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Consumers splurging on pricey alcohol despite rising costs

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Soaring inflation has made life harder for many of the world — but some individuals are still smoking expensive cigarettes and doing shots of fancy tequila.

From British American Tobacco to Tanqueray gin maker Diageo, cigarette and alcohol corporations cited strong demand for high-end products people can’t appear to shake after they reported results this week. Removed from buying cheaper alcohol and tobacco, shoppers are as a substitute trading up.

“In hard times, I feel people just want that little moment to have fun, you understand, to unwind with family, with friends with colleagues,” Diageo’s finance chief Lavanya Chandrashekar told Reuters.

The trend contributes to a pattern of affluent consumers spending big on luxury items following the COVID-19 pandemic. Lockdowns resulted in average bank balances rising and record stock markets boosted wealthy people’s investment portfolios.

Diageo, the world’s biggest spirits maker, on Thursday beat full-year sales forecasts, helped by demand for “super premium” brands equivalent to Don Julio tequila, Johnnie Walker Blue Label and Bulleit Bourbon. Bottles of Don Julio start at roughly 40 kilos ($49) on Amazon and go up into the lots of, as do several special edition versions of Johnnie Walker Blue Label. 

Diageo, the world’s biggest spirits maker, on Thursday beat full-year sales forecasts, helped by demand for “super premium” brands equivalent to Johnnie Walker Blue Label.Shutterstock / DMstudio House

Bottles of Tanqueray ginDiageo’s Tanqueray gin REUTERS

Food and private goods corporations equivalent to Procter & Gamble and Kraft Heinz have seen increased competition from cheaper private label brands as consumers trade down within the face of a value of living crisis. 

Individuals who smoke cigarettes, buy luxury products and drink alcohol, nevertheless, are likely to stay loyal to their brands even in the event that they’re dearer.

“There’s a fundamental difference in how consumers take into consideration something like baked beans versus a cocktail if you’re celebrating a special day,” Chandrashekar said.

Diageo doesn’t have much competition from supermarket-owned brands, she said, highlighting america where private label represents lower than 2% of the spirits market.

Sticking by their brands

Alcohol consumption increased worldwide throughout the pandemic as people stuck at home had limited options for entertainment.

Many at the moment are attempting to drink less, but higher, said Tineke Frikkee, fund manager at BAT and Diageo investor Waverton Investment Management. But the associated fee of living crisis and rising energy bills this winter mean that trading up may not last.

“As consumer budgets come under pressure, we may even see some downtrading, so still buying a bottle of spirits, but perhaps the subsequent price tier down,” Frikkee said.

AB InBev, the world’s biggest brewer and maker of Stella Artois and Budweiser, on Thursday reported higher-than-expected profits, helped by many drinkers switching to premium beers. 

InBev's Budweiser beerAB InBev, the world’s biggest brewer and maker of Stella Artois and Budweiser reported higher-than-expected profits, helped by many drinkers switching to premium beers. REUTERS

Because the start of the Russia-Ukraine war, U.S. sales of premium spirits have risen nearly 3% to $3.76 billion, in response to NielsenIQ. Globally, sales of high-quality wines, champagne and spirits are expected to rise about 6% to $155.2 billion in 2022, in response to Euromonitor.

Meanwhile, sales of luxury tobacco products – cigars, cigarillos and smoking tobacco – are expected to rise 7.5% to over $95 billion, in response to Euromonitor.

British American Tobacco has raised prices greater than its competitors in some categories and is investing more in its high-end Recent Port and American Spirit brands, chief executive Jack Bowles said in an interview. He highlighted growth in BAT’s American Spirit organic range.

American Spirit cigarettesBritish American Tobacco has raised prices greater than its competitors in some categories and is investing more in its high-end Recent Port and American Spirit brands.AP

Price hikes and luxury brands helped BAT beat first-half revenue and margin forecasts on Wednesday. 

“Consumers are sticking rather more with their (cigarette) brands and that’s why we didn’t see downtrading. We see premium growing in loads of places,” Bowles said.

Outside of alcohol and tobacco, earnings on Thursday continued a pattern of affluent consumers trading up.

Stellantis said strong pricing power and sales of high-margin cars including electric ones helped it top profit forecasts in the primary half, despite rising energy and raw material costs, and semiconductor shortages. 

While production problems hampered Volkswagen’s mass-market businesses, premium brands boosted the carmaker’s funds, with Audi seeing a 51% jump in operating profit and Porsche up 22%.

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