Boutique distilleries: mixing up the spirit industry

Spirit manufacturing industry revenue growth was 3% per annum from FY15 to FY19, reaching $2.1 billion in FY19. Spirit imports grew 6% per annum over the same period, to $877 million in FY19. Accordingly, imports represent over a third of the industry, and their market share is increasing. Boutique Australian spirits have elbowed their way to the front and are now getting service, but they are up against broad-shouldered competition from large importers providing cheap and cheerful product.

So who’s best mates with the bartender?

Diageo, Coca-Cola Amatil, and Asahi/CUB together have over 55% of the market share. Each of these players have multiple labels, but to jog your memory, here are some of the staples:

• Diageo, providing the house standards: Smirnoff, Johnnie Walker, and Tanqueray

• Coca-Cola Amatil, selling most of the American whiskies you might mix with coke: Jim Beam, Canadian Club and Maker’s Mark

• Asahi/CUB, key supplier to school leavers: Vodka Cruiser and Woodstock Bourbon.

Then, there are a number of large independent distillers, including Bundaberg Rum, Four Pillars, Archie Rose and Lark, which are holding material market share.

And more recently, the local crowd has started to change as there has been significant growth in new boutique distilleries. Australian Distillers Association membership rose from c.50 in 2015 to over 250 members today.

Did COVID-19 ruin the party?

Similar to other segments of the alcoholic beverage industry, sales were negatively impacted by COVID-19 restrictions as publicans turned off the lights, but this was offset to an extent by an increase in sales through off-licences and online.

Spirit manufacturing industry revenue deteriorated from FY19 to FY20 by (4%), however imports continued to increase (up 6%) and win more market share against the Aussie battlers.

Further, both large and small distilleries did manage to find some unexpected upside through the pandemic as they converted production to ethanol to be used for hand sanitiser products.

What trends are shaking and stirring the industry?

Straight spirits account for 42% of the spirit manufacturing market, with Ready-To-Drink products (RTD) representing a further 41%. The balance of the market is made up of liqueurs and other niche alcoholic products.

Spirits have remained unchanged. however RTDs are currently undergoing a significant shift towards premiumisation. As RTD products became less affordable for younger consumers due to the alcopops tax in 2008, manufacturers have subsequently been targeting more mature audiences with deeper pockets and more demanding palates.

Hard seltzers are a quickly emerging hot product in the alcohol industry. Some are made with spirits such as vodka, gin or tequila. However, the leading brands are actually brewed from fermented grains or cane sugar, and therefore fall within the beer category as a ‘flavoured malt beverage’. For example, in making their Fizzer product, Moon Dog brew a neutral base, that is filtered to remove any undesirable flavours from fermentation, and then re-flavoured with fruit.

Industry activity

The Australian alcohol industry contributed $6.9 billion in excise tax & WET in FY20, noting that Australia has the third highest spirits tax amongst developed countries.

Alcohol Beverages Australia (ABA) has been pushing for tax reductions to make Australian spirits more competitive globally, a whole-of-government approach to regulations to improve efficiencies and the inclusion and prioritisation of the total alcohol beverage sector, not just wine, in trade negotiations.

Pleasingly, the 2021 Federal Budget includes $255 million of tax cuts targeting craft spirits and beer production to help the industry expand its footprint globally, hopefully writing a similar story to the growth of Australia’s wine exports over the last few decades.

M&A activity

The signature transaction in the space was the acquisition of a 50 per cent stake in Four Pillars Gin by Lion. However there has been lots of less public fund raising / capital raising activity to support the growing number of boutique distilleries.

We expect there to be a wave of M&A in the medium term as:

• larger players look to splash cash and snap up successful boutique producers; and

• consolidation amongst boutique distilleries occurs as they look to set their next phase of growth on fire.

This blog is part two in our ongoing Food and Beverage blog series. The previous blog in the series can be found here.