Let’s raise another glass: 2021 Canadian beverage outlook is improving

Beer remains the number one alcoholic drink of choice across Canada, and competition continues to increase with the expansion of new micro and craft breweries. In 2020, there were over 1,100 breweries across Canada, 72 more than in 2019. While beer is the most consumed alcoholic beverage amounting to 38% of Canada’s total alcohol sales, beer as a percent of total alcoholic beverage sales have declined every year since 2010, when it accounted for 46% of sales. Competition and potential market saturation are a concern in several regions. Producer selling prices declined for the first time in over 20 years in 2020, falling 0.5%. The trend extended through the first four months of 2021 with a fall of 5.3%.

Brewery sales increased 5.0% in 2020 and are up 12.2% YTD in 2021 thru April as sales have ramped up ahead of summer. Local and craft breweries have been the largest recipient of the sales growth while international brand sales weakened. As a result, domestic beer (litres) retail volumes increased 0.8%, imported beer volume fell 14.0%, and total beer volume declined 1.7% in the 2019-20 retail year. The expectation is that domestic beer sales and volume will increase in 2021 as the economy re-opens, but competition will heighten.

Figure A.1: Nationally, domestic beer makes a large percentage of retail sales

* Sales over $1M annually. Beverages listed as “Other” are excluded. Regular beer has alcohol content between 4.1% and 5.5%, strong beer is 5.6% and over, light beer is 4% and under. Sales data is from liquor authorities and other retail outlets from April 2019 to March 2020.
** weighted provincial average

Source: Statistics Canada, FCC calculations

High competition within breweries and from spirits

Overall, the industry has a lot of business competition in Canada. The industry represents 5.2% of all food and beverages sales but accounts for 9.1% of all businesses in the beverage sector. With innovative low-calorie and spirit drinks adding more beverage competition, this could pressure prices and volume and lead to consolidation.

Cost of aluminum

Covid shifted packaging to aluminum cans and away from draught and bottles. However, with the cost of aluminum up 24% YTD in 2021, passing these additional costs to customers without hurting market share could be difficult. With sales expected to shift back to restaurants and bars, the significance of packaging costs should be lessened.

Winery sales increased 21.3% in 2020, outpacing all other beverage categories. Sales dollar growth was led by red wine; however, sparkling was the fastest growing wine on a weighted provincial average (figure B.1). Sales YoY in 2021 thru April are up 38.5%, an astounding value when considering that is 83.5% higher than the same first 4 months of 2019. Domestic volume, prices and exports all grew as many consumers increased purchases during lockdowns. Despite this growth, many wineries experience substantial declines in revenue tied to tourism, not disclosed in manufacturing data. With over 750 wineries and cideries across Canada, there will be significant competition to regain hospitality revenues in 2021.

Red wine continues to be the wine of choice for half of Canadians, followed by white and sparkling. Cider sales grew 2.6% in 2019-20 but have slowed substantially from the 12.5% average growth rate between 2012-19 as competition has been increasing from coolers.

Provincially, Ontario saw the largest growth in sales followed by Nova Scotia and Quebec. There exists an opportunity for growth in Canadian-produced wines in Quebec, where only 19.5% of all wine sold is Canadian. Much of this opportunity depends on the future of inter-provincial trade barriers.

The removal of social distancing will benefit sales in the third quarter as food service opportunities resume. Unlike other beverages, wine production in Canada is small compared to total consumption, providing an opportunity for growth. In addition, many imported wines come from countries with a lower cost of production, and they hold advantages in price. In total, 32.6% of all wine/cider sold in Canada is domestically produced, less than all other beverage categories (figure B.1).

Figure B.1: White wine leading the sales growth in wine

* Sales over $1M annually (except Nunavut). Beverages listed as “Other” are excluded. Sales data is from liquor authorities and other retail outlets from April 2019 to March 2020.
** weighted provincial average

Source: Statistics Canada, FCC calculations

Excise taxes

As part of a trade dispute settlement with Australia, Canada is removing its excise tax exemption program for Canadian producers. The industry is now looking for a replacement program to remain competitive with internationally produced wines. The 2021 Federal budget has set aside $101m over 2 years to this end, aiming to keep sales growth in line with the current trajectory.

Interprovincial trade barriers

The IMF estimated that inter-provincial barriers cost the Canadian economy the equivalent of 4% in GDP annually. Removing these barriers could boost sales growth, especially if restrictions on direct-to-consumer shipping are re-visited.

In 2020, there were 265 distilleries, with 55% defined as micro or small business. Distillery manufacturing sales grew 3.1% in 2020 to $1.2B. 2021 is expected to be a record year for sales and is off to a blazing start, with sales growing 41.4% YoY thru the first four months of 2021. This level of growth is not expected to be sustainable, but double-digit growth to finish the year is anticipated. Spirit coolers like hard seltzers are the hottest beverage on the market and the drink of choice for young Canadians.  Ending social distancing in the summer months should support continued strength in sales. Outside of spirit coolers, gin is the fastest-growing liquor in Canada, particularly for Canadian-made gin.

Across the country, almost half of all consumed distilled beverages are manufactured in Canada. This number has been declining from a high of 61.3% in 2005. There is a lot of competition in the distilled beverage industry with much more alcohol than beer or wine. Several larger companies are committed to increasing the production of spirits in Canada over the next few years. But significant investment is needed to retrofit or build production for newer, fast-growing beverages.

Traditional distilled beverages like whiskey and vodka continue to perform well and is the liquor of choice for Canadians, followed by rum, gin and liqueurs. Exports are very important for this industry. With the global economy expected to fully recover from COVID by 2022 and disposable incomes at record levels in western economies, demand for Canadian high-value and aged liquors will be strong.

Figure C.1: Domestic demand for spirit coolers is strong and expected to lead growth in 2021

* Sales over $1M annually (except Nunavut). Beverages listed as “Other” are excluded. Sales data is from liquor authorities and other retail outlets from April 2019 to March 2020.
** weighted provincial average

Source: Statistics Canada, FCC calculations

Normalizing production costs post-COVID

Labour productivity had been declining for years in the beverage industry, including distilleries. Compared to 2012, the industry had 23.6% less GDP per employee in 2020. Increasing production per employee post-COVID will be important for the industry to increase domestic production and sustain profitability. Having social distancing rules and PPE requirements removed will be step one, but capital investments will be needed to kick the industry into overdrive. Demand for distilled products is strong and meeting this demand without drastically increasing costs is critical for profitability.  

Economic recovery in the U.S. and the Canadian dollar

Over 60% of all distilled beverages manufactured in Canada is exported, with most of it going to the U.S. With GDP expected to grow 7.8% south of the border in 2021, exports should play a big role in 2021. The one headwind is the higher Canadian dollar. The loonie has increased from $0.722 in Q2 2020 to over 0.83 within Q2 2021. The expectation is that CAD value drops in the second half of the year, but any further appreciation will eat into the competitiveness of Canadian products.