Distillers Are Wise to Heed Social Practice

With drink having cost John Tower a Cabinet job, and concern rising over alcohol and driving, will drinking become, like cigarette smoking--a fading, unhealthful and not quite respectable pastime?

Signs are appearing. This November, under a federal law, warning labels will appear on bottles and cans of liquor, beer and wine advising of dangers during pregnancy and warning drinkers not to “operate machinery.” We won’t see a rerun of Prohibition--the law that from 1920 to 1933 forbade manufacture or sale of any drink with more than 0.5% alcohol. But the alcoholic beverage industry does fear the possibility of sales-clobbering excise taxes, which become easier for legislatures to impose when they can be called “sin” taxes.

Sales Off

New discouragements, in any event, are likely only to continue a 10-year record of slow sales for alcoholic beverages. The peak year for liquor was 1979, when just under 200 million cases of distilled spirits were sold in the United States, according to Impact, the newsletter of the beverage industry. About 200 million cases of wine and about 172 million barrels of beer were sold that year.

Since then, liquor sales have fallen to 159 million cases, wine to 187 million. Low-alcohol wine cooler sales grew to 60 million cases but have now peaked. Beer sales have increased but have failed to keep up with population growth. The real story in alcohol, in part because of concerns about health and drunk driving, has been one of moderation.

So are saloons closing, and companies going belly-up in the booze business?

Not at all. The beverage industry and related businesses such as restaurants are prospering by adapting to changing social practices.

Americans are drinking less alcohol, explains analyst Roy Burry of the Kidder Peabody brokerage house, but not less liquid. The cocktail may be non-alcoholic--mineral waters, fruit juices or flavored seltzers--or alcoholic--martinis and manhattans are reportedly making a comeback. Restaurants, which traditionally make a hefty profit selling pre-dinner drinks, are not complaining. “Did you ever think about the profit in a $2 glass of club soda?” asks one New York restaurant owner dryly.

Also, with lower consumption has come higher-priced drinking. Premium brands like Jack Daniels, Chivas Regal and Smirnoff are selling better than lower-priced merchandise. Champagne sales are up, and expensive imported cognac is one of the few types of liquor enjoying increased sales. It’s the small affordable luxury, like a Louis Vuitton handbag, explains analyst Burry.

Soviets Not Surveyed

Meanwhile, for all the concern about alcohol, Americans never have been big drinkers. In a comparison of consumption per head of population, the United States ranks 28th in the world, not only well behind wine-drinking Italy, France and Portugal--Nos. 1, 2 and 3 respectively--but also behind Argentina, in fifth place, Chile in eighth, West Germany, in 12th, and Britain, in 25th. Japan ranked 41st, and the Soviet Union was not included in the survey done by a Dutch marketing firm.

But the big trend in countries everywhere is the same as in the United States: moderation in drinking habits. Booze businesses in Europe and Japan are showing little growth.

What that means, of course, is that alcoholic beverage producers--like the cigarette companies before them--have surplus cash flow and a thirst for acquisitions. Without growing sales there is no need to expand plants, so depreciation and high income from selling premium brands adds up to high cash flow--and the ability to diversify by buying other companies. Brown-Forman, the Louisville, Ky.-based distiller of Jack Daniels, has bought Lenox china and other home furnishings companies. Seagram Co., the world’s largest distiller, acquired Conoco oil and a major interest in the Du Pont chemical company in 1981. Last year, Seagram bought Tropicana orange juice and has said it’s in the market for other non-alcoholic acquisitions.

The fact is, companies in the so-called sin businesses--tobacco and alcohol--are secure these days because they won’t be banned again as liquor was in the 1920s. The unintended consequences of Prohibition were too costly--bootlegging, the growth of organized crime. Prohibition also led to cheap and dangerous substitutes for liquor being peddled.

It was at that time that Scotch whiskey, hitherto unknown in the United States, gained a reputation for quality, because at least it was safe. And one of the great stories of opportunity seized is that of Joseph P. Kennedy, the entrepreneur father of President John F. Kennedy.

Joe Kennedy, seeing the repeal of Prohibition coming, sailed to England in 1933 with James Roosevelt--son of the new U.S. President--who went to help gain introductions to the big distillery owners. Kennedy then tied up U.S. import contracts for Scotch. Of course, if Kennedy were alive and dealing today, he’d be seeking fruit juice and mineral water acquisitions for those same distillers.