The Beverage Industries: Two Markets

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THE BEVERAGE INDUSTRIES: TWO MARKETS

Peter Zylstra

November 1999

The Beverage Industries Major Group consists of four different industries, soft drink manufacturers (SIC 111), distillers (SIC 112), brewers (SIC 113) and wineries (SIC 114). Apart from the weather and other seasonal impacts on sales, which all four industries share, the four sub-groups can be considered (for analytical purposes) as operating in two markets. Certain observations apply to the soft drink industry by itself, whereas the three alcoholic beverage industries - breweries, distilleries and wineries - share some other characteristics.

This summary of recent developments is based on results of the 1997 Annual Survey of Manufactures (ASM). Other sources are used to provide industry environment and economic background, which provide additional insight into the Beverage Industries in Canada.

Consumption of alcoholic beverages, on the other hand, is in a longer-range downward trend because of taxation, and health and social considerations. Canadians over 15 years of age drank on average 94 litres of alcoholic beverages in 1998, down from 128 litres in 1972. And, although sales quantities are declining, price increases maintain a steady growth in value of sales (Figure 1: Shipments of Alcoholic Beverages and Soft Drinks, Current and Constant (1992) Dollars, Beverage Industries, 1989 to 1997). Wines, a 6% segment of the total beverage market, have recently seen slow increases in per capita consumption.

Beverage Industries Major Group structure and performance: breweries dominate

The largest among the four beverage industries, in terms of the value of shipments, is the Brewery Products Industry, which usually accounts for close to half of the total major group sales. The Soft Drink Industry represents more than a third of the total and the Distillery Products Industry and the Wine Industry, with 11% and 6% respectively, ship the remainder. These proportions have been fairly stable over the years with distillery products slightly decreasing and soft drinks slightly increasing. (Table 1. Beverage Industry, Shipments and Employment by SIC, 1997).

Information from the Annual Survey of Manufactures (ASM) shows the Beverage Industries experiencing an overall increase in growth for 1997. It was a seventh consecutive year of expansion that followed two years of decline in 1989 and 1990. Although the rate had gradually dwindled from 9% in 1992 to 1% in 1996, growth was maintained during these years and 1997 saw a stronger up-turn again of 5%. Shipments reached $7.2 billion in 1997, up 28% from the 1990 low of $5.6 billion.

In terms of Gross Domestic Product (GDP), Beverage Industries expanded marginally by 4.2% in 1997, an increase well below that of 6.5%(2) for all manufacturing industries.

With 1.7% of all manufacturing shipments and 2.6% of total manufacturing GDP, Beverages is a medium sized processing industry. The proportion of value added to total shipments for the major group was a relatively high 59% in 1997, compared to the average for all manufacturing which stood at 40%.

A low point in the beverage industries’ shipments of 1990 coincided with reduced levels of capacity utilization in the following year. After falling to 66% in 1991, the capacity utilization rate recovered and has fluctuated since 1993 between 80 and 83%(3). Until 1997, when it stood at 82%, it did not advance sufficiently to prompt increased investment in new assets.

After staying at around $300 million for several years, capital expenditures dropped to $235 million in 1996. In 1997, capital expenditures went back up to $296 million and are estimated to continue upward in 1998, with preliminary data indicating a strong level of $428 million(4).

The Beverage Industries’ labour force is relatively small. Wages are a low 7% of shipments for the major group compared to 11% for total manufacturing. The major group’s manufacturing employment has fallen by 33% since 1988, when it was more than 17,000, to below 12,000 in 1997. The one-year drop in 1997 was 6% while employment for all manufacturing gained 4%. Reasons for a declining work force in these industries include an improved output per worker, the falling demand for alcoholic beverages and a decreasing number of conventional breweries. The latter was made possible by the dismantling of inter-provincial trade barriers that began in 1991 and the resulting economies of scale.

The larger beverage producers, which are 23 out of the total 199 industry establishments with at least 200 employees, include a relatively higher proportion of salaried personnel in their work forces. This group ships 60% of the total beverage product, and while they employ only 54% of the production workers in the industry, 82% of salaried employment is here. These include distribution, sales, advertising and administrative staffs.

