US channel splits will likely be permanently impacted by Covid-19

Historically in the US, approximately 80% of alcohol sales were conducted at off-premise retail establishments, such as alcohol, convenience, and grocery stores, with the remaining 20% being dedicated to the on-premise (bars, restaurants, etc.). However, as Covid-19 impacts the on-premise beverage alcohol landscape, the balance between the on- and off- premise occasion has shifted, with consumers being forced to migrate to ‘at-home’ consumption. But, is this really a new pattern of behaviour, or were consumers already gravitating to at-home consumption over the ‘away from home’ occasion in the on-premise?

What’s driving the ‘at-home’ occasion?

A number of key macro factors have been driving the ‘at-home’ occasion:

1)  For more than twenty years, the United States has seen off-premise alcohol consumer expenditures outpace that of the on-premise.

2) Between 2000 and 2020, on-premise prices have consistently risen across all categories, between 2.5% and 3.0%, or above inflation (2.0% in the same period), according to the Bureau of Labor Statistics. Data shows that in the same time period, off-premise prices have been increasing as well, however, at lower rates than that of the on-premise (off-premise prices across all categories rose between 0.6% and 2.1%, from 2000 to 2020).

3) The number of on-premise establishments serving alcohol in the US has decreased by 20% from 2001 to 2019.
While the above macro factors have been nudging consumers towards increased off-premise consumption even before the pandemic, there have been a number of smaller, but crucial, drivers that have also been influencing consumer behaviour: stricter DUI laws, the societal/generational shift towards online experiences, food delivery services (Grub Hub, Uber Eats, etc.), and the rise in on-demand at-home entertainment options.

As we see an increase in the ‘at-home’ consumption, IWSR analysts analyse what appeals to the ‘at-home’ drinker:

1) The beer and wine categories are split between male/female, with wine significantly skewing towards female consumers and beer skewing towards male drinkers.

2) Men consume spirits at home slightly more so than women.

3) The 25-34-year-old bracket leads all others for beer and spirits, while wine is dominated by those 65 years and older.

4) What’s interesting is that the much sought after 21-24-year-old bracket prefers spirits, beer and then wine.

5) From a house-hold income standpoint, the income brackets that outpace others (in ranked order) includes $100,000-$149,999, which prefer spirits. The $150,000-$249,999 bracket prefers wine. The $25,000-$49,000 income bracket is split rather evenly across spirits, wine and beer.

The question now becomes the long-term importance of these ‘at-home’ occasions post-pandemic

Trends prior to Covid-19 show more millennials living alone and without children than previous generations, and Gen Z is likely to follow a similar pattern. But with extra personal time, this demographic group is not going out at the same level or spending as much when out compared to older generations. Due to finances and technology, this group has grown comfortable with staying home and/or communicating digitally, from ordering food/alcohol delivery and online dating to connecting with friends – all occasions that would have once centred around the on-premise.

While there has currently been a significant increase in off-premise beverage alcohol volumes, it has not been enough to compensate for the losses in the US on-premise. According to IRI measured channels, total beverage alcohol volume sales for the off-premise has increased by 9.3% in the latest 52-weeks ending 16th August 2020. To overcome the losses in the on-premise, which is estimated to be down around 75%, the off-premise would need to increase volumes by 19% to compensate, based on IWSR estimates.

Alongside off-premise purchases, online sales of beverage alcohol through ecommerce channels are estimated to be up over 300% year-over-year through July 2020. As more consumers become aware that purchasing alcohol online is legal, the base of digitally-minded consumers will also grow alongside the expansion of delivery and/or ‘click & pick’ from brick and mortar services. Convenience is the driving factor for consumer popularity of ecommerce purchases.

As we continue to see the impact of Covid-19 unfold in the US, including how the balance between the on-& off-premise adjusts in line with on-premise re-openings and/or re-closings, IWSR estimates that through June 2020, spirits and RTDs have been performing strongly enough to bring the total industry to a 0.6% volume increase, rolling 12-month.

Taking all things into account, including surging ecommerce and off-premise sales, how permanent will the shifts be from on-premise to off-premise? “Value growth will likely suffer substantially due to the on-premise mark-ups, while volume growth will be dictated by ‘at-home’ consumption rates,” notes Brandy Rand, IWSR COO for the Americas. “People are also investing in making their home environment more comfortable and functional in lieu of going out – outdoor spaces, technology and entertainment, and items for cooking and making cocktails.”

A full return to the on-premise will largely be dictated by the development of a vaccine as well as consumer confidence to return to bars and restaurants amidst social distancing measures. But until there’s a vaccine, on-premise closures are imminent. The impending seasonal impact on outdoor dining is yet to be seen, with many restaurants unable to stay profitable with reduced indoor seating and takeout only.

It’s unlikely the US on-premise environment will return to the same level as pre-Covid for some time, forcing the industry to adapt to an immediate hybrid on- and off-premise model with meal kits, take-out and grocery options helping to offset dine-in losses. This new dynamic of operations to survive the pandemic changes how beverage alcohol producers will meet the current needs of bars and restaurants in the US.

IWSR data shows that, in the past, the off-premise has benefited following an economic downturn. For now, it appears as if the days of an 80% off-premise and 20% on-premise volume split in the US are long gone, and it will likely take a while for the premise split to return to these levels. For brand owners and marketers, however, the opportunity lies in meeting the immediate needs of the new drinking occasions that will undoubtedly continue to rise as consumers enjoy the comfort and safety of their homes.

The insights and data from this article are explored in greater detail in the IWSR’s Monthly US Brief, available complimentary to clients of the IWSR US Beverage Alcohol Review  (US Bar). 

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