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The Ratings Game: Inflation has sent drinkers toward cheaper beer or fancier booze

A divide between wealthy and not-as-wealthy alcohol consumers is hurting makers of premium beer, Cowen analysts said in a note on Wednesday.

Inflation-drained lower-income drinkers are seeking cheaper beer and liquor — at the expense of craft brews and imports, which saw their weakest growth in years, the analysts wrote. Meanwhile, their richer counterparts are expanding their palates and seeking out more premium-level wine, bourbon and other spirits, the analysts said, benefiting companies like Jack Daniel’s maker Brown-Forman Corp. BF.B, -0.48%

The trend, they said, followed some two decades of “premiumization” in the alcohol industry, characterized by a focus on higher quality that has led to the popularity of craft beer, bars that serve it in chalices and flute glasses, small-batch liquor production and natural and biodynamic wines.

“Over the course of the last 20+ years, total beverage alcohol in the U.S. has consistently benefited from premiumization,” Cowen analysts, led by Vivien Azer, said in the note. “That said, price increases are at multidecade highs, which coupled with broader inflation, is driving mix shift across U.S. alcohol.”

Within beer, the analysts said, prices rose more than other booze categories. But volumes, a measure of liquid sold, have fallen. And the so-called “above premium” beer category, which includes imported and craft brews, saw its “slowest share gain in years,” they said.

That category lost market share over the past two months, they said. And the growth in the rate at which customers directed their dollars to that category, relative to others, stood at around one percentage point in 2022, a decline from the prior three years. Cheaper beers, meanwhile, picked up market share.

“Beer has an outsized preference among lower-income consumers, which we believe has led to a deceleration in the multiyear premiumization trend seen in the category,” Azer said.

Elsewhere, spirits like bourbon were in demand during the holidays, as spirits were the only form of booze to grow volume in recent weeks. Higher-end bourbon, Azer said, gained around 2% of dollar share last year. And tequila remains the fastest-growing distilled spirit.

Wine that cost more than $20 grew in popularity, the analysts said, even though more signs emerged last year that shoppers sought out cheaper brands overall, helped by demand from wealthier customers who have taken less of a hit from inflation.

Lori Beaudoin, chief financial officer of luxury winemaker Duckhorn Portfolio Inc. NAPA, -0.55%, suggested last year that its customers could get used to selections getting more expensive.

“What we’ve seen is, we think customers are a little more accepting of the price increases right now,” she said. “They’re seeing it in so many of their other products, and that’s really helped us to maintain the margins that we expect to make.”

Shares of Brown-Forman closed up 1.8% on Wednesday. Duckhorn finished up 0.5%.

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