Recently, the Bureau of Economic Analysis released its fourth quarter estimate, reporting GDP growth of +3.3% – demonstrating the good news that the U.S. economy is still expanding. And, importantly, highlighting that a key component of the increase was consumer spending.

Consumer spending in calendar year 2023 for off-premise beverage alcohol was $225 Billion (+3.7%) while on-premise beverage alcohol reached $162 Billion (+11.3%) (note: neither of these amounts is adjusted for inflation, which was significant, especially in the on-premise) This is very good news that consumers continue to increase their spending on beverage alcohol.

On the downside, total servings of beverage alcohol entering the market were down -4.6%. BW166 has tracked servings of Beverage Alcohol entering the market monthly on a rolling twelve-month basis back to 2003 and annually back to the repeal of prohibition. The calculation of average servings is as follows:

• Beer & Cider – 12 ounces.
• Wine – 5 ounces, Wine Coolers – 12 ounces.
• Spirits – 1.5 ounces, Cordials – 3 ounces, RTDs – 6 ounces.

This is not a perfect science, especially with RTDs, but it gives a directional indication of overall trends normalizing for beverage type. Putting the 2023 decline in perspective, between 1996 and 2019 the number of serving grew annually at a rate of 1.21%. The Legal Drinking Age (LDA) population grew annually at a rate of 1.20%. This means that per capita consumption has been flat during this period. Looking further back historically to prohibition, there have rarely been material differences in servings and LDA growth. The last significant change was a decline in servings of -3.9% in 1991 when a significant F.E.T. increase occurred.

To look at inventories, one measure of calculating potential inventory build is to look at growth in servings versus LDA growth. Between 2019 and 2023, the average annual LDA growth was +.93%. The change in servings was:

• 2020: +1.20%
• 2021: +3.06%
• 2022: +1.22%
• 2023: -4.61%

Assuming that per capita consumption has remained relatively stable, these numbers indicate a buildup of inventories at wholesale, retail, or within consumer pantries through 2022, with some correction in 2023.

Another metric that indicates an inventory buildup at the wholesale level is the U.S. Census monthly survey of Beer, Wine, and Spirits wholesalers. From 2000 to 2019, wholesale inventory has been roughly 10.5% of trailing twelve-month sales. Some recent Metrics

• December 2019
  • LTM revenues – $158.8 Billion
  • Inventory – $17.1 Billion
  • Inv % of LTM Sales – 10.8%
  • Estimated days Inv (20% GP Margin) – 49 Days
• November 2023
  • LTM revenues – $187.0 Billion
  • Inventory – $24.6 Billion
  • Inv % of LTM Sales – 13.2%
  • Estimated days Inv (20% GP Margin) – 60 Days

The data shows distributor inventories have grown significantly. Historically, the typical reaction of wholesalers would be to reduce inventories to a par level of 45 days; however, several factors need to be considered:

• Pandemic supply chain disruptions.
  • Whether ocean freight or domestic freight, there were significant increases in inventory given the uncertainty of supply.
  • With stay-at-home orders, consumers were not spending on travel and out-of-home dining. These savings, coupled with government programs, increased consumers’ spending on goods for home consumption. Examples are more premium spirits purchases for amateur home mixologists or increased spending from Wine Clubs. Some of this was consumed, but the volume remains in consumers’ homes.
  • Factors such as these have created difficulties with traditional demand planning tools, so it is likely both wholesalers and retailers had an elevated assumption of future sales of higher-priced items. This results in higher inventories at wholesale and retail stores, especially of higher-priced items.
• Inflation and interest rates.
  • From December 2020 to December 2023, food and beverage costs for at-home consumption are up +19.1%. Average hourly wages are only up +14.1%. Consumers are feeling squeezed as inflation has exceeded compensation growth. One reaction to this has likely been the destocking of consumers’ pantries of beverage alcohol built up during the pandemic.
  • The higher interest rates are driving wholesalers and retailers to reduce inventories as well. This is more difficult with higher-priced items that were ordered when the demand signals were higher than reality.
  • One estimate of how higher interest costs impact wholesalers follows:
    • 2019
      • Assume 30-day terms from suppliers and a 3% annual interest cost. The yearly interest cost for inventory was about $199 Million.
      • Since wholesale is a low-margin business, assuming a 3% operating profit margin, wholesalers were making $4.8 Billion operating profit. Carrying cost on inventory was 4.1% of operating profit.
    • 2023
      • Assume 30-day terms from suppliers and an 8% annual interest cost. The yearly interest cost for inventory is now about $984 Million.
      • Since wholesale is a low-margin business, assuming a 3% operating profit margin, wholesalers were making $5.6 Billion operating profit. Carrying cost on inventory is now 17.6% of operating profit.

