To help explain the 2016 inventory accumulations and the subsequent poor industry performance starting off 2017, let’s take a look at some of the long-run trends in the alcohol beverage market.
Back in November, I posted an analysis of trends in wholesaling that included the value of inventory and current monthly sales – this was not just beer alone, but total alcohol beverage that includes beer, wine and spirits. These data are collected through a monthly survey by the U.S. Census Bureau and reported as part of their business and industry program. In that post, I described how the combined inventory and sales data are an indicator of the underlining health of the industry and can be used to interpret changes in supply and demand.
The inventory to sales trade data provide some long-run insights into the dynamics of the alcohol beverage marketplace and help take the focus off the short-run fluctuations that tend to dominate the industry trade press.
The inventory to sales ratio is an indicator of how much inventory distributors are willing to hold to support their current level of monthly sales. For example, our most recent ratio for February 2017 was 1.31 resulting from $15.7 billion of inventory supporting $12.1 billion worth of sales to retailers. When we look back at the period prior to the Great Recession, starting around 2003, the industry average inventory to sales ratio was roughly 1.10 – this means that distributors were willing to carry $1.10 of inventory for every $1.00 of sales. This ratio slowly began to climb as the economy grew and distributors became more comfortable holding a greater variety of products, as well as buying into higher-end products for their local retailers.
In December 2008, the inventory to sales ratio peaked at around 1.30. As the economy fell into a recession, distributors cut back on their inventories, uncertain of how future sales would pan out. In general, the industry continued to hold lower amounts of inventory relative to sales through 2011 and hit a low of around 1.20. Once the economy and job market began to improve later in 2011, the inventory to sales ratio slowly began to climb again. It did not take long for the industry to pass the prior highs of 1.3 and achieve a new record high of 1.40 in 2014.
So, the big question is, “What happened in 2015?”
The inventory to sales ratio suddenly turned down midyear 2015, falling from a high of about 1.40 to 1.31 in February 2017. This is not an economic or recessionary event like 2008. In my opinion, it was the peak in the high end for the economy in general. This did not just happen in alcohol beverage alone. It happened across the economy and included both durable and non-durable goods. The high end is not just a beer phenomenon, its crosses into may other industries as well.
But as far as the beer industry goes, the explosion of high-end options from new packages, styles and seasonal varieties all seem to have reached a maximum in 2015. There is only so much inventory a distributor can hold to support sales. While the inventory to sales data from the U.S. Census Bureau were turning downward in 2015, the NBWA Beer Purchasers’ Index for both craft and imports also began to trend downward at the same time. This was a second signal that maximum high end had been reached. (The Beer Purchasers’ Index is a monthly measure of expanding/contracting beer orders by participating NBWA beer purchasers). So, for both the U.S Census data and the NBWA Beer Purchasers’ Index, the peak of the high end seems to have occurred in mid-2015, and 2016 became an “adjustment” year for the beer industry, seeking a new equilibrium to find a new balance between supply and demand for high-end products.
Finally, the net changes in monthly inventories show the significant increase in fourth quarter inventories. The rapid post-recession increase that started in 2011 lasted through 2015, and was followed by a slowdown in inventory builds starting in 2015. However, the 2016 fourth quarter jump in inventories broke the downward adjustment needed to clear the marketplace seeking a new equilibrium. This set up the industry for relatively poor 2017 Q1 shipments.
Keeping up with the long-run trends while managing short-run market fluctuations is a challenge and game changer for distributors. The rapid growth of high-end products in the economy will have a significant impact on how and where beer is sold in 2017. Distributors and their partners need to evaluate the marketplace and find the correct product mix to meet consumer demand. The first quarter of 2017 is over, but a lot can still change for the beer market and the economy as whole. Stay tuned for more insights as we track this data series into 2017.