Super premium spirits have been outpacing mainstream categories for over a decade, but will a looming recession stall that trajectory? A new report suggests that economic conditions may soften demand for high end wine and spirits, but won’t hinder long term growth.
The Distilled Spirits Council of the U.S. (DISCUS) divides spirit categories into four segments, with super premium at the top— although ultra-premium is used to describe bottles priced above those tiers and running consumers upwards of around $150. Segment definitions aren’t legal or purely based on price per bottle, but supplier revenue per case as well as how a brand chooses to market itself. From 2010 to 2021, super premium spirits enjoyed an average volume growth rate of 8.8%, according to RaboResearch’s latest report on superpremium spirits and wine. A look at the tequila category reveals that super premium volumes have skyrocketed 1330% since 2003 and today account for 7.1 million 9-liter cases, according to DISCUS. Premium and super premium brands also drove growth for American whiskey.
More recently, the top tier of spirits has also been its fastest growing segment, up 24.2% in revenue from 2020 to 2021, according to DISCUS. That may reflect how the trend has accelerated during pandemic lockdowns when consumers, unable to spend on luxury on-premise experiences, poured their dollars into enjoying high-end spirits at home.
The good and bad news is that consumers of top shelf spirits have seen greater income growth in recent decades and are considered somewhat recession resistant— but that doesn’t mean they’re recession proof.
“Those with college degrees, those with master’s level-degrees or better tend to have very low unemployment rates and their unemployment rates go up very little during a recession,” said Stephen Rannekleiv, Rabobank global beverages strategist, who authored the report.
During the global financial crisis of 2007 and 2008, that segment of consumers was labeled recession resistant, added Rannekleiv, and their drinking habits tended to skew heavily towards wine. But while unemployment and income were largely unaffected for those groups, wealth was. Once the financial crisis took hold, there was a pullback in spending on high-end wines and spirits, demonstrating that those consumers will change current discretionary spending patterns based on their perceived ability to spend in the future.
According to the report, a decline in household net worth, fueled largely by drops in real estate and equities, is also a telling metric.
“There’s a correlation between household net worth and their spending,” said Rannekleiv. “When that goes down, so does spending on super premium wine and spirits.”
If the recent and forecasted interest rates increases reduce household net worth by an additional 3% by the end of the year, the average household net worth for 2022 will be just below 2021 levels, which would suggest that Q4 2022 will be sluggish for the super premium segment, according to the report. And unless there are unforeseen improvements in the economy, 2023 may dampen the demand for super premium wine and spirits.
That bleak outlook, however, may not impact major beverage companies’ decisions to invest in the category if they’re convinced of the premiumization trend’s long-term viability. In the past two months Brown-Forman acquired two leading super premium and higher brands: Venezuelan rum Diplomático and Gin Mare. This month, Pernod Ricard acquired a majority stake in Código 1530 Tequila, the ultra-premium tequila co-founded by country music singer George Strait.
“A slowdown in the numbers is going to create some hesitancy, there are likely to be some buyers that are going to get a little bit spooked if we see a bit of a downturn and hold back,” said Rannekleiv. “But if you are convinced of the long term trend, this could be a good opportunity.”
The flip side, added Rannedkleiv, is that rising interest rates and a strengthening dollar may give U.S. buyers an edge over foreign competitors when it comes to super premium acquisitions. Some U.S. super premium wines have attracted foreign buyers in recent years— Napa Valley’s pioneering Shafer Vineyards sold to a Korean luxury firm earlier this year, for instance. For buyers in the States, this economic climate may present an opportunity for M&A activity at more reasonable prices.
Consumer spending at restaurants is another influential bellwether worth watching. While there’s still some pent-up demand for dining out, a drop in traffic at upscale restaurants l could also impact sales for high end wines and spirits, added Rannedkleiv. In September inflation-adjusted restaurant sales declined $1 billion between Q2 and Q3 2022, according to the National Restaurant Association. While overall restaurant spending trended higher in recent months, much of that growth was the result of higher menu prices. But, as the pandemic proved, brands that pivot their sales strategy may remain unaffected by changes to on-premise trends.
“We went into the pandemic thinking tequila and cognac are categories that are going to get hit hard and they did spectacularly well,” said Rannedkleiv. “So I think it’s going to be the brands and categories that can make changes and be a little bit channel agnostic that’ll probably do a little better than others.”