The inventory problems have not been fully corrected, and we will see continued adjustments to inventory in 2024. Assuming a return to the norm on a per LDA consumption basis, we see the upcoming trends to be:

• We assume wholesalers will try to get inventories down to 30 days on average to reduce their carrying costs significantly. Unfortunately, this may be significantly more high-priced inventory they cannot quickly sell and reducing other supplier inventory to 15 days. This will lead to out-of-stocks and lost depletions for some suppliers.
• Since servings shipped into the market were well below estimated consumption, we should see about a 1% increase in shipments in 2024. It’s impossible to project exactly how this splits between Beer, Wine, and Spirits, but all parties will be fighting for a share of the market.
• The 1% growth in 2024 versus 2023 will decrease inventories, and shipments into the market should be back to 2019 levels in total shipments.
• In 2025, after inventories have been stabilized, shipments into the market could rebound in the 3% to 4% range. This is simply the effect of normalizing shipments and consumption.
• In 2026, shipments of servings into the market would revert to an increase of 1%, in line with LDA population growth.

The inventory issues are unusual in the history of the beverage alcohol industry in the U.S. It should also be noted that the servings entering the market do not account for potential shifts in Baby-Boomer consumption as they age, the apparent differences in perception of beverage alcohol by Gen Z versus older generations, or the negative pressure on beverage alcohol by the WHO or other government entities.

At this point, from a supplier perspective, there is another year of challenges ahead in 2024. One thought to address the challenges is to increase terms for domestic supply to 60 days if a wholesaler agrees to maintain stocks of 45 days for the extended terms. This might reduce the risk of out-of-stock and lost depletions, but the bankers and CFOs may not like it.

If misery loves company, there was plenty of misery to go around for Beverage Alcohol in 2023. The total servings of Beverage Alcohol shipped into the US market in 2023 declined by 5.1%. The data used by bw166 measures the total amount of Beer, Wine, and Spirits shipped into the US market; it is not a limited sub-segment such as syndicated data or SipSource. The final data can take between 30 to 90 days to be published, so the following estimates are based on bw166’s proprietary algorithms to project the nine to eleven months of data that have been published.

The declines include Beer shipments, 191.2 million barrels, down -5.5%; Wine Shipments, 394.6 million 9L cases, down -8.8%; and Spirits shipments, 289.1 million 9L cases, only up +3.0%.

Looking deeper into Spirits shipments, the TTB shows significant growth for Cordials and Cocktails, and it appears that some of the growth reported for Cordials includes a significant amount of RTDs. Cordials and Cocktails are trending up +30.8% in 2023. The other Spirits categories, such as Whiskey, Vodka, Tequila, etc., are trending down -8.9% in 2023. RTDs per 9L are not the same number of servings as a 9L case of 80-proof Spirits, so total servings of Spirits are down -2.5%. Also, from a margin perspective, it is probable that margins for RTDs are significantly lower than traditional 80-proof Spirits.

A driver of declines in 2023 is likely inventory reductions. These reductions are a result of several factors. A few examples are:

• With elevated interest rates, both wholesalers and retailers are reducing working capital by cutting inventories.
• The Census Bureau tracks the value of sales and inventories of Beer, Wine, and Spirits wholesalers. For the five years before the Pandemic, wholesale inventories on a monthly basis averaged 11.4% of annual sales. In 2023, inventories have averaged 13.7% of annual sales. This is a significant increase in a high-interest rate environment.
• During the Pandemic, consumers appear to have increased purchases of Beverage Alcohol. This was seen in Wine DTC numbers in 2020 and 2021. Likewise, this was seen with significant expansion of NABCA volumes, especially in 2020. These trends can be considered pantry loading, and consumers have likely been destocking their pantries.
• Consumer spending, especially for lower-income consumers, has been pinched. Since January 2021, grocery inflation is up 22%, while the average hourly wage for all workers is only up 12%.

A note of good news in 2023 is that consumers continued to increase spending on Beverage Alcohol. Total spending was $398.9 billion. Off-Premise beverage alcohol spending was $238.7 billion, up +2.7% versus 2022. On-Premise spending was $160.2 billion, up +10.2% versus 2022. The faster growth in the On-Premise was driven by higher inflation continuing in the On-Premise, likely driven by the need for higher markups in these channels to offset higher costs.

