How tariffs will disrupt the drinks trade

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The spirits business suffered a humdinger of a hangover when the pandemic-era cocktail boom unravelled. Trade wars threaten to make the headache considerably worse. 

This week US president-elect Donald Trump, who had already mooted tariffs of between 10 and 20 per cent on non-Chinese imports, threatened to put a 25 per cent tariff on all imports from Mexico and Canada on his first day in office. Meanwhile China has slapped duties of up to 39 per cent on EU brandy, in response to levies on Chinese electric vehicles.

It is a nasty cocktail for Europe’s drinks companies. Those with tequila brands such as the UK’s Diageo and Italy’s Campari are exposed to US-Mexico tariffs. Diageo also faces higher tariffs on Crown Royal whisky shipped from Canada to the US. Those companies along with Rémy Cointreau and Pernod Ricard, both based in France, would also be hit by tariffs on imports from the EU and UK.

For some, the impact would be hard to swallow. Imposing a 25 per cent tariff on US imports from Canada and Mexico and 10 per cent on those from the EU and UK would cut earnings per share for Pernod, Campari, Diageo and Rémy by 3 per cent, 8 per cent, 8 per cent and 19 per cent respectively, according to Deutsche Bank.

It might not happen. In 2019, Trump’s tariff threats roiled the market for months but were eventually watered down to cover just single malt scotch and Irish whiskey made in the UK, says Ed Mundy of Jefferies. The industry is lobbying hard on the impact on consumers and hospitality job losses.

Chinese tariffs are already proving disruptive. Hennessy, owned by French luxury group LVMH, briefly considered bottling its brandy in China to avoid import tariffs. But it suspended the plan after hundreds of workers went on strike. Rémy Cointreau is particularly exposed. On Thursday it said the proposed US 10 per cent tariff “is not going to kill us for sure” but acknowledged that the Chinese tariffs were a concern. It plans to cut costs and adjust prices to mitigate the impact, though weak demand will make it hard to pass on extra costs.

Even before Rémy feels the hit from Chinese tariffs, its sales this year will drop by more than analysts expected. There are, however, some early signs of stabilisation in the US market. Thursday’s 3 per cent share price rise is a sign that some investors think the fall in the shares — down by 70 per cent since 2021 — has gone far enough.

If tariffs are watered down, investors can start to look ahead to a time when the party gets going again. For now, however, the threat of higher duties is a big dampener on high spirits.

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