Product innovation to lead to spirited growth

Alcoholic spirits are a potential growth area for liquor manufacturers, with exports expected to increase over the next five years. The domestic spirit manufacturing industry has always been small, with just over 60% of domestic demand satisfied by imports in 2013-14. Distillers have responded to this competition by producing higher value premium products, propelling industry growth. Within the spirit manufacturing industry, however, ready-to-drink (RTD) alcoholic beverages have struggled over the past five years due to higher taxation, increased competition and consolidation and changing consumption patterns. Nevertheless, the outlook for spirits, including RTDs, is favourable, with revenue forecast to grow due to higher innovation and increasing exports.

Greater exports of Australian spirits have led to higher revenue for the spirit manufacturing industry over the past five years. Asia, particularly China, is a growing market for Australian spirits due to rising incomes and the reputation of Australian products as being high in quality. Furthermore, Australia’s proximity to Asian markets and the development of free trade agreements bode well for the industry. Nevertheless, competition from imports remains high in the domestic market, and local operators have reacted through premiumisation.

Australian distillers are focusing on high-quality spirits in an attempt to target high-value consumption, both domestically and internationally. Australia now houses 21 whisky distillers, and through premiumisation, WestWinds Gin from Western Australia and 666 Vodka from Tasmania have successfully penetrated the domestic market for white sprits after entering the market in 2011 and 2010, respectively.

Battling high taxes and increased health consciousness, the domestic RTD industry has contracted over the past five years. The outlook for the industry is more positive, with exports expected to drive growth. Exportation to New Zealand and Asian markets has enabled RTD manufacturers to achieve greater economies of scale through a centralised production hub. This, combined with growth in lower cost Australian spirits and greater marketing, is likely to lead to higher revenue and profit margins.

While the spirit manufacturing industry in Australia is in its infancy, its potential to increase sales domestically and internationally is significant. Domestic climatic conditions allow for a diverse range of spirits to be produced, allowing manufacturers to compete with the international spirits with strong brand loyalties. Consumer preferences for domestically produced goods and premiumisation trends offer investors growth over the long term.

LINK: Product innovation to lead to spirited growth