Tuesday, April 29, 2008

Interesting commentary on the effects of economic downturn and the Absolut issue from Wine and Spirits Daily.

"How is the economy affecting Fortune Brands’ spirits portfolio? That’s the million dollar question. Most of the spirits companies (other than Brown-Forman) have been reluctant to admit that the U.S. economy has taken much of a toll. The general consensus is that consumers view spirits as an “affordable luxury.” Sure, there might be a slowdown in value spirits brands, but premium and super-premiums continue to grow. In an age of premiumization and trading up, spirits companies are generally more concerned with their premium and up brands anyways. Most spirits companies also seem to think they will have no problem bouncing back from a slowdown and that the dawning recession is merely temporary. Declines in the on-premise are perhaps the biggest thorn for distillers, but most claim it’s not a significant change.

“What we have seen a little bit is a little less consumption at bars and restaurants and more people buying at their local liquor store, but it's not that significant,” Fortune ceo Bruce Carbonari told WSJ earlier this month.

In the first quarter, spirits sales were flat in the U.S., but Fortune says some of that was a result of larger-than-usual seasonal reductions in distributor inventories.

"While our reported spirits sales were relatively flat, shipments of spirits were adversely impacted in the U.S. by larger-than-usual seasonal reductions in distributor inventories that don't reflect the health of our brands in the marketplace," Carbonari said in a statment. "Had distributor inventory movements been consistent with the prior year, our worldwide spirits sales would have been solidly higher.”

Spirits sales increased at the premium end of the portfolio, reflecting favorable mix shift and Fortune’s continued focus on growing premiums. On a depletions basis, Fortune’s global premium brands grew in the U.S. and demonstrated strong growth in the U.K., Spain and Germany, as well as in Russia, India and China."


First quarter depletions for Jim Beam were off in the first quarter, but Fortune is still expecting another strong year for Beam. The next generation of Jim Beam’s market campaign will rollout in the second quarter.

Sauza had lower shipments overall in the quarter due to inventory movements and tough comps. Depletions were strong in the U.S., however, and super-premium Sauza Hornitos continued to see strong growth.

Courvoisier increased double digit net sales on strong increases in the U.S. Maker’s Mark also experienced strong depletions overall.

WEAKENING ECONOMY. There was a lot of economy talk in today’s conference call. Overall, Fortune maintains that the economy has not had a large impact on spirits sales, although it has taken a toll (albeit it small) on value brands and the on-premise. Florida and California in particular have experienced a slowdown.

“We have seen no significant changes in the U.S. market...we’ve seen some change on-premise versus off-premise...geographic slowdowns correlates to the housing market, which we are seeing most heavily in Florida and California, especially on-premise,” said Carbonari.

“We have not seen the softening U.S. economy have a meaningful impact on total consumer demand...we benefit from our strong premium position,” cfo Craig Omtvedt.

“We had a good Christmas season...we have not seen trading down. The premium brands grow more than the value side and we’ve seen this trend for awhile now. The cocktail is still an affordable luxury and people aren’t willing to give that up. We’ve seen very little trade down at this point,” said Carbonari."



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