The New Tariff Age

Thursday’s announcement of import duties could be interpreted as either:

• a laser guided smart bomb of measures aimed at carefully calculated strategic targets, or
• an assortment of random duties with little decipherable reasoning that in many cases appear to favour the bigger producers over the smaller ones.

French, Spanish and German still wines (which between them sold around 225million bottles in the US last year) were impacted, but Italian wine (which accounted for sales of over 330m bottles) was spared. Champagne and Cognac were left untouched but liquors were included. Single malt Scotch will be liable but blended whisky will not. Irish whiskies from Northern Ireland are included but whiskey from the Republic of Ireland is excluded – Jose Cuervo might understandably ask why Bushmills will be hit but Jameson will be left unscathed?

Not surprisingly, the published list takes some digesting and many are seeking more clarity before they judge. From the existing information and from business sources, the initial response to the announcement seems to be that the industry had anticipated worse and may have ‘dodged a bullet’. The markets are always a reliable barometer of the mood and the reaction was positive, with the share prices of the major brand owners rising.

There is an ongoing threat that the level of tariff or categories affected could escalate.

There may be a collective sigh of relief from much of the drinks sector, but the reality is that these tariffs could just be an opening gambit and there is an ongoing threat that the level of tariff or categories affected could escalate. It could be said that tariffs have become President Donald Trump’s weapon of choice in resolving and negotiating trade agreements. You could contend, for instance, that single malt Scotch and UK wine were simply included in order to strengthen the US’s hand in any post-Brexit free trade negotiations. Should Trump gain re-election in 2020, the drinks world will need to prepare better methods of coping with a global trading environment where tariffs are the norm.

The most effective antidote to a tariff is to cease exporting and to relocate production to a localised site. This may seem a radical proposition for many drinks players, but it is one solution that Campari’s CEO Bob Kunze-Concewitz is reported to have told Bloomberg they would consider, should tariffs become too punitive for Aperol Spritz.

Localised production is pretty standard practice among the global brewing fraternity, and undoubtedly for almost all ready to drink/FABs brands this is viable model. The place of production would seem to be less relevant for vodkas too, because consumers generally put less emphasis on ‘place’ when they buy into a vodka brand. On a case by case basis, relocation could be an option for spirits products, particularly products priced mainstream and below.

For many however, notably at the higher end, the place of production is integral to a brand’s identity and reinforces the heritage and authenticity that helps deliver the experience that justifies the price level. There is an ingrained belief that tequila should come from Mexico, rum from the Caribbean, Scotch from Scotland or Bourbon from Kentucky. Even the finest marketers will struggle to challenge that perception.

The place of production is integral to a brand’s identity and reinforces the heritage and authenticity that helps deliver the experience that justifies the price level.

Another side-effect of the global breakdown in free trade for the drinks industry will be the advancement of the travel retail channel. Added to existing national alcohol duty rates, the tariffs will amplify the variance between domestic retail prices and alcoholic drinks stocked in travel retail. You can expect a surge in ‘booze cruisers’ commuting to seek out alcoholic bargains. In turn this will restrict government’s ability to regulate and control the alcohol consumption of their citizens.

Perhaps the most worrying repercussion of an upsurge in tariff activity will be the cultivation of resentment and the spawning of nationalism. Tariffs could be perceived as an act of aggression between one trading block or nation against another and, as we are already witnessing, will quickly deteriorate into tit for tat responses. In turn this could shape consumer purchase decisions with consumers shunning ‘foreign’ brands.

Due to their strong national associations, many alcoholic categories have already become powerful symbolic targets. This was illustrated by the imposing of tariffs on American Whisky by the EU and French wine by the US. It may be that we are entering a period where drinks companies managing their International portfolios of brands in tariff affected markets is the new normal.

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About the IWSR

The IWSR is the leading source of data and intelligence on the alcoholic beverage market. The IWSR’s database, essential to the industry, quantifies the global market of wine, spirits, beer, cider and mixed drinks by volume and value in 157 countries, and provides insight into short- and long-term trends, including five-year volume and value forecasts. The IWSR tracks overall consumption and trends at brand, price segment and category level. Our data is used by the major international wine, spirits and beer companies, as well as financial and alcoholic beverage market suppliers. The IWSR’s unique methodology allows us to get closer to what is actually consumed and better understand how markets work. Our analysts travel the world in order to meet over 1,600 local professionals to capture market trends and the ‘why’ behind the numbers.