How will an increasingly insular world impact the beverage alcohol industry?

Trade wars – between the US and China, and between the US and the European Union – have brought increased import tariffs, with the threat of more to come this summer. These have already led to reduced imports of American whisky into the EU, and of single malt Scotch into the US, as well as narrower margins for companies forced to absorb the extra cost.

Furthermore, isolationist policies, such as the recent US move to restrict employment visas, and the reluctance of some governments to share Covid-19 vaccines, could engender a new atmosphere of insularity, reinforcing a move by consumers to favour local products over imports.

“This could be one of the biggest impacts of the pandemic and an increasingly insular world: a return to locally-produced spirits and other beverage alcohol products,” says Emily Neill, COO Research at IWSR. “If you follow this idea of ‘support local’ through, it is likely to create larger premium segments of these categories.”

This could be one of the biggest impacts of the pandemic and an increasingly insular world: a return to locally-produced spirits and other beverage alcohol products.

According to the Distilled Spirits Council of the US (DISCUS), American whiskey exports to the EU fell by 33%, at a cost of US$300m, between the imposition of a 25% tariff in June 2018 and the end of April 2020.

Jack Daniel’s owner Brown-Forman said during the company’s fiscal 2020 Q3 results announcement in March 2020 that margins had been squeezed by the move. Meanwhile, Albert Baladi, CEO of Beam Suntory, admitted that the company had been “hurt” by the EU tariffs, which had led to price increases in markets including the UK and Poland, in commentary on the company’s full-year results announcement for 2019.

The timing of the EU tariffs could also hardly be worse for the growing number of US whiskey makers looking to prioritise exports to mitigate the impact of an ever more competitive domestic whiskey landscape.

However, the picture in China – which imposed its own 25% tariff on American whiskey imports in late 2018 – is very different, with only a “muted” impact on consumption, according to the IWSR.

Healthy margins in the on-premise have enabled bar owners to largely absorb the extra costs and, where price rises have been enforced, these may even have served, paradoxically, to increase demand. “Chinese whisky consumers are not particularly price-sensitive,” points out Tommy Keeling, IWSR research director for Asia Pacific. “They are mostly upper middle class and can easily afford to pay more. As an imported brown spirit, whisky is an aspirational drink. Hence, a price rise can actually have the perverse effect of making a product more desirable.”

There is also no direct competition for American whiskey in China, and little meaningful competition in quality terms for US wines too. “There is little evidence of any category shift taking place,” says Keeling. ‘With baijiu accounting for the vast majority of spirits volumes in China, such a shift would not be immediately apparent anyway. The main risk for US brands is a consumer boycott for nationalistic reasons.”

IWSR forecasts the US whiskey category to keep growing in China, albeit at a slower YOY rate than prior to Covid-19. “This will primarily be due to Covid-19’s impact on the on-trade, which is a big driver for US whiskey consumption in China,” remarks Keeling.

EU spirits producers were the latest to suffer tariff increases on exports to the US, with a 25% tariff imposed from October 2019 on imports of single malt Scotch; single malt Irish whiskey from Northern Ireland; liqueurs and cordials from Germany, Ireland, Italy, Spain and the UK; and wine from France, Spain, Germany and the UK.

The move led Scotch Whisky Association CEO Karen Betts to warn of a predicted annual £100m fall in exports of single malt Scotch to what is the category’s biggest global market; meanwhile, DISCUS said that combined exports of Scotch and Irish whiskey had fallen by nearly 28%, to US$670m, between October 2019 and April 2020, while imports of liqueurs and cordials from tariff-affected countries dropped 21% to US$267m over the same period.

Now there is the imminent threat of fresh trade measures, including a WTO ruling on US aerospace subsidies, expected in late July, which could open the way to increased and expanded EU tariffs on American imports. At the same time, renewed tensions in Hong Kong could lead to a fresh round of sanctions and tariffs between China and western nations.

Meanwhile, the US Trade Representative is currently consulting on proposals to raise existing tariffs as high as 100%, as well as expanding the list of affected products to include previously excluded categories, including (among others) blended Scotch, Cognac, and vodka and gin from the UK, Germany, France and Spain.

“Given that the US is the largest premium-and-above market, this will have a huge impact on all companies importing brands – in other words, all the multinationals,” highlights Brandy Rand, COO Americas at IWSR. “This could lead to ‘by-passes’ – bottling liquid in Canada and exporting from there; blending imported and local spirit to create hybrid products; acquiring local craft or larger producers; and building up significant stocks. If tariffs increase and broaden, it will push consumers to local equivalents, which in the US should see a boom for premium US whiskeys, and for local craft and premium producers.”

However, local bottling is not an option for some regulated products, such as single malt Scotch, where bulk exports are banned. Furthermore, some categories, such as Scotch and Irish whiskies, are geographically limited by law and so cannot be made anywhere else.

“There are two forces pulling against each other,” observes Humphrey Serjeantson, the IWSR’s research director for Western Europe. “One is the desire to buy local; the other is the desire for products with specific origins and characteristics, including Cognac, Champagne and Scotch whisky,” adds Serjeantson. IWSR data shows that the US is the largest value market for all three of these categories, and in 2019, the US accounted for 25% of Cognac’s global value; 13% of Champagne’s global value and 12% of that of Scotch.

“These two forces exist independently of Covid-19. But if Covid-19 and further tariff increases raise the prices of imported goods considerably more than they do of local goods, that could boost local products,” remarks Serjeantson.

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