British blues set to bleaken

Frédéric Rouzaud, the head of Louis Roederer, says the Champagne house has enjoyed its best-ever January, with worldwide demand at an unprecedented level.

Roederer is in the enviable position of being a prestige house whose wines are demanded by those wealthy enough to be unconcerned by the fluctuations of economies, but its buoyant sales suggest that the global recovery is continuing. In Britain however, the picture is different.

Consumer confidence took its worst knock for 20 years after January’s VAT rise, with all the measures recorded by GfK NOP Social Research dropping heavily in the past month. Other surveys show that the public sector job cuts are kicking in and there is widespread fear of a double-dip recession.

Falling disposable incomes will certainly bring last year’s consumer spending recovery to an end in short order. Inflation is tipped to rise to about 5% later this year before falling back, but wage growth is unlikely to keep pace. Some forecasters suggest that real disposable income (i.e. allowing for inflation) will actually fall by about 2% this year, which would be the biggest drop in a single year since the mid 1970s. If interest rates rise and send up mortgage rates, the effect will be magnified.

We need to look back only a couple of years to find disconcerting precedents for the drinks sector. During the recession, consumers cut back most on discretionary spending such as eating out and going to the pub. True, volumes in the off-trade were boosted, but that eroded margins. That pattern is likely to be repeated.

The respected forecasting house Capital Economics recently said: “The downward trend in real spending on alcohol and tobacco would be exacerbated by a renewed downturn in overall consumer spending.”

It predicts that while actual spending on alcohol and tobacco might rise by about 3.5% this year, after inflation it will fall by about 1%, while the real decline in turnover in hotels and restaurants will be about 1.5%. In volume terms, alcohol sales could fall marginally.

Yet commodity prices for the raw materials for items such as bottles and cans are rising rapidly and distribution costs are soaring with the rising price of petrol, so producers and shippers are again being squeezed at both ends.

One crumb of comfort (to employers at least) is that wage growth is predicted to be among the lowest in any retail sector and while consumers are likely to bear most of the pain from the government’s squeeze during this calendar year, the picture for drinks producers stays dull into 2012.

Finance on Friday, 04.02.2011