How the coronavirus is affecting the drinks industry

The drinks sector is one of the hardest hit by the coronavirus (Covid-19), with China accounting for some 35% of global luxury goods sales. db analyses the impact of the outbreak.

Asian woman putting on face mask

The country is now virtually closed to foreign travel and in the words of Alexandre Ricard, Pernod Ricard’s CEO: “Night clubs and night bars are all closed in China and those bars and restaurants that are not closed are empty.”

Travel agents say that bookings for the Far East have “collapsed”, hitting the travel retail sector hard.

China accounts for some 35% of global luxury goods sales and for companies such as Pernod Ricard, who see it as a key component of the growth strategies, any interruption to trade, no matter how temporary, will hit profits hard.

China is Pernod Ricard’s third largest market and generates some 10% of the French group’s global sales and 15% of its operating profit.

Pernod Ricard says it is expecting a “severe impact” on its Asian travel retail sales for the third quarter of its financial year as a result of COVID-19, with a significant hit to passenger traffic and business performance visible in early February.

In its forecast for the second half of the financial year to the end of June, Pernod Ricard said the COVID-19 outbreak would cut overall group sales by 2% and slash 3% on profit from recurring operations for its full financial year.

The company is forecasting a 66% fall in Chinese passenger numbers in the next two months with a gradual recovery starting in April and for its travel retail business to be back to normal by June.

As a result, Pernod Ricard has cut its full-year profits forecasts to organic growth of between 2% and 4% from the 5% to 7% indicated in the autumn of 2019.

Before the Coronavirus outbreak, China’s economic growth rate was slowing and companies were already shaving their profits guidance. In January, Diageo said its profits to the end of June would be at the lower end of its 4% to 6% guidance range, but the full impact of the disease was then not widely recognised.

Remy Cointreau abandoned any profits forecast at all after the unrest in Hong Kong and the slowing Chinese growth rate decimated sales in its key Far Eastern markets. Its nine-month sales fell by 6.5% in organic terms, a third quarterly decline and double the drop analysts expected.

China provides about 20% of Remy Cointreau’s profits and was the source of about half its growth in 2019.

Meanwhile, Australia’s Treasury Wine Estates is facing an almost perfect storm.

China is the group’s main export market and it is also enduring a tough time in America where earnings have fallen by 17%. Worse, the transformative chief executive, Michael Clarke is leaving this summer and the company faces a class action by investors who claim it should have informed them earlier about its recent profits slump.

Even the seemingly indestructible LVMH, whose profits growth steams on like a super-tanker, is only “cautiously confident” about its 2020 profits. The Honk Kong protests had already shaved some of Moet Hennessy’s buoyancy. Cognac volume growth was down to 6% in 2019 against 10% in the nine months to September.

All the major players are making soothing noises about confidence in their longer-term strategies and their ability to recover once coronavirus is contained and business in the Far East normalises. But nobody knows when that will be or even if it will worsen first.

The Tax Free World Association (TFWA) and the Asia Pacific Travel Retail Association (APTRA) have issued a joint statement expressing “great concern for the travel industry”.

Vinexpo’s first oriental event is in question despite CEO Rodolphe Lameyse saying: “Everything is struggling in China and the rest of Asia because of the situation (with Coronavirus) but I’ve decided at the moment to keep the Hong Kong show scheduled as normal. I think it’s too early to make a definite decision but the show should still happen in May and if things go wrong then we go in July, that’s for sure.”

European spirits chief executives have also talked about “geo-political uncertainties” in their latest tours d’horizon about their company prospects. By that they are looking further than the uncertainties of Coronavirus.

The health crisis in China comes in tandem with bubbling trade war between the US and Europe. In October, the US put 25% on Scotch whiskies and liqueurs made in five countries in retaliation for what it regards as unfair subsidies to Airbus, the plane maker.

The Trump Administration has warned that these tariffs, in the largest market for luxury spirits, could be increased before the dispute is resolved. In an election year the president is unlikely to back down, and nor is Brussels.

Together US tariffs and the Far Eastern virus will put dents in 2020 profits. The spirits industry hopes they will not be large.