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2023 economic trends: Soft drinks and alcoholic beverages

4 min read

This information is shared from the 2023 FCC Food and Beverage Report – highlighting the opportunities and challenges for Canadian food manufacturers by industry. To get the bigger picture – read the full report.

Despite a difficult year, a rebound appears unlikely

FCC Economics projects beverage manufacturing industry sales to decline 2.3% in 2023 (Figure H.1).

Figure H.1: Beverage manufacturing sales are expected to decline 2.3% in 2023

Graph showing beverage manufacturing sales are expected to decline 2.3% in 2023.

Sources: FCC Economics, Statistics Canada, Barchart, Moody’s Analytics

Soft drinks are forecasted to lead the growth, growing 8% YoY. Distillery sales are forecasted to decline 6% YoY, wineries 5% YoY and brewery sales are projected to decline nearly 12% YoY. The federal excise tax increase in 2023 will likely lead to lower volume sales. On top of these federal adjustments, manufacturer and wholesaler inventories remain historically elevated, with the beverage wholesaler inventory-to-sales ratio 10% higher than at the end of 2019.

We’re forecasting margins to increase in 2023 (Figure H.2), thanks to sales of soft drinks and non-alcoholic beverages. Alcoholic beverage manufacturing margins are expected to be relatively flat YoY as it’s difficult to pass on higher costs in the highly competitive industry. We’re forecasting 2023 to be challenging for brewers, which could lead to some consolidation. We see some competitive upside for wineries as the loonie erased all its 2022 gains against the Euro.

Figure H.2: Margins fell in 2022, led by alcoholic beverages

Graph showing margins fell in 2022, led by alcoholic beverages

Sources: FCC Economics, Statistics Canada

How we got there: High costs among stiff competition

Beverage manufacturing sales declined 1% YoY in 2022 to $14.4 billion (Table H.1). Soft drink sales increased 13% YoY while alcoholic beverage sales declined. A small YoY rise in winery sales of under 1% could only partially offset distillery sales decreasing 12% YoY and brewery sales declining 3% YoY (14% YoY in Q4). Since 2019, alcohol consumption as a percent of total household consumption has declined 2%, while cannabis consumption has increased 23%. This trend is expected to be much stronger in the 15-24 age demographic.

Carbonated water volumes also declined, as the category saw less promotional activity, and some consumers cut it out of their budgets. On the other hand, low- and non-alcoholic versions of traditional alcoholic beverages have been growing in popularity, with grocery sales rising 9% YoY in 2022. According to grocery data from Nielsen IQ, caffeine beverages continued to grow at a torrid pace, with energy drink volumes increasing 15% YoY. And although traditional pop beverage volumes declined, gains from restaurant volume sales outweighed those declines.

Overall, the buy-local trend sustained the industry through the pandemic, and consumers strongly supported local breweries, distilleries and wineries. The impetus to buy local has faded, as evidenced by struggles among small beverage producers.

Table H.1: Sales declined 1% in 2022, the result of weaker alcoholic beverage demand

Table showing sales declined 1% in 2022, the result of weaker alcoholic beverage demand

Source: Statistics Canada

Brewers face fierce domestic competition

Breweries with sales under $20 million are estimated to have had negative net income for the past six years, making cashflow management a critical driver of performance. Over those six years, we have seen significant cutbacks on advertising, while raw materials have taken a larger percentage of sales. Breweries comprised 44% of all beverage manufacturers and grew 3% in 2022. The number of Canadian breweries has increased over 155% since 2015.

Small Canadian distilleries up against larger international corporations

Distilleries also had a difficult year, although the industry lacks the same degree of domestic competition as beer. Major international companies have increased their investment in this industry recently, resulting in imports rising 44% since 2020. Distilleries with $20 million or under in sales have posted negative net income for eight consecutive years. Advertising is more than double the expense line for distilleries as it is for breweries, making up as much as 10% of sales. There were 351 distilleries in Canada in 2022, an 8% increase YoY and over 270% since 2015.

The summer didn’t live up to the hype for wineries

Winery gross margins are estimated to have increased in 2022, although volume growth was weaker than estimated. The highly anticipated first summer after the pandemic came and went without living up to the hype for many B.C. wineries. There were 326 wineries in Canada, up 4% YoY and 22% since 2015.

Bottom line

  • The alcoholic beverage industry faced challenges in 2022 that will not fade in 2023.

  • Younger Canadians aren’t drinking as much as older generations have. However, there are opportunities in the $10-billion industry to displace international suppliers with high-quality products.

  • The beer industry is heavily concentrated, but there is strong demand for craft beer.

  • In all three, innovative new products that differentiate businesses can lead to growth.

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