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Whiskey: An Emerging Threat

Source: Beer Business Daily

June 26, 2017

As reported last week, beer sales so far this summer have been very lackluster.  IRI beer dollars are down  3% and 4.6% in volume over the Memorial Day period, without a holiday comp issue.  Even craft has slowed significantly.

I attended the Virginia Beer and Wine Wholesalers Association meeting last week (thanks for inviting me, VA), and while Amazon topped the bar conversation, the continued encroachment of spirits was also a hot topic of conversation. 

What gives? While the rise of taprooms is a common refrain, let me put forth another theory. 

When spirits started really dig into beer's share of stomach was in about 2005. Back then, it was vodka and high end tequila that was the real threat, ie. white spirits. 

Since then, brown spirits have gone on the upswing, particularly whiskey/bourbon and irish whiskey.  But most brown spirits take a minimum of two years to age in barrels, so this increase in demand caught many distillers off guard and there were shortages, keeping whiskey prices high.

That's changed. In fact, amidst the glut in aged whiskey today, and while beer continues to raise prices, brown spirits are holding pricing. And I would submit that brown spirits have a larger overlap of consumers with beer than white spirits.

And it's only going to get worse. David Driscoll, K&L Wine Merchants' head spirits buyer (a major W&S retailer), believes California is "about to see what happens when an entire retail industry goes to war over pricing due to an oversaturated, overstretched, and overexposed whiskey market that's beginning to buckle under all that extra weight," per Wine & Spirits Daily.

David, a well respected industry figure, went on to outline what he believes led to the impending price war. We paraphrase: the brands and distributors are under pressure to top last year's numbers. However, the increasing market competition makes that more difficult, leading to salespeople cutting deals "they shouldn't." As a result, the market gets "flooded with crazy deals" and "things really heat up when retailers begin shedding inventory to recoup cash against that instability," he writes.

While we have not heard any direct acknowledgement of an impending whiskey price war from the big guys, there have been a number of public companies who have said they won't be raising price this year.

Brown-Forman (Jack Daniels) chief Paul Varga said in a recent earnings call that in the current environment the company is "leaning a little more heavily on volume versus price to drive [their] net sales growth" in fiscal 2018. Similarly, Diageo (Bulleitt) has also made some downward pricing adjustments on its "core products," because it had taken successive price increases, which were not followed by the rest of the industry.

"I'm predicting some pretty good deals for the rest of 2017. Whiskey drinkers are going to be thrilled, especially when I start dumping stuff at prices too good to be true," concluded David.

This is not good news for beer.

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