Birger Maekelburger and Philippe Bland from PwC’s Strategy Consulting Practice, Strategy&, were the headline speakers at the Australian Drinks Association's final Network Breakfast of the year held on Wednesday, 25 October 2023, at the Kirribilli Club in Sydney.
Drawing upon their extensive knowledge of the Australian and international retail and consumer goods sectors, Maekelburger and Bland delivered a compelling presentation on the interplay between the economic outlook, emerging consumer trends and the implications for businesses of the drinks industry in Australia.
Economic outlook: Consumption no longer driving growth
Maekelburger began the presentation by showing trended ABS data highlighting the deceleration in the Australian economy over recent quarters, with consumption no longer driving growth.1
“While we are not in a recession, we are experiencing what economists are calling a ‘per capita recession’. Population growth outpaced GDP growth, effectively leading to a negative effect on GDP per capita,” Maekelburger explained.
He said inflation is one of the driving factors for the slowdown of consumer spending in Australia.
“Inflation has likely peaked and is slowly coming down. But, the RBA is trying to achieve a slow flight path towards the 2-3% target, so inflation will stay with us for a while.”2
He noted that aside from the obvious increase in the cost of products, inflation forces the RBA's decision to adjust interest rates, which, affects especially homeowners and renters.
“Those that are holding high mortgages are painfully aware of what’s happening. Mortgage rates have gone up, reducing the amount that I can spend on other things than living. In Australia, a lot of landlords are also mortgagees and pass through higher mortgage payments. Together with higher demand through population growth, this led to higher rents.”
“So irrespective of whether you own a house with a mortgage or you're renting, your disposable income is currently being squeezed.”
Interest rates are obviously not always negative, especially for the typically older generation, who own their houses outright and have savings. This results in three distinct household groups: Renters, mortgagees, and retirees with very different consumption patterns.
The slowdown in discretionary consumer spending is visible across categories including alcoholic beverages over the past three months to August 2023. Encouragingly, spending in hotels, cafes and restaurants has held up well as there is still a strong desire among consumers to socialise and dine out.3
“The reality is, consumer spending will take some time to recover. We expect that at the end of next year and then hopefully into 2025 we’ll see an uptick. But in the next 12-18 months, we predict spending to stay subdued.”
Consumer trends: Five priority topics for the drinks industry to consider
Following Maekelburger’s macroeconomic update, Bland took the stage to discuss consumer trends that present opportunities for the drinks industry.
“We've noticed, interestingly, that people's propensity to buy alcohol doesn't necessarily follow GDP growth or decline. That leads to us understanding that as an industry, alcohol is fairly resilient to some of these economic shocks, more so than other categories,” he explained.
He said that while Australia is facing some economic challenges, consumer trends highlight there are five important opportunities and priority topics for the drinks industry to consider.
1. Alcohol is largely ‘downturn-proof’
Despite price increases, alcohol appears to be less of an inflationary concern for consumers when compared to food and groceries. Bland says this trend is akin to the 'lipstick effect,' where alcohol is considered a low-cost luxury good that consumers continue to indulge in during both economic upswings and downturns.
2. Value-seekers vs down-traders
The impact of inflation has prompted consumers to fall into two primary categories: "value-seekers" who actively seek discounts and promotions to maintain consumption of their preferred products, and "down-traders" who opt for more affordable versions or generic alternatives.4
“Value seems to be a paramount decision-making priority for consumers, where they will prioritise value over even convenience. Consumers are more likely to buy from their local retailer for a good deal on their favourite bottle of wine overpaying a premium for the convenience of having it delivered to their door,” explained Bland.
3. On-premise has re-surged post-COVID
Looking at channel performance currently and what is forecasted over the next four years, Bland says that both on-premise and retail will experience modest growth, mostly driven by population growth. A shift from retail to on-premise is not expected as consumers remain keen to socialise and adapt to inflationary pressures by choosing local experiences over extravagant holidays.
4. Drinking volume and frequency has changed
Despite recent trends toward mindful drinking, there has been an overall increase in the number of Australians drinking over the past three years.5
Blanc explained that this trend along with the resilient nature of the industry provides opportunity particularly in certain categories of alcohol and in certain age groups.
He continued to highlight that this increase has been largely driven by RTDs, which have experienced a remarkable 10% growth in penetration compared to the pre-pandemic baseline.
Additionally, wine has expanded its reach, increasing penetration by 3%, with the highest incidence in the 50-64 age group. Beer, however, has seen a 5% drop in the number of drinkers.
5. Sustainability matters
Notwithstanding the changing buying patterns of Australians, consumers continue to prioritise sustainability as a key decision-making factor when choosing brands and products. The attention to ESG (Environmental, Social, and Governance) credentials has notably increased since 2019, with nearly half of consumers now favouring sustainable offerings.6
While younger consumers show a higher propensity for valuing sustainability, demand for strong corporate values and transparent origins remains consistent across all age groups.
Implications and recommendations for the drinks industry
Maekelburger said that while consumer spending will likely remain subdued for a while, not everything is doom and gloom for the drinks industry.
He outlined six key avenues that organisations should consider for strategic decision-making in the immediate to long term.
He concluded: “Businesses who truly understand their consumers, continuously innovate to meet their needs, and never stop communicating will be in a position to unlock the limited pockets of growth that remain in the market and emerge stronger when spending comes back.”
Source:
1 ABS – Australian National Accounts (https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release)
2 RBA - Forecast Table, August 2023 (https://www.rba.gov.au/publications/smp/2023/aug/forecasts.html)
3 ABS – Monthly Household Spending Indicator, August 2023 (https://www.abs.gov.au/statistics/economy/finance/monthly-household-spending-indicator/latest-release)
4 IWSR Drinks Market Analysis 2023
5 Roy Morgan, March 2023 (https://www.roymorgan.com/findings/9153-alcohol-consumption-march-2023)
6 PwC - Sustainability in Retail Report (https://www.pwc.com.au/retail-and-consumer/sustainability-in-retail-report.pdf)