US consumers cut back on spirits as cost of living pressures bite

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US drinkers are continuing to cut back on their vodka, whisky and tequila intake in a sign that, despite the improved economic environment, consumers are finding higher prices hard to swallow.

The volume of spirits sold in the US in the first seven months of the year shrank 3 per cent compared with the same period last year, according to drinks data provider IWSR, with vodka, rum and Scotch whisky among the worst performers. 

US spirit volumes had grown consistently at around 2.6 per cent in the two decades until 2019. They then shot up to almost 5 per cent between 2020 and 2021 as lockdowns boosted alcohol intake before falling flat the following year and dropping 2.9 per cent in 2023.

The consumer caution has triggered debate among analysts as to whether the gloom in the spirits sector is cyclical or structural. The pandemic spirits supercycle, during which bored consumers splashed out on pricier spirits then dialled back amid spending worries, has dented investor confidence in the medium-term prospects for spirits. 

“The industry was expecting an existential threat when the pandemic initially hit, but instead saw a doubling of growth in the first year,” said Marten Lodewijks, president of the US division at IWSR.

“What has happened since appears to be more of a correction than anything else, with the boost of stimulus checks and extra disposable income running out.” As with other consumer goods, the price of spirits has soared due to inflationary pressures.

The share prices of spirits groups including Pernod Ricard, Diageo and Brown-Forman have taken a battering over the past 12 months, falling to early pandemic lows as they struggled to build back sales growth after the boom and bust.

Vodka sales by volume fell 3.8 per cent in the year to July compared with the same period last year, while Scotch whisky dropped 5.8 per cent. Sales of tequila, the US’s fastest-growing spirit, fell 1.1 per cent.

Some believe the sector’s issues are structural and cite the proliferation of the new class of weight-loss drugs, known as GLP-1s, low levels of alcohol consumption among Gen Z and the growing legalisation of marijuana as factors that will weigh on spirits sales in the long term. 

However, Jefferies analyst Edward Mundy said that while GLP-1s, marijuana use and Gen-Z abstinence “may be gently chipping away” at US alcohol consumption, the big drivers of current weakness were from cyclical factors including destocking — in which retailers hold off on ordering while they run down inventories — as well as disruption from the fast-growing “ready to drink” (RTD) category and pricing pressures.

RTDs, in which beverages are sold pre-mixed and ready for consumption, bucked the trend for declines across the sector, including in beer and wine. While sales volumes of RTDs overall grew 2 per cent, spirit-based RTDs grew 11 per cent.

French spirits group Pernod Ricard and LVMH’s wine and spirits division each reported falling sales in their latest quarterly earnings, with Pernod warning that destocking by US retailers and heavy discounting was still weighing on revenues.

In a trading update last month, Diageo chief executive Debra Crew said that while consumer remained cautious, she believed the “fundamentals” of the spirits industry remained strong.

“[I] am confident that when the consumer environment improves, growth will return and the actions we are taking will position us well to outperform the market.”