While declining in numbers, the workforce in the Beverage Industries was paid a relatively high wage rate and had a high rate of output. After dropping in 1993, the average hourly wage rate grew by 3% in each of the two following years and by 5% in 1996. Although the hourly rate fell by 1% to $21 in 1997, it was still well above the average hourly rate of $17 for all manufacturing.

Production per worker saw a fifth year of increase and reached $615,000, up 36% from $452,000 in 1991. Due to the highly automated processes that the industry employs, this rate is one of the higher ones among manufacturing industries where the average rate for all industries was $309,000 in 1997. With production per worker improvements regularly outrunning wage rate advances, unit labour cost (wages/production) has regularly improved. It has seen a total reduction of 17% since 1991.

Among the component industries of the Beverages major group, three industries contributed to the overall growth in major group sales, while one saw sales fall. Major group expansion of 5% was caused by sales increases of 7% in Soft Drinks, 5% in Beer and 11% in Wine. Distillery sales decreased by 5%.

In the Soft Drink Industry demand has been steadily rising. Shipments for 1997 were up 60% from 1990 and with more than one third of the major group's shipments; this industry accounted for slightly less than half of its growth. However, competition has kept prices down and with a flat price index, increases in the value of shipments have been similar to its real growth.

More than one third of shipments in the Soft Drink Industry originate in Ontario and one quarter is shipped from Quebec. Most of the remainder is manufactured in the Western provinces, while a minor portion comes from the Maritimes, primarily New Brunswick.

As with soft drink quantities, value of sales has continued to increase, reaching $1.9 billion in 1997. With price movement low, national brands have endeavoured to regain market share (which had been lost earlier to private labels) by stepping up advertising, improving packaging and shelf space agreements with grocery chains. Among soft drink products, low calorie commodities have been levelling off at slightly over 15% of total manufactured shipments in recent years. "New age" drinks have not lived up to their initial promise(5).

At the expense of refillables, the proportion of total soft drinks sold in non-refillable containers, mainly family size plastic bottles, has surged over the last ten years to over half of the total and has even overtaken cans, which dipped to 44% (Figure 2: Proportions of Refillable and Non-Refillable Bottles and Cans Used in the Soft Drinks Industry, 1985 to 1997). The increase in non-refillables is a result of changes in provincial government policy following the success of municipal recycling programs.

Although the value of manufacturers’ shipments for Breweries, as well as retail sales of Canadian beer, rose in 1997, brewers, like the other two alcoholic beverage industries, face a longer range declining trend in domestic demand. Per capita consumption of beer in Canada fell from 80 litres in 1985 to 63 litres in 1998(6). Sales are also weather dependent. For example, in 1997 sales in hectolitres dipped down in part because of a relatively inclement summer, triggering a price war. But during a long hot season in 1998, ground was regained and sales quantities increased 1.7%.

Growth in the value of manufacturers’ shipments, which has increased by more than two thirds since 1985, has been maintained with price increases. Although shipments dipped down 2% to $3.2 billion in 1996, growth resumed in 1997 when value of shipments rose by 5% to $3.4 billion. Retail sales of Canadian beer have continued to enjoy steady advances in value: $5.8 billion in 1997(7).

Almost half of Canadian beer is brewed in Ontario, slightly more than a quarter in Quebec and close to 20% comes from the Western provinces. The most popular containers for beer are still bottles. Although this share has been declining slowly from 86% in 1985, in 1997 still more than two thirds of beer sold was in bottles.

In addition to a proliferation of new brands, two developing trends affecting the industry are microbreweries and u-brews. The number of microbreweries producing craft and specialty beers has increased from four in 1984 to 48 in 1997. The market share of microbreweries is approximately 10%. U-Brews are cutting into the demand for the conventional brewers' product to a minor extent(8).

Most activity in the Distillery Industry takes place in Ontario where more than 60% of spirits are distilled. The largest wine-producing provinces are British Columbia with 36% of total shipments, closely followed by Ontario with 35%.

