South Africans are paying more to drink

South Africans are not drinking more liquor. Even so, despite the difficult economy, large retailers are somehow still making a lot more money from liquor sales.

This contradicts the IRi report, which says “Volumes have increased by >10% per annum, suggesting South Africans are drinking more.”

Shoprite Holdings pushed up sales 25.1% for the year to end-June. Tops at Spar saw an increase of 19.3%, for the six months ended-March. Massmart’s alcohol annual sales increased by 13.6% for the six months to June 2019.

Pick n Pay registered double-digit growth for the period ended March 2019. 

According to Evan Walker, portfolio manager at 36ONE Asset Management, the chains managed to do this despite alcohol volume being largely flat for the past two years.

Paying more to drink

So how are retailers making more money while sales are flat? The answer is simple: they are charging consumers more.

Walker says the liquor retail outlets are experiencing revenue growth because of producer inflation.

“If you look at the numbers there is a little bit more inflation in the liquor market and a component of higher taxes that have come through,” he says.

He says that excise tax is being pushed on to consumers.

“The volumes are flat, and to some extent, they have been stagnant for the past two to three years. 

“South Africa has had top-line inflation, which has resulted in consumers paying more to drink,” says Walker.

Another industry source who chose to remain anonymous says this has resulted in retailers using revenue growth to lure consumers.

“Top-line is all good but what is it doing to their margins? Because when you look at their margins they are not necessarily going forward. The revenue growth is there to get clients in,” he says.

“But they need to make money off the revenue growths as well.”

Convenience and surplus

They both agree that the presence of liquor retail outlets has made it easier and convenient for consumers to make liquor purchases while doing their grocery shopping.

This has seen all the chains increase the size of their liquor store network over the past few years.

“There has been this big formalisation, predominantly Tops, and Pick n Pay Liquor coming aggressively into the independent market. There has been a big shift in the consumption of alcohol in the country, simply because of convenience and surplus,” says Walker.

He says Tops at Spar has been successfully leading in terms of increasing its retail outlets.

According to the Liquor Industry trends in South Africa Report by IRi (December 2018), Spar has added about 40 Tops stores every year since 2013, totalling over 730 shops. Checkers expanded its LiquorShops outlets by almost 50 stores in 2018, while Pick n Pay had over 440 liquor outlets, after having opened 59 new liquor outlets in 2018 alone.

South African liquor category CPI

The channel shift and the power of millennials

There has also been a generational shift in the market with millennials now driving liquor sales. They want product innovation promising low-calorie, low-carb, gluten-free, lactose-free and alcohol-free offers and they want to moderate their intake of these ingredients, according to the IRi report. 

“The younger generation is more health-conscious. They want to drink better rather than more. They want to drink low alcohol or no alcohol,” says the industry source. 

Premiumisation and taste

Beer purchases have been driven by premiumisation, as beer drinkers continue to demand a superior standard.

“The premium beers have done well from a growth perspective,” says Walker, who puts this down to being socially conscious, especially among millennials. 

He adds: “There has been a more upmarket and premium beer trend.”

The change in consumer preference is not just happening in South Africa, as beer volumes have been declining globally by 4% to 5% annually, according to Walker. 

“Consumers are also moving towards drinking Ready to Drinks [ciders and flavoured beer].  This is because of how consumers taste profiles are changing and there are occasions were male and female prefer to drink [the same type of drink] together at a social gathering” he says.

Switching from whisky to gin, vodka, and new flavours

Walker says that in developed countries such as the US, the spirit volumes are increasing by 3% to 5% annually and this has become the trend in SA as well.

“White spirits such as vodka and gin are increasing. They are taking market share from beer as the occasions and aspirations are changing as well,” he says.

He says though these drinks have been around for centuries, their consumption has increased in the last five years. The reason for this shift in the market is due to experiential and aspiration elements for the new drinks, according to Walker.

The white spirits have done well in becoming innovative especially because they have expanded their flavour explorations.

“There have been more flavours and they can be used in cocktails.  It seems that these spirits are still going to be doing well for a while.”

He advises that beer distilleries reinvent themselves.

Walker says that craft beer is no longer doing as well as it used to in the market. “There used to be many entrants in the market, but now they are not making it. They are diminishing gradually in size. They just can’t make it.”

However, the IRi report differs in opinion.

Craft Beer Volume Sales and Active products

“The premium craft gin segment is growing at over 100% per annum and retailers are taking full advantage of this trend. The number of craft gins available on [the] shelf increased by 2.5x versus a year ago,” it reads.

It says craft beer attracts higher living standards measure (LSM) consumers.

“Heineken’s Soweto Gold, for example, recently became one of the top-selling craft beers in formal retail, attesting to the fact that craft beer is for everyone in South Africa.”

Brandy volumes have declined as well.