The Drinks Market

Performance in 2008

PREPARED FOR

Drinks Industry Group of Ireland

By

Anthony Foley

Dublin City University Business School

www.drinksindustry.ie					March  2009

Contents								Page

1.	Overview of 2008 Market					3

2.	Introduction and Weak Economic Environment		5

3.	Volume of Alcohol Consumption				6

4.	Product Mix							7

5.	Prices								8

6.	Retail Sales in Bars						9

7.	Off Licence Performance					10

8.	Value of Sales							10

9.	2009 Prospects 						11

•	
1.  Overview of 2008 Market

2008 was a very poor year for the overall drinks market in Ireland. It was the worst performance in 25 years. The poor performance was mainly driven by the weak national economic situation. This was compounded by the increased level of cross border purchases of alcohol which was caused by the euro/Sterling exchange rate movement and the excise and VAT differential. GDP volume declined by 1.7% in 2008, total national consumption volume declined by 0.5 % and the unemployment rate increased to 6.3%. Unfortunately, the 2009 economic performance and the 2009 drinks industry performance will be much worse than in 2008.
•	The 2008 performance deteriorated as the year progressed.  Performance in the second half of 2008 was much worse than in the first half.  
•	The volume of alcohol consumption declined by 5.9% in 2008 compared to an increase of 2.5% in 2007.  The volume decline in the first half of the year compared with 2007 was 3.9%. The volume decline in the second half of 2008 was 7.2%.  Even when the increased level of cross border sales is allowed for there is still a substantial consumption decline of about 5% in 2008.
•	This decline was the weakest market performance in 25 years and is worse than the decline of 4.5% in 2003 which was caused by the large increase in spirits excise.
•	Per adult consumption decreased by 7.3% in 2008.
•	Per capita consumption decreased by 7.7% in 2008.
•	Average consumption levels in 2008 are back at 1997/98 levels and are about 13% below the peak levels of 2001.
•	All four alcohol drinks categories, beer, spirits, cider and wine had volume declines. The lowest decline was wine (-4.1%).   Cider declined in volume terms by 11.0%. Spirits declined by 7.7%.  Beer declined by 5.0%.
•	The individual product market volume shares in 2008 were wine 22.7%, beer 49.6%, spirits 19.5% and cider 8.2%.
•	Soft drinks consumption volume declined by 5.0% in 2008 and bottled water declined by 5.4%.
•	On licence alcohol prices rose by 4.2% in 2008 compared to 2007. Off licence prices rose by 2.2% in 2008. Alcohol prices as a whole increased by 3.6%. 
•	The value of the alcohol market declined by about 2.5% to €6.9Billion.
•	
The growth in the off licence share of alcohol consumption continued. Bar sales volume, which includes food sales, soft drinks and off licence as well as bar sales of alcohol, decreased by 6.8% (the volume decline in the last quarter of 2008 compared with 2007 was 11%).  The value of sales decreased by 3.1% in 2008. The volume of bar sales of alcohol declined by about 9% and there was an estimated 3% decline in off licence sales volume resulting in an increase in off licence share.
•	Prospects for the Irish drinks market in 2009 are very weak. GDP is currently forecast to decline by 8.0% in 2009. The volume of consumer expenditure will decline by 6.5%. Employment will decline by almost 10% and unemployment will double to 12%. Tax increases and pay cuts will reduce disposable income. The overall national price level will decline by up to 5% and the drinks industry will also face severe price pressures. The factors encouraging cross border shopping will continue. All of these developments will have a negative impact on the volume and value of the Irish drinks market in 2009.
•	Based on the expected economic decline and the continuing attractiveness of cross border shopping alcohol volume could decline by 10% in 2009 with a larger decline in the employment intensive on licensed sector. This could lead to a decline in drinks related employment of up to 10% or 9000 jobs. 

2. Introduction and Weak Economic Environment

This report examines the performance of the alcohol and soft drinks market in 2008.  It deals with total and per capita consumption, product mix, prices, value and volume of sales and the distribution between on and off-licence sales.