Canadian beverage manufacturers for the most part supply the domestic market, where 86% of their volume is shipped. The remainder (most spirits) is exported. In recent years, industry exports have been a surplus over beverage imports, which are primarily wines.

After expansion until 1994, and a drop the following year, exports were on the rise again by 10% in 1996 as cross border beer wars with the United States had settled down. Total exports rose 11%, to $1.2 billion in 1997.

Almost half of total exports is composed of one commodity: whiskies. The export market is of prime importance for Canadian distillers, two thirds of distillers’ revenue derives from rye whisky sales, most of which is exported, mainly to the US.

The Canadian wine industry has strengthened(9) with high quality blending and specialty wines, which have become popular in export markets. At home, Canadian wineries supply a fairly constant third of the retail wine market.

The Beverage Industries can be seen as supplying two markets with different characteristics, one for soft drinks and one for alcoholic beverages. In the recent past, soft drinks has been expanding while competition kept prices low. The second market, for alcoholic beverages, is in a decline but price increases are maintaining sales levels. The exception to this may become wines. In this minor market segment recent increases in consumption appear to be continuing.

For the total of the four industries in this major group, the outlook is one of continued relatively slow growth or minor decline. Data from the Monthly Survey of Manufacturing (MSM) (10) show a current dollar increase of 4.3% in manufactured shipments for 1998, while prices increased 2.3% for the year(11). Constant dollar Gross Domestic Product (GDP) for the industry was up 6%, ahead of the 4% increase for all manufacturing in 1998. With capacity utilization reaching 89% in the first quarter of 1998, capital expenditures jumped to $428 million in 1998. Based on capital expenditure intentions, they were estimated to fall back to a level of $321 million in 1999.

Longer-range prospects differ for the two basic beverage types, with the mix having an uncertain impact on total industry major group performance. With rising consumption, strong growth potential for the major group exists in the soft drink sector providing prices lose some constraint. Domestic per capita consumption for alcoholic beverages, however, will likely continue its downward trend. These inelastic markets may also be sustained by price increases. In both categories there is additional expansion potential in export markets.

References

1. Statistics Canada, Catalogue No. 32-229-XPB, Apparent per Capita Food Consumption in Canada.

2. Statistics Canada, Catalogue No. 15-001-XPB, Gross Domestic Product by Industry.

3. Statistics Canada, Catalogue No. 31-003-XPB, Industrial Capacity Utilization Rates in Canada.

4. Statistics Canada, Catalogue No. 61-205-XPB, Private and Public Investment in Canada.

5. "Beverage industry outlook: new age drinks lose sparkle" Globe and Mail, July 29, 1998.

6. Statistics Canada, Catalogue No. 63-202-XIB, The Control and Sales of Alcoholic Beverages in Canada.

8. "Attacks from big brewers leave u-brews foaming" Financial Post, April 27, 1996.

9. " Winery stocks gain ground after vintage year" Financial Post, October 31, 1996.

10. Statistics Canada, Catalogue No. 31-001-XPB, Monthly Survey of Manufacturing.

This article was written by Peter Zylstra. Peter is a Statistics Canada economist in the Manufacturing, Construction and Energy Division.

Further information on Canadian manufacturing can be found in the publications Manufacturing Industries of Canada: National and Provincial Areas (Catalogue 31-203-XPB), available annually for $68 per issue in Canada and for $68 U.S. outside Canada, and Products Shipped by Canadian Manufacturers (Catalogue 31-211-XCB), available annually for $430 per issue in Canada and for $430 U.S. outside Canada. Order these products and other Statistics Canada publications by telephone, dial 1-800-267-6677, by fax: 1-800-889-9734, or by Internet.

For more information about manufacturing data or time-series, call the Disclosure and Dissemination Unit, Manufacturing, Construction and Energy Division at (613) 951-9497 or by Internet: manufact@statcan.gc.ca. For information from International Trade Division telephone 1-800-294-5583 or by Internet: trade@statcan.gc.ca.