When the first shots were fired in the trade war between the US and China, then Canada, the European Union (EU) and Mexico, US whiskey, along with iconic American brands Harley-Davidson and Levi’s, became a symbolic target for retaliation. The subsequent tariffs imposed on whiskey understandably caused alarm in an industry that has been thriving for the past several years.
US whiskey (Bourbon, rye, Tennessee whiskey and others) has been enjoying a renaissance in its home market, driven by innovation and a burgeoning craft movement which has spawned the creation of a new category, US single malts. There are over 1,800 different brand lines and extensions of US whiskey currently available on the market.
With export markets helping to underpin the prosperity of the category, the assumption was that tariffs would take the momentum out of growth and have repercussions for the future development of the category. Exports were viewed by both large and small players as the way to maintain the expansion of the industry; it was part of their long-term plans.
At 10%, Canada’s tariff rates were less draconian than others, but the inevitable price rises will have implications for a market that had been enjoying good but slowing growth. In terms of volumes though, Canada accounts for little more than 1% of export consumption. Mexico is enjoying good growth but is also a small part of the overall export picture.
The market that threatens the biggest fallout from tariffs will be the EU.
The market that threatens the biggest fallout from tariffs will be the EU. The IWSR’s figures show that in 2017, 17% of US whiskey sold globally was consumed in the EU. The market has added as many as 3.3m nine-litre cases in 10 years. In 2017 alone that increase was not far off half a million cases. Any fallout to this lucrative growth market will be harmful.
Brown-Forman passed the 10% price increases on to its distributors in the EU and have been vocal in warning about the implications of these retaliatory tariffs. In Europe, the company’s flagship Jack Daniel’s brand had been in a good place, enjoying a fashionable following in important demographics. That has helped Brown-Forman’s sales to rise by over 30% in the region in the five years to 2017. Brown-Forman accounts for more than six in every 10 litres of US whiskey consumed in the EU.
If you analyse all tariff affected markets, then Brown-Forman makes up nearly two-thirds of volumes. The level of the company’s exposure is reflected in the fact that over 90% of all its whisky sales now come out of the US according to IWSR. With rival Beam Suntory sales overtaking Brown-Forman in its home market in 2017, the latter’s worries would seem to be justified.
Brown-Forman estimated that the initial effect has been to knock 1% off its third-quarter net sales growth. The company may have passed on some of the tariff cost but has opted to absorb a chunk of the cost. The company has spent decades building up the Jack Daniel’s brand and is understandably reluctant to risk damaging its brand by letting price rises alienate its customers. Absorbing the cost of the tariffs has had implications for its margins. Its year-to-date reported gross margins declined 190bps to 65.3%, around two-thirds of which it accredits to the tariffs.
The IWSR has been tracking the impact of the tariffs on trade figures and reports. According to the US Department of Commerce, dollar sales growth of US whiskey exports to foreign countries was nearly cut in half in 2018. The evidence that this is related to the tariffs can be found in the before and after figures. January to June yielded a surge of 31.3% as retailers stockpiled and producers shipped as many cases as was viable before the tariffs applied. In the months following the tariffs, July-December, exports decreased -11.3%. The strong first-half performance outweighed the second half, resulting in an increase of 6.2% over 2017.
The high standing of US whiskey in its export markets will also provide some immunity to price rises on the ground.
The high standing of US whiskey in its export markets will also provide some immunity to price rises on the ground. The IWSR’s figures show that in the tariff afflicted markets, 57% of all volumes are premium priced or above. Encouragingly, this demonstrates that there is a willingness for consumers to pay a higher price for their whiskey. Its not a regular commodity and is comparatively inelastic.
Brown-Forman’s careful nurturing of its Jack Daniel’s, Woodford Reserve and Old Forrester brands has been rewarded with 84% of its sales in the impacted markets falling into the IWSR’s premium-and-above price bands. This will make them better equipped to ride the storm.
Nobody knows when the storm will end, but Brown-Forman is expecting another hit in 2019 if the tariffs remain in place. There seems to be little sign of a shift in the stalemate, but there will be political pressure in the whiskey heartlands for something to be done. Higher prices are hitting, but in the longer term, charging more for a brand does nothing to harm its equity. In contrast, it is discounting that can lift sales in the short term but lower a brand’s status in the longer term.
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