Household spending has slowed in Australia as consumers pump the brakes on discretionary purchases. These changing shopping habits are having a growing impact on the drinks industry.

Alcohol has been historically resilient during tough economic times and has previously been regarded as a “recession proof” industry.

“People drink in good and bad times,” Tim Bain, chief investment officer at Spark Asset Management Group, once said.

Seeking Alpha agrees: “Alcohol stocks are generally considered to be recession tolerant investments due the relatively stable demand for alcohol during tough economic times.”

However, Australia’s biggest liquor retailers – Endeavour Group and Coles Liquor – released their FY24 results this week and both saw profits down in what they described as a challenging market.

Coles said its sales were impacted by customers reducing their discretionary spending due to economic pressures, with all banners showing evidence of shoppers managing to a budget with units per basket declining.

Sales revenue was particularly subdued in the second half and the first eight weeks of FY25 saw sales revenue declined by 1.4%.

The CrowdStrike outage in July impacted the period given the number of liquor stores that were unable to trade during the outage. However, excluding the impact of CrowdStrike, liquor sales revenue declined by 0.3%.

CEO Leah Weckert said: “Many Australians continue to feel cost of living pressures. Our surveys tell us that mortgages and rents, fuel, rising energy bills and groceries are at the top of factors affecting the household budget.

“To minimise spend, customers continue to eat more at home, cut back on treats, eat less red meat and reduce their alcohol consumption,” Ms Weckert said.

Sales up but profits down

While sales rose 4% at Endeavour Group in FY24, net profit fell 3%. Endeavour Group Managing Director and CEO Steve Donohue said value-conscious consumers were increasingly seeking bargains due to cost-of-living pressures.

He noted there had been a large shift in the RTD space, with consumers seeking convenience and value, moving from four-packs to cheaper six- or 10-pack because “you’re getting more bang for your buck on a per-ml or a per-litre basis”. In beer, he said shoppers were seeking 30-can slabs rather than 24 cans.

According to a new report released by inventory management software provider Unleashed, the cost-of-living crisis has resulted in the Australian drinks industry swallowing an overall profit plunge of more than 25%.

Unleashed Head of Product Jarrod Adam said: “With high operational costs at the best of times, the food and beverage industry is in a tough battle against inflation. Add in a decreasing sales pipeline, rising excess stock levels and a weak economy, and you have a recipe for an industry facing a severe drop in profit margin.”

Stomping Ground brewery co-founder Guy Greenstone said businesses have been forced to swallow increased costs to stay afloat in a competitive market.

“In some cases we’ve had to drop prices just to stay relevant, it’s tough out there and margins are definitely being eroded,” he said.

“You just have to become a bit more efficient, a bit more lean. Manufacturing practices, we’re just trying to do more with less.”

Shoppers seek discount options

Endeavour CEO Donohue’s bargain hunter comments echo those made by the Commonwealth Bank Group in its monthly CommBank Household Spending Insights (HSI) Index.

The index was flat in July, which the bank attributed to consumers looking to prioritise discount shopping options. 

Household spending in July saw the biggest falls across Hospitality (-2.4 per cent), Utilities (-1.3 per cent) and Food & Beverage (-1.2 per cent).

“Hospitality spending dropped in July and has been the weakest category over the past year, as consumers cutback on visiting cafes and bars,” CBA Chief Economist Stephen Halmarick said.

“We’re also seeing changes in shopping behaviours within categories, as consumers look for cheaper alternatives.”

Moderation and downtrading to continue

IWSR’s consumer insights tracking also shows the dominant themes of moderation and downtrading.

Its data compared consumer sentiment and attitudes to beverage alcohol in the first half of 2024 with the position 12 months ago across 15 key markets: Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Mexico, South Africa, Spain, Taiwan, the UK and the US.

“A growing focus on health and at-home consumption, combined with a dramatic squeeze on household incomes, pushed consumers into downtrade mode in the first half of 2024,” said IWSR Senior Consumer Insights Manager Nastya Timofeeva.

“The changing political landscape in many markets further intensified consumer apprehension about the future, finances and spend on alcohol, which has become a luxury for many. After economic moderation forced consumers to cut spend on alcohol, many consumers are now choosing to maintain this new lifestyle.

“This fundamental structural shift to moderation will continue, with volumes remaining under pressure throughout 2024, although improving consumer finances are likely to reignite the ‘less but better’ premiumisation trend that has characterised the past five years.”

Drinks companies feel the pinch

Annual results from drinks companies have painted a similar picture of consumer downtrading.

Brown-Forman announced on Thursday that it had missed its first-quarter profit and sales estimates.

Reuters reported the company posted a 5% fall in sales for the quarter ended July 31 “as consumers wrestling with rising costs of living cut back spending on its higher-margin products”.

“Liquor makers such as Brown-Forman and Constellation Brands have been struggling to boost sales for their premium brands with consumers increasingly switching to affordable alternatives,” Reuters said.

Diageo also reported flat organic net sales for the year ending 30 June 2024.

While US whiskey was up 3%, Scotch sales declined by 10%, with Johnnie Walker reporting a 6% drop and single malts slipping by 14%. Both tequila and vodka fell by 7%. The biggest falls were for Casamigos, which plunged by 20% and Cîroc, which plummeted by 26%. Gin reported a 8% decrease, with Gordon’s down by 6% and Tanqueray tumbling 11%. Rum sales declined by 6%.

The company’s RTD portfolio dipped by 1%, however the more budget-friendly beer category climbed by 14%.

AB InBev CFO Fernando Tennenbaum recently told analysts beer volumes were now growing in most of the company’s markets.

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