The report is mainly based on official data sources from the Revenue Commissioners and the Central Statistics Office and is compiled by Anthony Foley, Dublin City University Business School.

The drinks market performance was very weak in 2008. This was driven by the poor national economic performance. Real GDP declined by 1.7%. Real consumer expenditure declined by 0.5%. Total employment declined slightly following years of substantial growth. The alcohol tax differential with Northern Ireland worsened and the euro appreciated against Sterling which also encouraged cross border shopping. All of these factors contributed to the decline in the drinks market.

As with the economy as a whole the drinks market performance deteriorated as the year progressed. The rate of decline accelerated in the later part of 2008. 

3.	3. Volume of Alcohol Consumption

The most generally used domestic and international indicator of aggregate alcohol consumption is quantity of pure alcohol contained in the various beverages. In calculating the aggregate alcohol volume wine was based on a 12.5 % alcohol content and cider was based on a 5% alcohol content.  Based on Revenue Commissioners data for the four beverages groups, the volume of alcohol decreased by 5.9% between 2007 and 2008. The decline in the first half of 2008 compared with 2007 was 3.9% but the rate of decline increased in the second half of 2008 with a volume decline of 7.2%.

On a per capita basis there was a decrease of 7.7% from 10.741 litres of pure alcohol in 2007 to 9.919 litres in 2008.  Per adult consumption declined by 7.3% from 13.488 LPA to 12.497LPA in 2008. This greatly intensifies the pattern in recent years of stable/declining average consumption levels. The 2008 reduction has brought alcohol average consumption back to the 1997/98 levels and well below the peak average consumption levels of 2001.  Per capita consumption in 2008 is 12.5% below the peak 2001 level. The 2008 per adult consumption is 13.5% below the peak level of 2001.

Table 1 Volume of Alcohol Consumption 2007 and 2008

	1997/98
Average consumption	Peak average consumption 2001	2007	2008	% change (07/08)	
TOTAL VOL (MLPA)	Not applicable	Not applicable	46.605	43.861	-5.9	
Per capita(LPA)	10.14(1998)	11.33	10.741	9.919	-7.7	
Per adult(LPA)	12.76(1997)	14.44	13.488	12.497	-7.3	

Source: Derived from Revenue Commissioners and CSO.        
 
In the face of continuing population growth in 2008(+1.9%) the large volume decline was driven by substantially reduced average consumption per person and per adult. 

3.	4. Product Mix

The official data divides alcohol into beer, cider, wine and spirits.  All four categories experienced declines. The lowest decline in 2008 was wine. The volume of wine consumption decreased by  4.1 %.  Cider volume decline was 11.0%. The beer volume change was a decrease of 5.0% and the spirits decrease was 7.7%.

The consumption shares of the four product categories in 2008 were beer 49.6%, spirits 19.5%, wine 22.7% and cider 8.2%.

Table 2 Product Category Mix and Growth 2007 and 2008
	Beer	Spirits	Wine	Cider	
% Share 2007	49.1	19.9	22.3	8.7	
% Share 2008	49.6	19.5	22.7	8.2	
% Increase in volume 2007/08	-5.0	-7.7	-4.1	-11.0	

Source:  Revenue Commissioners

The soft drinks and bottled waters market also declined in 2008 following growth in 2007. Soft drinks volume declined by 5% in 2008 compared to a growth of 3% in 2007. The bottled water market reversal was very large. In 2008 the volume of bottled water declined by 5.4% following a growth rates of 10.2% in 2007 and 15.8% in 2006.

5. Prices

As measured by the Consumer Price Index (CPI) average alcohol prices in 2008 were 3.6% higher than in 2007. This compares with an overall CPI increase of 4.1%. There were different price movements in the on and off licence sectors. On licence prices increased by 4.2% and off licence prices increased by 2.2%.  

Table 3  Alcohol Price Change 2008
	% change	
All Alcoholic Drink	3.6	
 Off Licence	2.2	
On Licence	4.2	
CPI	4.1	

Source.  Derived from CPI, CSO.

