Alcohol Giants Pivot as Premium Drinks Lose Fizz in Economic Squeeze

The alcohol industry is experiencing a significant shift in consumer behavior, forcing major players to reconsider their long-standing "premiumisation" strategy. Diageo, Pernod Ricard, and other industry giants are grappling with the reality that customers are increasingly opting for more affordable options in the face of economic pressures.

For over two decades, the alcohol industry has focused on promoting higher-priced, luxury beverages. This strategy, known as "premiumisation," became popular in the early 2000s when Diageo, the world's largest producer of spirits, divested its food business to concentrate on premium drinks. The trend continued with other companies following suit, such as Carlsberg relaunching its Export brand in 2016 to target the growing craft beer market.

The financial rationale behind this approach was clear. Premium brands like Don Julio tequila, founded in 1942, were outperforming mass-market options like Smirnoff vodka, which originated in Moscow in the 1860s. Moreover, these high-end products offered better profit margins. For instance, Diageo's premium brands reportedly yield operating margins 7 percentage points higher than the company average.

However, recent economic challenges have begun to erode this strategy's effectiveness. In November 2023, Diageo's CEO revealed that customers in Latin America were feeling the pinch from higher interest rates and opting for less expensive alcohol. This trend is not isolated, as evidenced by Carlsberg's CEO noting in August 2024 that even premium consumers were trading down to more affordable options.

The shift in consumer behavior is reflected in company valuations. Major alcohol companies, including Diageo, Pernod Ricard, Campari, Heineken, and Carlsberg, are now trading at lower forward price-earnings multiples compared to their pandemic-era highs. This decline indicates broader growth concerns, with the fading premiumisation trend playing a significant role.

In response to these challenges, alcohol companies may need to refocus their efforts on more affordable products. This could mean allocating more marketing resources to brands like Smirnoff vodka or Johnnie Walker Red Label whisky, which has been the world's most widely distributed blended Scotch whisky since its founding in 1820. However, this strategy shift comes with its own set of problems.

Firstly, promoting cheaper drinks could negatively impact profit margins. Secondly, it may undermine the industry's efforts to promote responsible drinking, potentially attracting increased government scrutiny. The alcohol industry has largely avoided the level of criticism faced by tobacco companies, partly due to its emphasis on responsible consumption.

The global alcoholic beverages market, valued at $1.47 trillion in 2021, is expected to grow at a compound annual growth rate of 3.8% from 2022 to 2030. However, this growth may come at the cost of the premium segment, which has been a key driver of profitability for major alcohol companies.

As the industry navigates these challenges, it must balance the need for growth with maintaining profit margins and upholding responsible drinking initiatives. The coming years will likely see a significant reshaping of strategies across the alcohol sector, with potential implications for both companies and consumers alike.

"Customers in Latin America were feeling the pinch from higher interest rates, and were similarly opting for less expensive booze."

This shift in consumer behavior and industry strategy marks a significant turning point for the alcohol sector, potentially ushering in a new era of competition and innovation as companies adapt to changing market dynamics.