpassed 2019 levels in value terms.

The latest data from beverage market authority IWSR Drinks Market Analysis examined trends and data across 160 countries globally.

PREMIUM SKUS ‘MORE RESILIENT’

One prevailing trend remains premiumisation, which continues unabated for wines and spirits in the premium-and-above price tier.

Premium-plus spirits (US$22.50 and above) are predicted to grow by more than +50% in value in the Americas 2021-2026; by more than +40% in Africa and the Middle East; by more than 20% in Europe; and by just shy of +20% in Asia Pacific.

Interestingly, the single biggest driver of beverage alcohol in the coming five years will be the growth in premium-and-above national spirits in Asia Pacific, notes IWSR.

Globally, wine in the premium-and-above price band (US$10 and above) grew by +12% in value last year, and is forecast to increase in value by +16% to 2026.

Key trends discussed in the briefing were the rapid rise in the ready-to-drink (RTD) and low/no alcohol segments, ingredient formulations, and sustainability credentials.

Unboxing trends in the RTDs market, Brandy Rand pointed out growth of approximately +14% in volume in the global market in 2021 (IWSR studies the breadth of categories – hard seltzers in addition to other bases such as cocktails, wine spritzers, coolers, cocktails and long drinks).

The wallet power of millennials in spurring appetite for premium and ‘less but better’ products focused on moderation was also a point of conversation.

In addition, global beverage alcohol e-commerce also displayed its pulling power last year, enjoying growth of +16% in value terms from 2020–2021, though this slowed versus 2019-2020 when growth in value yielded +45%.

Brandy Rand, Chief Operations Officer Americas, described the healthy development of RTDs across several drinks segments in the US and globally. Click to enlarge.

Concluding, Meek acknowledged that the global beverage alcohol industry is in a ‘pretty good place’ overall despite the prevailing headwinds.

Despite the uniqueness of the inflationary pressures facing the world today, compared with instances in the 1920s and 1970s, means the historic highs in accumulated savings means higher earners are better able to unwind higher spending.

However, it remains tougher to predict how long those increased savings levels will last and the willingness of consumers to continue spending at higher price points.

Products higher up the premiumisation value chain, are likely to be more resilient and able to lessen the impacts of inflation.

“Challenges remain, including whether bars and restaurants will continue to attract consumers who have grown comfortable with ecommerce and at-home consumption; whether consumers will accept price increases on their preferred brands; and whether inflation and supply-chain issues will lead to consumers down-trading and gravitating towards local rather than imported products,” added Meek.

“We’re living in an age of uncertainty, and these are uncharted waters for the industry. However, as we have seen in previous crises, this is a very resilient industry sector.”

*At variable currency rates; in constant currency terms, value growth was +9% in 2021.

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