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Spirits That Move Markets

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Some investors in alcoholic beverages are calling for a celebratory glass, while others are considering drowning their sorrows. Global trends in the sector range from the negative—prohibition efforts in Indonesia to a second year of falling Scotch consumption numbers and climate threats to top Chilean wines—to the positive: the rise of craft spirits and the potential for growth in premium drinks in India.

Shades of Prohibition are rising in Indonesia, where small shops have been banned from selling beer and premixed drinks. Not just travelers who enjoy alcoholic libations are worried, but investors are as well: two Islamic parties have proposed legislation to ban alcohol altogether. Offenders could get up to two years in prison, should the proposals become law.

Why worry about a ban on booze in Indonesia? The effects can be quite far-reaching, considering that it’s not just the drinks sector that could be suffering if the ban is passed. Tourism and hospitality are definitely not happy about the possibility, especially considering that in 2013, according to International Wine and Spirit Research, Indonesia is the 10th largest consumer of beer in Asia at 28 million cases and beer sales have risen 54% over the last 10 years.

The ban that just took effect is very specific: it bars Class A beverages—those with less than 5% alcohol content—including beer and low-alcohol wine. It was actually enacted in January, but gave vendors three months to prepare for compliance. The proposed law, however, is far broader and would not just jail violators, but fine them heavily as well.

Proponents of the proposed law claim it is meant to protect the health of the country’s youth, but imbibers and those in the spirits business aren’t buying that, particularly since it seeks to bar the sale, production, distribution and consumption of all beverages with more than one percent of alcohol. While there would be some exemptions, they are not clearly defined—something that generally creates the potential for trouble. Brewers from Heineken to Carlsberg to Diageo, owner of Guinness (Indonesia has the most Guinness stout drinkers in the region) are not pleased.

Scotch consumption, meanwhile, is down for the second year in a row, with China’s crackdown on conspicuous consumption playing a substantial role. Rabobank said in research that Scotch has not only lost ground in China but in the U.S., where it’s losing market share to other drinks, such as bourbon and Irish whiskey. Blended Scotch in particular “appears to be battling structural issues and struggling to remain relevant, particularly among younger consumers,” according to Rabobank.

Not that there aren’t bright spots, such as strong export growth to Taiwan and India, the growth of “premium single malts and the rise of the innovative grain Scotch category.” Premium brands across spirits segments and companies, said Rabobank, “showed strong buoyancy,” with Pernod Ricard India’s whisky brands  recording double-digit growth and “prestige and premium brands” from United Spirits (Diageo again) and Radico Khaitan growing at rates ranging from 5.5–7% “on a like-for-like basis.”

China’s crackdown is also hurting sales of cognac, to the extent that Hennessy (part of LVMH) is looking toward the U.S. to pick up the slack. The $2 billion industry has seen China’s cognac imports fall by 26%, while on the other hand U.S. imports have risen by 13%. Cognac’s growth within the U.S. market owes much of its growth to one particular segment of the population, according to Stephen Rannekliev, executive director, food and agribusiness research and advisory at Rabobank.

Rannekliev said in research that the overall brandy market in the U.S. is “currently marked by extremes—‘bling’ at one end and ‘boring’ at the other—with an enormous gulf in between. Cognac [brandy made in Cognac, France] has recently witnessed considerable success, and it achieves excellent pricing in the super-premium segment.” Thanks to “a series of references in hip-hop songs calling out cognac brands,” Rannekliev said in the report, there is strong growth in the U.S. that is “mainly limited to the African-American market.”

Within those limits, however, the growth is impressive. “African-Americans make up 12% of the U.S. population, but data from IRI [Information Resources, Inc.] suggests that they generate more than 60% of U.S. cognac sales.”

Brandies outside the cognac category, even premium brands, however, are not faring anywhere near as well in the U.S. There’s a chasm, not just a gap, between high-end sales of cognac at one end of the market and low-end brandy sales at the other, with neither domestic nor imported premium brandies making a strong showing anywhere in the midrange.

Climate concerns are another factor weighing on the sector, sometimes unpredictably. A case in point is Chile, where eight years of drought has caused some vineyards to abandon their lower-end wines so that water is available to tend the grapes for their higher-end vintages. Not just sales but their very vineyards are threatened.

In the Australian states of Victoria and South Australia, meanwhile, vineyards are dealing with abnormally early vintages, some calling them the earliest they could remember. South Australian vineyards are also running into problems finding wineries that can deal with the problem of white and red grapes ripening at the same time—driven by hot weather and little rainfall. Some vineyards were forced to leave grapes on the vines because of a lack of facilities to deal with them. But prices are high, because while harvests may have come early, they are also low in volume.

According to the Australian Wine Research Institute, growers may have to get used to earlier-than-normal harvests—a trend it said it has seen over the last 10–15 years. In reports, both Grape Growers Australia executive Lawrie Stanford and AWRI viticulturist Mark Krstic credited the early harvest trend to climate change.

In anticipation of the need for change, the Australian Grape and Wine Authority is currently engaged in clonal trials of Chardonnay and Shiraz, with a focus on climate change.

Dr. Michael McCarthy, principal scientist viticulture with the South Australian Research and Development Institute (SARDI), said in a statement, “The Australian industry is fortunate in that, due to a number of factors, vineyards have greater longevity than in a number of other countries. However, if climate change projections prove correct, vineyards planted now will experience warmer and probably drier conditions throughout their lifetime.” It’s hoped that the clonal trials can offer some guidance on how to be ready.