Is premiumisation on its way out?

The consumer is trading down. Figures from both sides of the Atlantic show that the recession is taking its toll on premium brands as consumption moves out the bar into the home and focuses on standard or own-label brands.

Recent figures from the US, where spirits sales growth slowed to just 1.7% in July compared with the same month in 2008, according to Nielsen, have served to highlight a trend of slowing growth (but at least it is still growth!) within which cheaper brands are outpacing premium priced offerings.

Furthermore, US opinion polls cast doubt on whether trading up to premium brands – “premiumisation” – will return to the mid-2007 peak once the recession is history. Indeed, Deutsche Bank analysts have published a paper entitled “Premiumisation is dead”.

In May, Pierre Pringuet, Pernod Ricard’s chief executive told the drinks business exclusively: “All of a sudden [in November 2008] the growth rate slowed and the growth pattern – which was very much in favour of premium products – changed.

“For those products that we classify at less than US$10 in value growth was virtually zero and it was in high single digits for premium products. Today it is basically the reverse. Consumers in the US have definitely traded down.”

In Britain, Datamonitor figures show that 41% of all grocery sales at the end of July were own-label brands compared with 38.2% at the same time in 2008. It seems improbable that households trading down to supermarket lines that are 22% cheaper on average than branded goods have not also traded down in their drinking habits.

Here, too, there is a swing to drinking at home away from the bars in which premium brands are move prevalent.

That means that results to be announced in the next two weeks will be analysed intensely for the latest evidence of what is happening to premiumisation, the growth engine on which Diageo and Pernod Ricard have based much of their strategy over the past decade. Moving consumers up the quality scale provides higher margins and bigger profits and the phenomenon has been most marked in the crucial US market, which accounts for about a third of both group’s net sales.

One of the most studied indicators will be advertising spend because spirit companies will be able to cut back (or get more coverage for their money) as the cost of advertising falls to reflect the recession and reduced levels of media spending from other business sectors. Industry figures suggest that a “normal” level of spending on advertising spirits is about 16% of sales revenue.

Equally important will be what guidance Paul Walsh, Diageo’s chief executive, issues with his annual profits figures next Thursday (27 August) about organic profits growth in the next 12 months. Pringuet’s pronouncements will follow with his latest results a week later.

The two industry giants are potentially more resilient to the vagaries of consumer patterns, so all-encompassing are their portfolios. Their results will highlight the challenges being faced by less powerful or diverse competitors.

Finance on Friday, 21.08.2009