The price performances of the different drinks categories are shown in Table 4.

Table 4 Price Changes (%), drinks categories 2008
	On licence	Off licence	
Beer	4.2	4.2	
Spirits	4.1	1.9	
Wine and cider	3.8	1.3	
Soft drinks and mineral water	4.5	5.4	

Source.  CSO

6. Retail Sales in Bars

Total alcohol consumption, which includes both on and off licence sales declined by 5.9% in 2008 as measured by Revenue clearances data. The volume of bar sales decreased by 6.8% in 2008 according to the CSO. The rate of decline accelerated as 2008 progressed. In the last quarter of 2008 the volume decline in bar sales was 11% compared with the same period in 2007. The value of bar sales decreased by 3.1% in 2008 compared with an increase of 2.5% in 2007. The last quarter value decline was 6.5%. The bar sales index includes all bar sales including food, soft drinks and off licence sales as well as bar sales of alcohol. The industry view is that food sales performed better than drinks sales. Consequently, the decline in drinks sales in bars was larger than the Index of Retail Sales figure compiled by the CSO. We estimate that the volume decline in alcohol on licence sales in bars was about 9% in 2008.

Table 5 Bar Sales % Change
	Volume	Value	
2006/07	N/C	2.5	
2007/08	-6.8	-3.1	

Source. CSO

7. Value of Sales

The off licence share of alcohol consumption has increased over the medium term.  The latest CSO data relates to 2007 when off licence sales were 37% of the total alcohol sales.  As off licence prices are lower than on-licence prices, the volume share of the off-licence sector is substantially above its value share. The 2008 volume shares were estimated to be approximately 48% on licence and up to 52% off licence. Robust comprehensive data on off licence volumes are not available but it is possible to make a reasonable estimate. On licence alcohol sales account for about 80% of the bar trades business. On the assumption of a zero growth in the non alcohol segment the alcohol decline was 9% in 2008.  Based on the total alcohol market and bar volume declines the off licence volume has decreased by 3% in 2008 and the on licence sales have declined by 9%. The off licence share of the volume market increased by about one percentage point in 2008 (excluding the cross-border impact).

8. Off Licence Performance

The overall alcohol price increase was 3.6%. The volume decrease was 5.9%. This gives a value decrease of 2.5%. The 2007 CSO estimate of alcohol personal expenditure was €7.1B in 2007. This suggests an expenditure level in 2008 of €6.9B. 

Table 6 Value and Volume Changes in the Alcohol Market 2008 

	%	
Volume change	-5.9	
Price Increase	3.6	
Value change	-2.5	
Value Estimate 2008	€6.9B	

Source:  Revenue Commissioners and CSO

9. 2009 Prospects

All the economic indicators and forecasts suggest that 2009 will be a substantially worse year for the drinks industry than was 2008. The euro will continue to be strong relative to Sterling over the short term. The alcohol tax differential with the North will continue to be substantial. Both of these in addition to substantial pressure on personal disposable incomes due to tax increases and pay cuts will provide a continuing strong motivation for cross border shopping in 2009.

The latest economic forecasts suggest that GDP will decline by 8.0% in 2009.  Real consumer expenditure will decline by 6.5%. Income tax increases and pay cuts will greatly reduce personal disposable income and will reduce demand for alcohol and also increase pressure to purchase products in the much cheaper Northern Ireland. Unemployment will double to 12% in 2009 compared to 6.3% in 2008. Employment is expected to decrease by 9.5%. Prices in the economy are expected to fall by 4% to 5% because of the weak demand situation. 

The drinks industry is facing a volume decline in domestic sales of, at minimum, 10% on the basis of the likely economic outturn and cross border impact. In addition there will be severe pressure on price levels in 2009. This decline will result in a substantial decrease in the employment and economic contribution of the drinks industry in 2009. 
The employment intensive public house sector faces a particularly bleak 2009. Overall, employment could fall by 10% or 9000 jobs.