As alcohol consumption declines, global liquor companies are struggling to clear inventory. Companies that sharply increased production to meet the surge in alcohol demand during the COVID-19 pandemic are now resorting to so-called "tearful discounts" to unwind the stockpiles.
On the 18th (local time), the Financial Times (FT) in the United Kingdom reported, "As demand for Scotch whisky, whisky, cognac and tequila plunges to record lows, liquor companies are accumulating massive stocks of spirits," adding, "They are temporarily shutting distilleries and are having to cut prices to move bottles piling up in warehouses."
In fact, financial reports show that the five largest listed global liquor corporations—Diageo, Pernod Ricard, Campari, Brown-Forman and Rémy Cointreau—hold a combined $22 billion (about 32 trillion won) in aged liquor inventory. That is the highest level in the past 10 years.
In particular, aged inventory at France's traditional cognac house Rémy is 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 the "Johnnie Walker" series, also saw its aged inventory as a share of annual sales surge from 34% in fiscal year 2022 to 43% last year.
Trevor Stirling, an analyst at global investment bank Bernstein, said, "This level of inventory build-up is unprecedented," adding, "Current company stock levels far exceed those accumulated after the financial crisis."
Liquor companies began building inventory in earnest when they sharply ramped up production to meet the drinking boom during the COVID-19 pandemic. Stirling said, "In 2021–2022, everyone lost control and thought this demand would last forever." But as sharp inflation and an economic slowdown reduced consumers' disposable income, liquor demand has contracted rapidly in recent years.
FT said investors are debating whether this downturn stems from temporary cyclical factors or fundamental social change. Some assess that decreased drinking is tied to the rapid spread of weight-loss drugs such as Wegovy and Ozempic, along with rising global interest in health and wellness.
Liquor companies have also moved to cut prices to reduce inventory. Rémy Chief Executive Officer (CEO) Frédéric Marlière said at a results announcement in Nov. last year that price cuts were inevitable due to oversupply, noting, "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 around $35.
Some companies are effectively halting liquor production to manage inventory. Diageo has suspended whiskey production in Texas and Tennessee until summer, and Japan's liquor group Suntory has closed the main distillery for Jim Beam bourbon in Kentucky for at least a year.
However, given the industry's nature of producing liquor based on demand at least two years out, there are concerns that such measures could have negative long-term consequences. Edward Mundy, an analyst at U.S. investment bank Jefferies, said, "If you cut inventory during a downturn, you can run into major problems meeting demand when it recovers," adding, "No one knows what demand will look like in five years."