While some of the declines have been driven by inventory reductions there are other troubling issues. Based on Gallup survey data, a higher share of younger consumers have a less positive view of Beverage Alcohol. In addition, there are troubling signs from various government bodies with a more negative view of alcohol. The industry needs to work together to overcome these issues to make sure 2023 is not the new norm.

bw166 tracks the total beverage alcohol market in the US based on tax-paid shipments into the market, both domestic and imports, as well as various data from the Bureau of Economic Analysis, Census Bureau, The Bureau of Labor Statistics, and various state agencies.

The measurement of the market continues to be disrupted by the effects of the Pandemic, elevated inflation, increased interest rates, supply chain disruptions, and even the boom and then slowdown of Hard Seltzers.

bw166 has created serving indices to track total servings of Beverage Alcohol entering the market. The Basis of these indices are:

• One serving of Beer is 12 ounces
• One serving of Wine is 5 ounces with minor adjustments for Wine Coolers.
• One serving of Spirits is 1 ½ ounces with adjustments for Cordials and RTDs.
• The base year for the indices is 2003.
• Since 1994, the growth in servings has generally grown in concert with the growth of Legal Drinking Age adults. This means that per capita consumption has been relatively flat. The Serving Index per LDA has hovered close to 100 from 1994 to 2019.

The following provides a few data points for the Serving Index

• LDA Population Index – December 2019 – 120.4, July 2021 – 122.4, September 2023 – 124.9.
• Serving Index per LDA – December 2019 – 99.7, July 2021 – 103.9, September 2023 – 95.9.
• Serving Index Total Beverage Alcohol – December 2019 – 120.11, July 2021 – 127.14, September 2023 – 119.80.
• Serving Index Beer – December 2019 – 100.6, July 2021 – 104.93, September 2023 – 96.06.
• Serving Index Wine – December 2019 – 158.95, July 2021 – 169.46, September 2023 – 148.95.
• Serving Index Spirits – December 2019 – 144.15, July 2021 – 155.32, September 2023 – 158.96.

Spirits servings have been bolstered by growth in RTDs and Cordials, while traditional spirits, such as Whiskey, Vodka, Tequila, etc., are showing recent slippage.

The general decline in the market can be explained as follows.

• It is obvious that there was a pickup in shipments into the market through July 2021. This was due to the Pandemic as well as concerns about supply chain disruptions. The effect of this was a building of inventory at wholesalers, retailers, and even pantry loading by consumers.
• Another factor during the pandemic was that consumers traded up in the Off-Premise as most of the On-Premise was shut down. This provided a signal to the market prices were moving up quickly. This was a false signal, and Off-Premise pricing has moderated. Unfortunately, more high-end products were brought into the market, which is causing an inventory overhang at high price points. A signal of this is the Census Bureau value of Beer/Wine/Spirits wholesale inventories growing from $18.7 Billion in September 2019 to $25.5 Billion in September 2023.
• As the Pandemic moderated, the market has seen increases in inflation rates followed by higher interest rates.
  • Consumers have felt the impact and are likely drawing down pantry loading and moderating price points at which they purchase.
  • Retailers are watching consumer trends as well as looking at their balance sheets with higher carrying costs for inventories. They are carrying less inventory and refocusing their promotions at different price points.
  • Wholesalers typically carry a large amount of debt to carry their inventory. They are also reducing their inventory levels to reduce interest costs.

Historically, shipments into the market closely tracked apparent consumption. With the build-up of inventory during the pandemic, historical trends have not held. The implication is that as long as consumers maintain somewhat consistent consumption trends, the market will stabilize over the next twelve months and likely return to volume trends more like 2016 to 2019.

From a value standpoint, we believe that pricing will continue to slowly move up per unit as it has for the past few decades. It will not move up as quickly as it did during the pandemic.

Also, regarding consumer expenditures, a key source of data for bw166 is the Bureau of Economic Analysis. These are the economists that develop and report US GDP as well as the Consumer Price Index preferred by the Federal Reserve. With the September data, they have restated consumer expenditures from January 2013 to August 2023. The changes in the Compound Annual Growth Rates are shown below:

• Beer Off-Premise: from 4.9% to 6.1%
• Wine Off-Premise: from 4.9% to 6.5%
• Spirits Off-Premise: from 5.1% to 7.2%
• Total Beverage Alcohol On-Premise: from 6.7% to 6.2%

The implication of these changes is that for 12 Months ending September 2023, Consumers have spent $398 Billion on beverage alcohol. The US is a large and varied beverage alcohol market. While there is a short-term slowdown, as noted above, there are many opportunities if industry members focus on market share.