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Wednesday, May 31, 2023

A major beer maker says shoppers are finally balking at rising prices — and it could signal inflation's near its peak

A major beer maker says shoppers are finally balking at rising prices — and it could signal inflation's near its peak

Inflation will persist through 2023, but a downtick in demand for staples like beer is a new and necessary phase on the way out of the current cycle.
It takes a lot to waive beer drinkers off the bottle. And for that reason, beer sales are a solid indicator of the state of the economy when inflation is in play. 

"We are very fortunate in the alcohol beverage business that we tend to be recession-resistant," said William Newlands, CEO of Constellation Brands, which owns Corona and Modelo along with major wine and spirits brands, on a Thursday earnings call.

Newlands and his peers from other companies have been warning investors that the current environment, in which supply chain costs have caused mass inflation, would test consumers' desire for beer.

The average price of beer in the US increased nearly 8% from November 2021 to November 2022, according to Moody's. All indications say it's still going up, though there's a lag in nationwide data. 

"It's obviously too soon to be able to give complete reassurance that the price increase has landed well and not changed consumers' behavior because we're still learning, and we'll see what unfolds over the next few months," Molson Coors CEO Gavin Hattersley said at a Morgan Stanley investor conference in early December. Molson Coors upped prices 5% in the spring and another 5% in the fall, company executives said.

Other players in the beer supply chain, including the stores that sell Modelo and Corona, up their own prices to varying degrees on top of the wholesale price, Newlands explained Thursday. So Constellations' view of sales across the country shows how much consumers are willing to pay. The CEO said that in some places, especially California, prices have gone as far as consumers will tolerate. 

"Many businesses, including ours, took additional pricing over what we had planned. And that caused an overall softness in the market," Newlands said. "It wasn't limited to us." 

Some supply chain costs are coming down as imports and overall freight demand cool, but those will take time to hit the balance sheet, and then perhaps eventually the shelf. Sales of Constellation beer brands were up 8% in the most recent quarter, but the company's stock still fell on Thursday since high costs are continuing to strain profits. 

The CEO said the company will need to be more cautious about raising prices further since consumers are starting to balk. 

Economists say that inflation will persist through the whole of 2023, but a downtick in demand for goods, which then sends a signal to companies to cool it with price hikes, is a new and necessary phase on the way out of the current cycle.
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