As alcohol consumption declines, global liquor companies are struggling to clear inventories. Companies that dramatically increased production to meet the surge in alcohol demand during the COVID-19 pandemic are now resorting to so-called "tearful discounts" to unload piling stock.
On the 18th (local time), the Financial Times (FT) in the United Kingdom reported, "With demand for Scotch whisky, whiskey, cognac, and tequila plunging to record lows, liquor companies are piling up massive stocks of spirits," adding, "They have temporarily shut distilleries and are being forced to cut prices to move the bottles stacking up in warehouses."
In fact, financial reports show that the matured liquor inventories held by five of the world's largest listed liquor corporations—Diageo, Pernod Ricard, Campari, Brown-Forman, and Rémy Cointreau—total $22 billion (about 32 trillion won). That is the highest level in the past 10 years.
In particular, the matured inventory at Rémy, a traditional French cognac house, stands at 1.8 billion euros (about 3 trillion won), roughly twice its annual revenue and close to its market capitalization. As of March last year, Rémy's annual revenue was 884.6 million euros (about 1.5 trillion won). Diageo, known for its Johnnie Walker series, also saw its matured inventory as a share of annual revenue jump from 34% in fiscal year 2022 to 43% last year.
Trevor Stirling, an analyst at global investment bank Bernstein, said, "This kind of inventory buildup is unprecedented," adding, "Current corporate stock levels are far above those accumulated after the financial crisis."
Liquor inventories began to climb in earnest when companies sharply ramped up production to respond to the drinking boom during the COVID-19 pandemic. Stirling said, "In 2021–2022, everyone lost discipline and thought this demand would last forever." But with rapid inflation and an economic slowdown squeezing consumers' disposable income, alcohol demand has contracted quickly over the past few years.
FT reported that investors are debating whether the downturn is a temporary economic factor or stems from fundamental social change. Some say the decline in drinking is tied to the rapid spread of weight-loss drugs such as Wegovy and Ozempic, along with a global rise in interest in health and wellness.
Liquor companies have also moved to cut prices to reduce inventory. Rémy Chief Executive Officer (CEO) Frédéric Marelli said at an earnings release in November last year that price cuts were inevitable due to oversupply, adding, "We are now in a completely different world." Hennessy cognac from LVMH, which rose to $45 per bottle in the United States during the pandemic, is now trading at a low of about $35.
Some companies appear to be halting liquor production itself to manage inventory. Diageo has suspended whiskey production in Texas and Tennessee through the summer, while Japan's liquor group Suntory has shut down the main distillery of Jim Beam bourbon in Kentucky for at least a year.
However, because the industry typically plans production with at least two years of future demand in mind, there are concerns that such moves could lead to negative long-term results. Edward Mundy, an analyst at U.S. investment bank Jefferies, said, "If you cut inventory during a downturn, you could face major problems meeting demand when it recovers," adding, "No one knows what demand will look like in five years."