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I'll Have a Bourbon With a Splash of Tariff


Written by: Brian Sudano

At the risk of gross understatement, the Trump Administration's new trade tariffs were not met enthusiastically by our most important trading partners. In the tit-for-tat global trade war now brewing, the American whiskey industry - centered in deeply Red states - finds itself in the crosshairs. A new 25% tariff on American whiskey imposed by China in July was on top of those already announced in June in Europe and Mexico followed by Canada in July. That Jack and Coke you were looking forward to on vacation is going to cost more on the beach in Mexico, under the Eiffel Tower in Paris, at the ski lodge in Canada or at the Great Wall of China.

What's unfortunate is that the American whiskey export business has been a great success story in recent years as consumers around the world grow a taste for high-quality brown spirits. Over the past generation, free trade agreements and the reduction of tariffs aided in leveling out the playing field and American whiskey makers have skillfully taken advantage. Brown-Forman's Jack Daniel's is one of the most compelling export stories we know across global beverages and the brand has become the international flagship for American whiskey. But the success of American whiskey exporting hasn't been just about Jack Daniel's - it's been broad-based with the high-end of the industry enjoying particular success as well.

In the medium-term, as manufacturers adjust pricing to reflect tariffs, we think it's fair to say that American whiskey exports are very likely going to be damaged. However, the risk for whiskey isn't necessarily limited just to sinking export volumes. The world has a complicated relationship with America and with these new tariffs, America as a brand itself is likely at risk with many foreign consumers. This could linger even if the whiskey tariffs ultimately get repealed. We also see a possibility that aging inventory originally intended for export will find its way into the domestic market, raising the possibility of a price war in the middle and lower price segments of the category. That's something to be watched closely.

Let's look at the data to see what's at risk. Per Beverage Marketing Corporation's proprietary DrinkTell™ database, American whiskey export volumes have been booming since 2009, growing at a rate of nearly 7% annually. Export whiskey now stands at 43.5 million proof gallons and $1.1 billion wholesale versus the total US domestic market of 55.0 million gallons and $4 billion wholesale. Export wholesale dollars have increased in step with proof gallons, increasing from $751 million in 2009 to $1.1 billion today, a CAGR of +5%. Wholesale dollars per proof gallon have stayed relatively steady over time, in the mid-to-high $20 range, fluctuating with global currency trends.

Although new Chinese tariffs got significant attention in the media, realistically China doesn't matter much for American whiskey exports. China represented just 0.1% of overall Bourbon export volumes and dollars in 2017 and high-end whiskey in general in China is struggling due to changes in gifting regulations among other issues. This negative trend is not new as volume and dollars in China have been declining at double-digit rates since 2009; the anti-corruption push in China merely accelerated the declines.

Although China is not an important export market, Europe certainly is and export volumes there look susceptible to losses as manufacturers take up prices to offset tariffs. Currently, the top 15 countries in Europe represent about 20% of American whiskey export volumes at roughly 8.6 million proof gallons. At $150 million wholesale dollars, Europe represents 13% of export dollars. If Europe were to lose 1/4 of its volumes, that would represent roughly 5% of all American whiskey export volumes and probably 3-4% of wholesale dollars. That number is material.

As for our NAFTA partners, Mexico and Canada aren't nearly as big as Europe, but are meaningful. Whiskey exports to Mexico represent just below 400,000 proof gallons and about $6.7 million in wholesale dollars, both just below 1% of total whiskey exports. Canadian exports, now at about 450,000 proof gallons or about 1% of volume, have been shrinking at double-digit rates since 2009. However, Canadian wholesale dollars are significantly higher than Mexico at just below $37 million, about 3% of total exports. Canadian wholesale dollars have been growing at an annual rate of +5%.

If you have to find cover in a trade war, finding a solid bunker and ending the evening with a nice glass of whiskey might not be a bad idea.

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