Economy leaves mixed spirits for drink companies

NEW YORK (Reuters) - Tough financial times call for tough decisions ... or maybe just an extra drink or two.

Common wisdom suggests that financial hardships like resetting mortgage rates or crumbling home values can make people seek solace in alcohol, giving wine and spirits makers a cushion when the economy goes south.

The industry, also buoyed by targeting consumers with high discretionary incomes, is getting a chance to test that theory this year, which has seen less-than-joyful U.S. shoppers cut back on holiday purchases as they face a credit crunch and higher costs all around.

This week, the last before the Christmas, will be key to companies' holiday fortunes, since it is a time for last-minute gift buying and entertaining.

"It could be challenging for retailers this year," said David Ozgo, chief economist for the Distilled Spirits Council of the United States (DSCUS). "If (the consumer) continues to spend, then we'll have our typical big holiday season. If they don't, obviously sales might ease up a bit."

Ozgo said alcoholic drink makers like Diageo PLC, Pernod Ricard SA, Bacardi Ltd and Brown-Forman Corp can make up to a quarter of their U.S. annual sales in the days between Thanksgiving, which was November 22 this year, and New Year's Eve.

"This week will let us know whether the people who are watching their budgets for Christmas are going to be tightening or not," said Jonathan Goldstein, senior vice president of Park Avenue Liquor Shop in Manhattan. Goldstein, whose store specializes in rare items, said he has not yet seen his well-heeled clients pull back.

But for a store that caters to a wider audience, the story is quite different.

"I've seen a disappearance of the higher-end corporate customer," said Steven Kaiden, who owns Winfield-Flynn Ltd Wines & Spirits a few blocks away. "The $100 per person (gift-giver) has sometimes traded down to $50."

WHOLESALE HOLDING UP?

DSCUS estimates industry-wide volume grew 2 to 2.5 percent this year, down from a 4-percent increase last year.

The trade group's Ozgo said so-called "super-premium" brands -- those with the highest prices -- continued to grow at double-digit rates, while brands in the mid-tiers were slower.

"'Value' is declining a little bit, but it always has been," Ozgo said of the lowest end of the spectrum. "The fact that it hasn't gotten worse tells me that you're probably seeing some people that would normally drink premium brands shifting to value brands."

That thesis was proven by Brown-Forman, which blamed the wider slowdown, rivals' discounts and consumers' increasing frugality for U.S. volume declines of its Jack Daniel's and Southern Comfort brands in the quarter ended on October 31.

Chief Executive Paul Varga said then that people in times of economic weakness often go out less and instead buy alcohol to drink at home, a trend that hurts premium brands since price becomes more of an issue, prompting some to "trade down" to cheaper bottles.

Executives from other companies acknowledged consumers' troubles, but none went as far as Varga.

"We know there are some issues in the economy," said John Gomez, chief marketing officer for Bacardi USA Inc. "We are seeing a late buying pattern from the consumer," he said, meaning that consumers are procrastinating. "But (we) expect to have a good holiday."

Nick Rose, chief financial officer of the world's largest spirits company, Diageo, shared Gomez's optimism.

"At the moment, our business is still pretty robust despite all the speculation and comment that's spreading around the total industry number," Rose told Reuters, adding that Diageo was hurt "very little" by the wider slowdown since it owns many high-end brands, such as Ciroc vodka, Johnnie Walker whisky and Tanqueray gin.

Alain Barbet, chief executive of Pernod Ricard USA, said it was still too early to tell exactly how the economic slowdown would affect holiday sales.

"While we are conscious of the challenges affecting American consumers, we are confident that we will see growth in both volume and particularly value," Barbet said.

Timothy Ramey, an analyst with D.A. Davidson & Co, said spirits industry stocks were attractive relative to other consumer segments, since wine and spirits drinkers may skew higher than the general population regarding demographic and income, making them less hurt by things like higher gasoline costs.

"It's not new news that the consumer is weak," said Ramey, who has "Buy" ratings on Brown-Forman and Constellation Brands Inc. "The question is: where among the consumer's range of choice will we see spending and where do we see cutbacks?"

"I think wine and spirits probably is disproportionately positive in an environment like this," Ramey said.

(Editing by Dave Zimmerman)