Like most consumer-discretionary products, sales of wine and spirits have been hurt by spiking fuel prices, rising unemployment, and pervasive worries about the U.S. economy. But alcoholic beverages, like cigarettes and other tobacco products, appear to be less discretionary than most nonessential items due to the lifestyle choices that drive demand for them.
"Beverage alcohol continues to be pretty recession-resistant," says Richard Hurst, an analyst at market-research firm The Nielsen Company. "Spirits are still showing tremendous resilience."
Data collected from the principle retail stores showed spirits sales up 5.4% in May on a dollar basis, and 3.6%
on a volume basis, which Hurst deems very healthy.
Top-Shelf Growth
"We're continuing to see the top end of the market for spirits outperform the rest of the market," he says. "Premium and ultra-premium brands—those that are $12 and above—are still seeing very healthy growth, and we're seeing those sectors increase their share of the total market."
Constellation Brands' (STZ) healthy profit report for the quarter ended May 31, posted on July 1, seemed to confirm that. The Fairport (N.Y.)-based company attributed a nearly 62% jump in earnings, to 34¢ a share, to wider profit margins that stemmed from price hikes in all markets and from selling more of higher-margin wine brands such as Clos du Bois than lower-margin ones such as Almaden. Including integration costs related to acquisitions, restructuring charges, and other nonrecurring items, Constellation reported earnings of 20¢ a share, vs. 13¢ a year ago.
Investors were encouraged by the earnings—and Constellation's reaffirmation of its $1.68-to-$1.76 EPS forecast for fiscal 2009—pushing the shares up 4.5% to close at 20.75 on July 1, while most of its competitors fell out of favor as the strength Constellation is showing in the face of a consumer pullback isn't being shared across the spirits industry.
After the market close on June 30, Fortune Brands (FO) issued a profit warning, saying it now expects earnings from continuing operations to be about 16% to 25% lower than the $1.51 a share it reported for the second quarter of 2007, instead of the 6% to 15% drop it had initially estimated.
Mixed Business
Granted, Fortune isn't representative of the spirits industry, given that its business portfolio also includes home and hardware products such as kitchen cabinetry, doors, and windows, and golf brands such as Titleist. Even its Beam Global Spirits & Wine business is atypical, with sales in Australia coming under pressure in the past two months since the government hiked the excise tax on ready-to-drink spirits, driving consumer prices for Fortune's Jim Beam products up 25% in that country.
Citing the rapid spike in gasoline prices and a decline in consumer confidence, Fortune Chief Executive Officer Bruce Carbonari says the company is seeing home-improvement purchases stay soft, deferred big-ticket purchases by golfers, and a slower rate of trading up to premium-brand hard liquor purchases. For the full year, the company now expects earnings before charges and gains to drop by roughly 6% to 19% from 2007 earnings of $5.06 a share rather than the flat to 9% lower estimate it previously made.