Turning Bad Fat into Good
Spirits are picking up, so to speak, in the alcoholic beverage industry, though rising commodity prices may constrain margins, according to a new study by AlixPartners LLP, the global business-advisory firm. Prospects are also looking up in the non-alcoholic beverage sector, despite similar margin pressures.
AlixPartners found some 87% of U.S. consumers plan to spend the same or more on alcoholic beverages over the coming 12 months, a marked contrast to last year’s AlixPartners study, when 70% said they would spend the same or more on alcohol. Similar positive sentiment prevailed in non-alcoholic beverages, as 84% of consumers said they would spend the same or more, as opposed to early 2010, when only 74% said they planned to spend the same or more on soft drinks, coffee, teas, sports drinks and bottled water.
“Though demand is on the upswing for most beverage types, the industry players across both sectors face significant challenges in managing their cost structures,” said David Garfield, managing director and head of the Consumer Products Practice at AlixPartners. “Of note, selling, general and administrative costs as a percentage of sales are up across the board, while the prices of critical input commodities are skyrocketing.”
The AlixPartners Beverage Industry Review gauges anticipated buying behavior and the drivers of beverage choice in both the non-alcoholic and alcoholic beverage categories. In addition to the consumer poll, the study examined the financial performance and fiscal health of multiple industry players globally.
According to the study, among the rising costs for non-alcoholic beverage companies, SG&A as a percentage of total sales reached 33.9% in 2010, up from 32.7% in 2009. This translates to a $1.7 billion cost-savings opportunity if the companies collectively were able to cut such costs to 2009 levels. In the alcoholic beverage category, among beer brewers specifically, the comparative cost-savings opportunity is $330 million. Among spirits distillers and wine vintners, SG&A costs have risen to 23.2% of sales, up from 21.6% in 2007.
In addition to rising internal costs, soaring commodity prices also pose a challenge. Corn prices jumped 52% in 2010 and were up another 10% through the first quarter of 2011. Corn is a significant input in non-alcoholic beverages; prices for other critical commodities to the industry, such as sugar and aluminum, are also rising. In the alcoholic beverage sector, pressures are being exerted by 47% and 24% jumps in wheat and barley prices, respectively, in 2010.
When it comes to purchase channels, restaurants and bars are likely to see a significant increase in alcoholic beverage consumption as consumers plan to ramp up spending in on-premise locations over the coming 12 months, according to the consumer poll. When asked to identify where they would buy alcoholic beverages, 37% of consumers cited restaurants, up from 20% in 2010, while 37% of consumers cited bars, up from 21%. Liquor stores remained the top outlet, cited by 46%, up from 41% in 2010.
“Out-of-stock supply issues continue to plague both non-alcoholic and alcoholic categories,” said Raj Konanahalli, director in the Consumer Products Practice at AlixPartners. “Wine, spirits and beer topped the list, by far, but similar issues affected non-alcoholic beverages when we asked consumers to identify the categories where their preferred brands tend to be out of stock.”
“Though consumers indicated that they’re likely to spend more on alcohol in the coming 12 months, a weighted-average analysis of total spending shows that beer sales may stagnate,” said Darren Morrison, vice president in AlixPartners’ Consumer Products Practice. “Despite the overall uptick in demand, our analysis found that one in three consumers would look to reduce their spending on beer by lowering consumption, looking for sales and promotions or trying less-expensive brands.”
Given an estimated market size of $101 billion in the U.S., beer could face a $1 billion hit in sales this year, AlixPartners said, though the firm noted that craft brews continue to be a bright spot, seeing an uptick in sales of 11% in 2010.
When it comes to non-alcoholic beverages, consumer preference for convenience stores and club stores continues to rise. Some 37% of consumers cited convenience stores as a likely purchase destination, up from 27% in early 2010, while club stores jumped to 28% from 19%. Grocery stores are being hurt the most by this trend, seeing a precipitous decline, with 68% of consumers saying they would buy their soft drinks and other non-alcoholic beverages there, down from 78% last year.
Spending, the study also found, is expected to jump across a number of non-alcoholic beverage categories -- juices, dairy, coffee and bottled water. However, demand for sports/energy drinks is likely to be flat, while consumers seem to be cutting back on ready-to-drink teas and carbonated soft drinks. Dairy is tops in terms of the number of consumers that drink any beverage at least once a week. In terms of frequency, coffee is king, with consumers quaffing java an average of 6.2 times per week, followed closely by bottled water and dairy. Consumers in the survey said they consume beer and wine, on average, about twice a week.Industry Financial Health
Non-alcoholic beverage companies reversed a sales decline of 2.2% in 2009, with sales rising 0.8% in 2010. However, smaller companies (those with annual revenue under $1 billion) are struggling to generate earnings growth. Collectively, these players posted earnings before interest taxes, depreciation and amortization of just 9% of total sales, versus the 22% posted by large companies (annual revenue in excess of $5 billion).
Beer brewers posted a collective 2010 year-over-year sales increase of 2.6%, down significantly from 9.2% in 2009, though EBITDA rose slightly, to 25% of sales. Distillers and vintners saw a 3.1% increase in sales, vs. a decline of 2.7% in 2009, though gross margins were flat.
The industry analysis also found that approximately one in 10 non-alcoholic beverage companies -- and one in five beer brewers -- are in danger of economic distress within the next 24 months, given precarious financial positions and high debt. Some 24% of vintners and distillers are in fiscal danger.
“Though demand trends are positive, beverage companies still face significant challenges,” said Garfield. “They need to walk a tightrope between innovation and efficiency, continuing to develop exciting new products but while also driving profitable growth in their core brands.”
The AlixPartners Beverage Industry Review was augmented by a consumer poll conducted February 7-9, 2011, with 1,000 U.S. consumers
From the May 5, 2011, Prepared Foods' Daily News.