Alcoholic drinks in Germany – caught between maturity and a hard, austere place

Germany has had more than its fair share of the spotlight over the past year. The country emerged as the pillar of stability, counterbalancing the European Union’s Sisyphean fiscal woes and crucially adopting the role of a strict nurse for the indebted patients of the South.

Now, as the readily exported bitter medicine of austerity is coming home to roost, the decline in domestic consumer spending is casting a heavy shadow over the sales of alcoholic drinks which were already suffering from the chronic issues of ageing demographics, stricter drink-driving legislation and rising health concerns.

Polarised, green and health-aware

If anything, the main problem with the German alcoholic drinks market becomes obvious just by skimming through top-line per capita consumption figures. Standing at 147 litres – compared to a global average of less than 35 – maturity and saturation are proving to be inescapable by-products of a very long drinking tradition that is culturally embedded in the country.

And this is exactly the building block of the downward sales spiral that has engulfed the market for the best part of the last decade.

Posting a 1% volume CAGR decline over 2004-2009, according to Euromonitor International, it appears that the most exciting development taking place in the German alcoholic drinks market has been the steady – if not particularly spectacular – haemorrhage of sales in the vast majority of key categories.

While 2009 did not see the dramatic slump witnessed elsewhere, performance remained sobering. Polarisation, flavour sophistication, a shift towards lower ABV varietals and the renewed momentum of the off- trade are archetypical Western European megatrends which Germany, being the region’s primary locomotive, is also embracing.

Polarisation has been gaining traction for some time, translating into strong sales for the premium and economy ends of the market, essentially mirroring dividing lines within German society itself.

Recent figures provided by the German Economic Research Institute (DIW) have shown that the income gap between the richest and the poorest in Germany is widening, and this will be further cemented by the recent package of cuts presented by the federal government in response to the enormous state debt.

According to Euromonitor International’s Countries and Consumers market research database, in 2008 around 14% of Germans, or 11.5 million people, lived in poverty, up by a third from 10 years before. As the economic headwinds have only intensified in the meantime, previously steadfast premiumisation appears dead in the water while higher-end products are now growing hand-in-hand with a flurry of private label offerings in all segments.

German consumers have also subscribed to the much-vaunted switch to the off-trade that took most mature markets by storm over 2009 as the on-trade bore the brunt of the recessionary battering.

Nevertheless, it has to be noted that German on-trade consumption only accounted for a relatively meagre 33% share of total alcoholic drinks volumes in 2009, down from 34% in 2007. Even though consumer confidence did not so much as collapse in the country, German drinkers proved to be quick to batten down the hatches by either opting for thriftiness-induced cocooning or by increasingly visiting discounter stores. Discounters, hence, also stood to gain, reaching 27% of alcoholic drinks volume sales through the off-trade in 2009, on a consistently upward trajectory.

On the other hand and beyond the rather gloomy socio-economic indicators, the solid nature of the eco-trend (which triumphantly proved to be largely recession-resistant), the core value of health awareness and the refreshing boost of flavour sophistication continue to be the key stepping stones for innovative activity within the domestic industry.

Undiluted interest in green credentials and high levels of health awareness have come to represent quintessential Germanic attributes and while the latter is behind the surge in sales of low/non-alcoholic beer it is the former that is already radically reshaping packaging across the board.

According to Euromonitor International’s packaging database, PET packaging in particular has witnessed stratospheric growth rates, posting a 25% volume CAGR over 2004-2008 as efficiency and technological advances assist it in overcoming purist criticisms and taboos.

Stagnancy, declines and the odd ones out

While discrepancies are bound to differentiate the varying degrees of sobering performance among key alcoholic drinks categories, there is no escaping the fact that, all in all, it was a sobering performance indeed. Beer, wine and spirits all posted declines in 2009 ranging from the marginal to the severe.

Beer saw volumes slide by 2% in 2009. While economy and premium lager fared relatively better than standard varietals, no segment managed to escape the slump. Apart from the issues of sheer maturity and saturation, the ageing population, evolving consumption traits and increasingly disillusioned young audiences retained their stifling grip on the category.

Senior consumers tended to minimise their alcohol intake, the middle-aged segment of traditional beer drinkers diminished while younger consumer groups were on the lookout for alternatives.

Wheat beer proved to be one of them. Wheat beer sales were especially strong in their region of origin, the Southern German state of Bavaria, but continued to grow as more and more Germans across the country enjoyed the milder taste and slightly higher alcohol content compared to pilsener.

On the other hand, wine’s only marginal losses came to resemble a form of cautious optimism in the context of an overall declining market. Still white grape wine underperformed while red and rosé varietals flatlined, reaffirming the sense of stagnation that has robbed the domestic market of any groundbreaking developments over the past couple of years.

Low-alcohol and organic offerings surfaced as the only – still niche – segments that managed to secure significant gains while spearheading innovation.

As for spirits, the overall disappointing performance was underpinned by low single-digit declines in whisk(e)y, brandy and cognac and liqueurs, while rum and vodka’s high mixability, availability of affordable options and youthful profiles picked up most of the slack.

An unenviable role

Providing the only shelter in the midst of the latest pan-European fiscal maelstrom will inevitably spell trouble for both Germany’s economy and its consumers’ confidence and expenditure moving forward.

The recent government austerity measures will most acutely be felt by the armed forces and public sector, with a combined loss of 50,000 or more jobs while an eye-watering EUR30 billion cut in the social security budget and a reduction in subsidies for stay-at-home parents will prove to be another hit for the already shrinking lower-middle classes.

Against a bleak backdrop of an overall alcoholic drinks market that is expected to continue to stagnate, opportunities are still there to be seized. RTDs/high-strength premixes, which managed to vividly demonstrate their resilience in 2009, will continue to post gains on the back of a sustained further shift to the off-trade.

The saturation issues troubling the domestic wine industry could potentially open the floodgates for the New World likes of Distell, Constellation and Concha y Toro to enter the market, provided they can come up with convincing value-for money propositions.

In the meantime, a temporary upsurge in sales in the context of the Wold Cup is more than welcome. The hangover is nevertheless looming on the horizon.