As The Trade Wars Cool Off, How Will The Spirits Industry Change?

Source: Forbes, As The Trade Wars Cool Off, How Will The Spirits Industry Change?
By Kate Dingwall

In June, the beverage alcohol industry collectively breathed a huge sigh of relief as retaliatory tariffs, a result of a longstanding EU-US trade dispute completely unrelated to the alcohol industry involving illegal subsidies grained to Airbus, de-escalated.

The trade war has majorly disrupted the spirits industry, hitting distillery and winery workers, importers, exporters, distributors, retail and restaurant workers, farmers, packaging companies and logistic providers. Established brands were staring down the barrel of ever-incoming tariffs, and new brands were hesitant to compete in an unstable market. “During the tariff debacle, no EU product could feel safe,” says John Beaudette, the founder and partner of leading American alcohol importer and distributor MHW Ltd. “The Office of the United States Trade Representative (USTR) could periodically adjust both the tariff rates on the products already impacted and add new categories and products from other countries.”

What does this relief look like for the alcohol industry? Read on as Beaudette, a board member of the Distilled Spirits Council of the United States (DISCUS) and the National Association of Beverage Importers, dives into what the American booze landscape looks like with newly-tepid tariffs.

(Of note, American Whiskeys remain the only spirit subject to 25% tariffs connected with an ongoing dispute on steel and aluminum.)

How do tariffs affect the industry?

John Beaudette: Brands impacted by 25% tariff hikes either raised prices, reduced costs (by making cuts in advertising, marketing, and manpower), or some combination thereof. Many brands assumed they might be next, triggering significant shipments of products from non-tariff EU producers into the US as insurance against a potential tariff. This had significant repercussions concerning logistics systems—container shortages, public warehouse space challenges, and pier drayage delays drove up costs for everyone. “

“On top of all the uncertainty and challenges tariff-impacted brands faced, the pandemic struck and put many brands in a position where they could not execute a sales strategy catered to the changing dynamics of consumer consumption trends. For instance, for the last decade, US imports of single malt Scotch had been growing at around 6% annually. Suddenly, Scotch imports dropped 4% in 2020 when overall spirit volumes increased almost 5% across all categories. Through no fault of their own—they were ensnarled in the tariff war. The reality is their loss was someone else’s gain. New brands could play ball.”

“Another casualty of the arbitrary tariffs was the elimination of the US as a target for new brands seeking to export. With an extra 25% in costs, both US importers and foreign producers opted to wait for a better time to launch something new.”

So we’re about to see a huge onslaught of new brands?

JB: “There is no question we have entered another new brand acceleration period, similar to what happened after the advent of the internet. We have seen an increase of 36% in new brand entrants through June 2021 vs. the prior year. To handle the surge, we have already increased our staff by 40% and another 20% by year-end.”

“On the supply side, a good indicator of new brand initiatives and activity can be seen in the number of alcoholic beverage formulas submitted and processed by the TTB. For 2020, formula submissions of primarily spirits and malt products surpassed 24,000 up 70% from five years ago. Another metric from ‘bw166’ indicates that the TTB has approved over 21,000 spirit labels over the last twelve months ending July 2021, up 20% for the year, but up 33% for the last three months.”

Will new brands be able to enter the market on such short notice?

JB: “To meet the ever-changing and often fleeting demands of beverage alcohol consumers, some significant supply-side momentum builders have converged to help new brands and players jump on the opportunity. While the Trump administration threw the industry a curveball with tariffs, on the flip side, they provided a significant federal excise tax relief program (referred to as the ‘Craft Beverage Modernization Tax Reform Act’) for both domestic and foreign qualifying producers. It represents a large permanent economic opportunity for new, emerging, and established brands.”

“For spirit producers, it offers huge incentives to invest in their brands or launch a new one. To put it into perspective, a qualifying producer of 40% ABV bottle could save over $1 million in excise taxes for up to 50,000 9 liter cases. This represents a 70% reduction in taxes, allowing investment in people, marketing, and other brand-building activities. Foreign producers from all over the world have never seen an incentive program like this and they are excited to be collaborating with their US importer to invest in sales efforts in that market.”

Are these brands brand new, or international brands entering the US?

JB: “One of the major drivers of new spirit brands entering the US market is the potential for a lucrative exit/sale opportunity. Global drinks companies like Diageo, Constellation Brands STZ +0.6%, and Pernod Ricard pay hefty premiums to entrepreneurs who can build a brand—it’s one of the reasons why so many celebrities have entered this industry in the last few years. With their social media power, they can create demand and therefore build a brand almost overnight.”

“Brand loyalty is low right now—new entrants with a good product and package and credible story can grab customers very quickly.”

How has e-commerce played a role in this surge of new brands? 

JB: “We’ve heard industry players say the pandemic moved the calendar up five-plus years in terms of alcohol e-commerce and getting consumers comfortable with online buying and home delivery. Case in point: third-party marketing and fulfillment platforms such as Drizly, ReserveBar, MiniBar, Thirsty, and many others saw their businesses triple and quadruple overnight.”

“One byproduct of the pandemic will be a movement to grant spirits similar limited direct-to-consumer sales opportunities, consistent with the way wines are handled. Craft spirit distillers and importers want the ability to ship bottles to customers within and outside their state, especially when their brand is not available in that market. Wines use a controlled system that tracks the shipments of products direct to consumers, ensures state taxes are collected, and mandates receipt signatures by only those aged 21 or above. Spirit players want that same opportunity. Kentucky has already initiated a program where licensed distilleries throughout the US and importers representing foreign brands can ship spirits direct to consumers on a limited basis. It will be interesting to see which other states initiate similar models.”

Are we going to see more RTDs?

JB: “The hard seltzer phenomenon has been shocking to me. In my 30+ years in this industry, I have never witnessed anything quite like it. Flavored Malt beverages, a category within beer, climbed by 251 million cases in only two years. Most of that growth was the explosion of hard seltzers. This matches the 251 million cases of total spirits consumed in the US in 2020!”

“In 2020, the US added 45 million cases of alcohol consumption [according to Beverage Information Group]. Wine added 3.5 million cases, spirits added 15 million cases, and beer/malt-based added 25 million cases. Considering beer is over 10 times the size of spirits in Volume, Spirits are certainly garnering shares from wine and beer.”

“A large portion of new formula and label approvals handled by the TTB relate to spirit-based ‘Ready To Drink’ (RTD) cocktails and hard seltzers. While the majority of hard seltzers, such as White Claw and Truly, are made with neutral malt ferments, many new entrants want to move consumers to actual spirit-based cocktail-type offerings. While some are rum-, tequila-, and whiskey-based, the majority of new RTDs are vodka-based, reflecting the fact that one-third of all spirits consumed in America today are vodkas. 20% of the new products we see at MHW are now spirit-based RTDs.”

“I see a ‘jump ball’ coming whereby today’s hard seltzer consumers (downing 200 million+ cases per year) can be reeled in by marketers of traditional spirit drinks, cocktails, spirit-based RTDs, wines, and traditional beer brands. You can bet the folks at White Claw, Truly, and the others will do their best to make sure they control the jump ball tip-off.”