Global spirits manufacturers are grappling with a confluence of challenges that threaten to reshape the landscape of the industry. As tariffs and brand boycotts emerge as significant impediments, leading producers are adjusting their sales targets amid growing economic uncertainty. Most recently, French cognac powerhouse Rémy Cointreau joined the ranks of industry giants like Diageo and Pernod Ricard in altering its financial outlook, citing a lack of macroeconomic visibility and geopolitical instability, particularly with regard to the ongoing trade tensions between the United States and China.
In a statement released on Wednesday, Rémy Cointreau disclosed that its ambitious sales goals for 2029-2030 were no longer feasible due to these external pressures. The company reported a notable 22% decline in full-year sales for its cognac sector, which includes the renowned Rémy Martin brand. This downturn is attributed to weakening demand in the crucial U.S. market and a complex set of challenges affecting consumption patterns in China. Similarly, LVMH, another leading luxury firm, recorded a 17% drop in sales for its flagship Hennessy cognac during the first quarter of the year.
The sobering environmental factors impacting cognac sales extend beyond the immediate market scenarios. Tariffs have emerged as a key concern, particularly because the spirits industry, with its prestige and legal restrictions, relies heavily on local production which is highly susceptible to U.S. import levies. For instance, products like Champagne are legally mandated to be produced and bottled within the Champagne region of France, making them particularly vulnerable to international trade policies.
Sanjeet Aujla, an analyst at UBS, underscored the vulnerability of spirits against geopolitical tensions. He noted that the unique geographical characteristics associated with spirits create an inherent risk in the global marketplace. Rémy Cointreau has projected that current tariffs could translate into a staggering €65 million ($55 million) hit to its business after accounting for mitigating strategies. Diageo has also indicated that approximately a quarter of its operations are likely to face adverse impacts from these tariffs.
In stark contrast, the beer segment appears less affected by such external shocks. Notably, AB InBev, the world’s largest brewer, along with Heineken and Carlsberg, has been able to maintain its forecasts for the year, suggesting that breweries may weather the storm more robustly than spirit makers. This disparity highlights an important distinction: wines and spirits face a greater risk of consumer boycotts, with political sentiments prompting potential shifts in consumer loyalty towards domestic alternatives.
The current challenges arrive at a time when the spirits industry is experiencing a marked deceleration following a decade of robust growth. The pandemic had spurred a significant uptick in alcohol consumption, as consumers seeking refuge from lockdowns splurged more on premium brands. Aujla elaborated on this trend, stating that drinkers not only increased their purchases but also gravitated towards higher-quality offerings during the pandemic. However, as economic conditions begin to shift, many consumers may be reluctant to spend lavishly on premium spirits, prompting a potential pivot towards more affordable ready-to-drink (RTD) options.
Jefferies, a global investment banking firm, noted in a recent report that the growth of spirits is being challenged by the increasing popularity of RTDs, particularly those made from vodka and rum, as price-conscious consumers look for ways to save amidst rising inflation. The trend of “premiumization” that had transfixed the industry appears to be at a standstill, as current economic pressures alter consumer spending habits.
Moreover, a broader cultural shift towards health and wellness is influencing drinking behaviors. A growing number of individuals are identifying as “sober curious,” exploring lower alcohol consumption while companies are adapting by introducing ranges of low and no-alcohol products. The rise of weight loss medications, which have been shown to diminish cravings for alcohol, introduces yet another layer of uncertainty for spirits manufacturers.
Although analysts are split on the duration and permanence of the sales downturn, there is recognition that both cyclical and structural factors are contributing to the overall climate. James Edwardes Jones, an analyst at RBC Capital Markets, indicated that while economic headwinds and leftover stocks from the pandemic contribute to the current scenario, there are also lasting shifts in consumer behavior to consider. Aujla echoed this sentiment, suggesting that while the industry is facing cyclical challenges, the growth trajectory of the U.S. spirits market may settle at an annual rate of 1-2% lower than the historical 4-5% norm once the current pressures dissipate.
The intersection of economic uncertainty, evolving consumer preferences, and regulatory challenges presents a complex landscape for the global spirits industry. As manufacturers reevaluate their strategies and targets, the ramifications of these developments will likely extend well beyond immediate sales figures, potentially reshaping the market dynamics for years to come.