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Don't Expect Consumers to Skimp on Their Booze

Americans may be drinking less, but they're drinking better.

Even though a slowing economy is expected to temper the growth of U.S. spirits sales this year, industry watchers doubt consumers will lose their newfound taste for high-end products.

Bar Shelf
Bar Shelf

The Distilled Spirits Council expects spirits sales to rise 4.6 percent this year, that's slower than last year's growth of 5.6 percent and a moderation of the robust growth the industry has seen since 2001.

"We are not seeing people eating out as much, and if people are going to be staying home, it's very doubtful that they are going to be home muddling mint to make a mojito," said Eric Schmidt, research director at Beverage Information Group, which was formerly known as Adams Beverage Group.

With this in mind, Schmidt expects to see a continuation of the slower growth in the spirits industry again in 2008. However, Schmidt and others who track the industry continue to expect consumers will continue to seek out higher quality products.

"We're not talking about huge investments," said Peter Wijk, a brand director at Absolut. "We are talking about everyday luxury goods. On the scale of things, it is still a small amount of money changing hands, and it's been my experience that these things are rarely effected."

This bodes well not only for the spirits industry, which has benefited from the aura of sophistication linked to spirits brands and cocktails, but also for the wine industry and for craft beers, which also have been riding this trend.

Wines at Watershed Moment

Early reads on the wine industry indicate that last year was a watershed moment. U.S. wine consumption is projected to have surpassed Italy's for the first time.

At least some of the gains are attributed to the habits of millenials, or adults under the age of 30, who are becoming wine drinkers at a faster pace than earlier generations.

This age group has "adopted and embraced" imported wine, and most notably red wines, at an early age, said Stephen Brauer, general manager of Pernod Ricard's U.S. wine business.

"It speaks to the growing sophistication of that generation," Brauer said. "They have a taste for interesting flavors."

This is a positive development that bodes well for wine's long-term growth prospects and may explain why companies with deep roots in spirits and beer, including Diageo, Pernod Ricard, and Constellation Brands have been concentrating on expanding their wine portfolios over the past few years.

These younger wine drinkers also are more willing to try wines from a wider-range of countries. This has helped fueled the growing interest in wines from New Zealand, Chile, and Argentina.

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Chester Brandes, president and chief executive of Belvedere's Imperial Brands unit, is placing a bet that these same types of consumers might be ready to try the company's Bulgarian wines.

"The wine-making history in Bulgaria goes back a few thousand years," Brandes said. "They are really producing high-quality wines."

This year the company will launching wine brands from this region. In addition, Imperial is looking to acquire a Californian wine brand.

Imperial is not alone in stepping up the investment in its wine business. So many companies want to enter the U.S. market and are willing to take a loss against the dollar's weakness in order to so, Schmidt said.

He also thinks the dollar's weakness helping to make California wines more attractive and affordable to consumers outside the U.S.

Craft Beers Still Gaining Ground

As for the beer category, craft beers continue to show explosive growth, but the growth of imported beers slowed down last year.

Rising grain and commodity costs are going to be a bigger challenge for brewers this year.

Anheuser-Busch expects the cost of making a barrel of beer to rise by 3 percent this year. Meanwhile, revenue per barrel is expected to climb between 2.5 percent to 3 percent, the company said.

The higher costs will be even more of a challenge for the smaller companies that often have a hard time passing along their costs to their customers than it is for larger companies such as Anheuser-Busch and SABMiller, said Schmidt.

Especially with a slowing economy, it can be difficult to raise prices, he said.

Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at christina.cheddar-berk@nbcuni.com

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