Alcohol sales show resilience in on-premise
After a few lean years in the on-premise channel, analysts are predicting that establishments can expect a rebound in sales for 2011. Among the segments in the channel, alcohol sales at restaurants and bars are forecasted to increase 1.9 percent, according to Technomic Inc., Chicago.
The food and beverage research firm expects spirits-based drinks to see the highest rate of growth at 2.3 percent, while wine is forecasted at 1.4 percent growth and beer sales at 1.6 percent growth. These numbers are coming off of 2010 when alcohol sales were basically flat for on-premise, says David Henkes, vice president at Technomic and head of the firm’s on-premise practice.
“Alcohol definitely grew faster than the underlying segments, so we’re starting to see a return of consumers not only to the on-premise channel but in general,” Henkes says.
When looking at last year’s dollar sales, Henkes says that wine recovered with nearly a 1 percent increase in consumer sales for 2010 and spirits saw about the same growth, while beer remained flat.
Areas of rebound
The National Restaurant Association (NRA) released its 2011 “Restaurant Industry Forecast,” which projects an industry sales increase of 3.6 percent compared to 2010, equal to 1.1 percent in inflation-adjusted terms, the association states.
“I think there are more people planning to spend more than spend less, so I do think 2011 will be a return to growth,” says Mike Ginley, partner at Next Level Marketing, Westport, Conn. “With the numbers out there, even at the high-end, restaurants are doing very well as of a year ago.”
Ginley foresees beverages playing an important role in that growth by the application of food and beverage deals. For example, restaurants might offer two entrees, an appetizer and a dessert for $20 to drive traffic into the store, which could result in beverage purchases. Ginley says he has seen operators offer similar deals with alcohol beverages such as lowering prices to entice sales.
“I think consumers are ready to start trading back up, so there should be more opportunities for innovative new drinks that sell for a premium,” he says. “I think beverages play a big role in helping to drive not only revenue growth but profit growth.”
Ginley says that beverages might account for about 15 percent of revenue at the average full-service restaurant, but in terms of profit, beverages might contribute between 40 and 50 percent.
Technomic’s Henkes offers caution on the NRA’s growth numbers when put in the context of alcohol beverages because the association is forecasting all foodservice, whether they include beverage alcohol or not, he says. He adds that Technomic predicts that segments that serve alcohol will see 1.1 percent growth during 2011.
Henkes adds that restaurants are not the only on-premise segments that have shown growth. Hotels and lodging in overall food and beverage sales experienced a 6.5 percent increase in 2010, when compared to a very weak 2009, he says.
Another segment where beverage sales showed resilience was nightclubs and bars. Next Level’s Ginley says the on-premise marketing agency found that 21- to 29-year-old consumers were more likely to spend discretionary income on going out and on-premise consumption. Ginley adds that beverages remain vital to the nightclub segment as they can make up 80 to 90 percent of sales.
“In terms of looking at the channel and segments, business in the clubs and independent bars was much stronger than the full-service restaurant side,” he says.
As consumers return to on-premise locations during the economic recovery, beverage alcohol categories might experience a change in purchasing behavior. Technomic’s Henkes notes that consumers have shown a trend for trading down from expensive to less expensive in the wine category as well as altering how much wine they are purchasing.
“What we have seen is people are buying wine a whole lot differently,” he says. “There’s been a strong move toward wine, but it hasn’t necessarily been reflected in sales dollars because people are buying cheaper wines. People are buying value-oriented wines, and they’re buying wines by the glass instead of bottles of wine.”
However, Next Level’s Ginley says that he does not see the trading down concept affecting on-premise as much as other channels.
“I think trading down is more of a phenomenon in the off-premise than the on-premise,” he says. “It’s a macro trend. Specific to the on-premise, I don’t see trading down.”
When it comes to the beer category, Henkes has noticed that craft beers have become a popular trend that could be the drivers for the beer category in on-premise for 2011. This shift in purchases also could align with the broader consumer trends of local sourcing and buying local, he adds.
The spirits category has seen an affect from the concept of mixology, retro cocktails as well as the “skinny” drink phenomenon, Henkes says.
