Title: "Australian Alcohol Market Faces Sharpest Decline in Decades Amid Cost of Living Crisis: What It Means for Investors and Consumers"
By Byron Kaye
SYDNEY (Multibagger) - Louise Dowling, a liquor store owner in Sydney, is grappling with a significant slump in sales, forcing her to work an additional 40 hours a week to compensate for the staff she had to lay off. This scenario is reflective of a broader trend where Australia's prolonged cost of living crisis is compelling consumers to drink less.
"Without the foot traffic and sales, you simply don't have the financial means to employ extra staff," Dowling remarked at her P&V Wine + Liquor Merchants store in Enmore, a bustling dining and nightlife hub. "Everyone's tightening their belts, including us."
After experiencing a surge in sales driven by pandemic lockdowns and unused savings, Australia's alcohol industry is witnessing its steepest downturn in recent memory. More individuals are cutting back on discretionary spending and opting for healthier relaxation alternatives.
According to the Australian Bureau of Statistics (ABS), alcohol sales grew by just 0.7% in the year to June, marking the slowest pace in at least 25 years. Notably, this modest increase is likely attributed to rising prices, as alcohol sales volumes actually fell by 3.9% during the same period.
Australia, one of the world's wealthiest nations per capita with high alcohol spending, is experiencing this slowdown amidst a decade-long global decline in alcohol consumption due to health concerns and personal choices.
This trend is evident in the year-end earnings reports of alcohol sellers. Supermarket giant Coles, the second-largest alcohol retailer by sales, reported a 21% drop in liquor store profit, citing a decline in discretionary spending. Similarly, Treasury Wine, the largest wine producer, saw a 7% profit decrease in its mid-range unit, partly due to "soft consumption trends" in Australia and Britain.
Endeavour, the biggest liquor store and pub owner by sales, reported a modest 1.8% increase in pre-tax profit but was downgraded by analysts after revealing that retail sales rose just 0.6% in the first six weeks of the 2024/5 financial year.
Tom Kierath, an analyst at investment bank Barrenjoey, noted that alcohol companies previously benefited from marketing more expensive products and saw a surge in sales during lockdowns. However, post-pandemic inflation has led to soaring bills for housing, energy, and petrol, prompting consumers to cut back on spending, including on alcoholic beverages.
"People are looking to save money now, and in various consumer categories, they are downgrading," Kierath explained. "Alcoholic drinks are no different."
Australia's largest brewer by volume, Asahi, which produces popular beers like Victoria Bitter and Carlton Draught, reported an 11.7% drop in operating profit for Australia and New Zealand in a half-year update. The company also revised its full-year profit forecast for the region, reducing it from 9% growth to 1.7%.
Healthier, Cheaper Alternatives
While alcohol remains ingrained in Australian social life and identity, researchers predict that the trend towards abstinence will continue to grow. The Australian alcohol market shrank by 3% from 2022 to 2023, the largest decline among major markets such as China, the United States, and Britain, according to industry researcher IWSR. The researcher forecasts the Australian market to grow by just 1% annually on average until 2028.
Cost is a significant factor, said IWSR’s research director for Asia Pacific, Sarah Campbell. The government imposes inflation-indexed tax hikes on alcohol producers twice a year. Rising costs of labor and ingredients, among other factors, mean companies can no longer absorb these increases and must pass them on to consumers. "Australian drinkers remain in down-trading mode," Campbell added.
Health concerns, heightened after COVID, also contribute to the decline in alcohol consumption. Data from the Australian Institute of Health and Welfare showed that while the number of frequent drinkers has slightly declined, the proportion of non-drinkers rose to 23.1% of the population in 2023 from 16.4% in 2001.
Michael Livingston, an alcohol policy researcher at Curtin University, noted that the rise in abstinence began a decade ago with teenagers concerned about the state of the world and their lives. "That generation is now aging into the peak drinking years," he said.
Alcohol producers and retailers have attempted to counteract this trend by targeting various groups of drinkers, but Livingston warned, "There are not many avenues open to them at this point to maintain profitability at the level they were."
Melbourne blogger Natalie Battaglia, who shares non-alcoholic drink recipes on her Instagram account The Mindful Mocktail, has seen her followers grow from 120,000 to 586,000 in the past 18 months, driven by interest in becoming "sober curious." About one-third of her followers are aged 18 to 25. "This growing focus on health and wellness, alongside the financial pressures from the cost of living crisis, suggest that demand may not return to pre-downturn levels," Battaglia said.
Analysis for the Everyday Investor
If you're wondering how this information impacts you, let's break it down:
- Reduced Alcohol Consumption: Due to rising living costs and health concerns, Australians are drinking less. This trend affects the profitability of alcohol-related businesses, from small liquor stores to large producers.
- Impact on Investments: If you have investments in alcohol companies, be prepared for potential declines in stock prices and dividends as these companies face reduced sales and profits.
- Market Adaptations: Companies are attempting to adapt by marketing non-alcoholic alternatives and premium products. However, these strategies may not fully offset the downturn.
- Personal Finance: For consumers, this trend reflects broader economic pressures that may require further budget adjustments. Spending on alcohol is a discretionary expense that many are choosing to cut back on.
Understanding these dynamics helps you make informed decisions, whether you're managing a portfolio or adjusting your budget. The shift towards healthier lifestyles and tighter budgets is reshaping the alcohol market, and staying informed will help you navigate these changes effectively.
Stay ahead, stay informed, and make smart financial choices!