Although consumers might have made adjustments about what drinks they purchase, a notable shift in category preferences has not occurred.
“We really don’t see a lot of cross-category trading,” Ginley says. “… At the end of the day in on-premise, the slowdown did give more room for some more of the premium priced brands to come in and establish a beachhead in on-premise.”
On-premise operators as well as beverage manufacturers have installed new products and promotions to bring consumers back to the on-premise channel.
In March, Cecchetti Wine Co., Sonoma, Calif., announced the launch of Backhouse, a line of affordably priced wines from California aimed at the on-premise market segment.
“Many of our wholesale partners expressed a strong demand for an affordably priced wine that could be offered to restaurants for their by-the-glass programs,” said Roy Cecchetti co-founder and chief executive officer of Cecchetti Wine Co., in a statement.
Backhouse currently offers Cabernet Sauvignon, Pinot Noir, Merlot, Chardonnay and Pinot Grigio. All are priced at $7 a bottle.
In addition to offering more affordable products, on-premise operators have incorporated programs such as happy hour, bundled meals and other deal-oriented propositions. For example, Groupon and Restaurant.com sell certificates for businesses to consumers at a discounted price.
“I think the buzzword of the year has been dealing and value-oriented dealing,” Henkes says. “… Operators have been really focused on value in order to entice customers back in.”
But Henkes says that value needs to be more than just price in order for operators to sustain their customer base.
“Our caution on [value] is low price is not a sustainable point of differentiation,” he says. “Going forward, as the economy slowly recovers, but recovers, restaurants and bars really need to have an ownable and sustainable point of difference. And beverages can certainly play a role in that.”
Henkes suggests that signature beverage programs as well as flavor offerings could be ways that beverages can offer that differentiation.
Programs that Next Level’s Ginley has seen used for beverages include allowing consumers to upgrade cocktails to premium and ultra-premium brands for a nominal price, using larger sizes to get them to drink more per occasion, as well as tasting flights, which could be used for wine, spirits and beer.
“With a tasting flight, they get to try a small amount of three types and compare and contrast them together and see which one they like best to make their full-size purchase,” he says.
Although some on-premise segments experienced growth this past year, Ginley still cautions that economic performance still is affecting the recovery of on-premise.
“I think the economy always plays a big factor in on-premise,” he says. “You need discretion; you need a healthy economy; you need low unemployment; you need people to have jobs and have discretionary income to be able to afford to go out to eat. A healthy economy is very important to a healthy on-premise.”
Technomic’s Henkes sees the same connection between the economy and on-premise.
“One of the biggest things we believe is inhibiting a more robust recovery in on-premise is the unemployment rate … and I would say not only the unemployment rate, but the under-employment rate,” he says.
With the economy being in recovery mode, forecasts for on-premise for 2011 have been more positive compared to past years.
“The outlook is the best it’s been since 2008 since the recession really hit,” Ginley says. “… I think the recovery is fragile, so unfortunately it’s going to be a kind of tepid recovery through 2011, and I think a more robust recovery in 2012.”
And beverage alcohol sales likely will be a contributing factor to that recovery.
“We expect the alcohol serving segments to grow about a little over 1 percent in 2011,” Henkes says. “We do think alcohol is probably going to grow faster than that. We’re starting to see alcohol occasions return, and we’re starting to see a little bit more pricing come back.”
However, both caution that a new factor has emerged that could affect alcohol sales growth for on-premise â€” gas prices.
“I think all the indicators are there that 2011 will be a much better year, but gas prices are really the one uncertainty right now,” Ginley says.
A demographic this could affect would be the millennial consumers, because this could affect their discretionary income, he says. Even though the increase in gas prices is an emerging factor, it is something researchers are paying attention to.
“If those prices continue to run up throughout the summer, that’s really going to put a damper on recovery,” Ginley says. “… There’s a definite correlation between on-premise health and gas prices.”
Henkes says the increase in gas prices might act as a regressive tax on consumers. “That could really negatively impact the on-premise channel because some people are going to be paying $4 or in some cases higher for gas,” he says. “That’s money that’s coming out of their take-home pay that’s not going to be going to restaurants or bars.” BI