Costs are skyrocketing, but drinkers and smokers are still spitting

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However, people who smoke cigarettes, buy luxury goods and drink alcohol tend to stay loyal to their brands.


Soaring inflation has made life harder for most people around the world – but some people are still smoking expensive cigarettes and making fancy tequila shots.

From British American Tobacco to gin maker Tanqueray Diageo, cigarette and liquor companies cited strong demand for high-end products that people didn’t seem to shake when they reported results this week. Far from buying cheaper alcohol and tobacco, shoppers are instead looking up.

“In difficult times, I think people just want that little moment to celebrate, you know, to relax with family, with friends with colleagues,” Diageo chief financial officer Lavanya Chandrashekar told Reuters.

This trend is contributing to a pattern of affluent consumers spending heavily on luxury items in the wake of the Covid-19 pandemic. The shutdowns led to higher average bank balances and record stock markets boosted the investment portfolios of the wealthy.

Diageo, the world’s largest spirits maker, beat full-year sales forecasts on Thursday, helped by demand for “super premium” brands such as Don Julio tequila, Johnnie Walker Blue Label and Bulleit Bourbon. Bottles of Don Julio start at around 40 pounds ($49) on Amazon.co.uk and number in the hundreds, as do several special-edition Johnnie Walker Blue Label releases.

Food and personal goods companies such as Procter & Gamble and Kraft Heinz have seen increased competition from cheaper private label as consumers dip in the face of the cost of living crisis.

However, people who smoke cigarettes, buy luxury goods and drink alcohol tend to stay loyal to their brands, even if they are more expensive.

“There’s a fundamental difference in how consumers think of something like baked beans versus a cocktail when you’re celebrating a special occasion,” Chandrashekar said.

Diageo doesn’t have much competition from supermarket-owned brands, she said, pointing to the United States where private label represents less than 2% of the spirits market.

True to their brands

Alcohol consumption increased around the world during the pandemic as people stuck at home had limited entertainment options.

Many are now trying to drink less, but better, said Tineke Frikkee, fund manager at BAT and investor Diageo Waverton Investment Management. But the cost of living crisis and rising energy bills this winter mean the trade may not last.

“As consumer budgets are under pressure, we could see some price reduction, so still buy a bottle of spirits, but maybe at the next price point,” Frikkee said.

AB InBev, the world’s largest brewer and maker of Stella Artois and Budweiser, reported higher-than-expected profits on Thursday, helped by many drinkers switching to premium beers.

Since the start of the Russian-Ukrainian war, US sales of premium spirits have increased nearly 3% to $3.76 billion, according to NielsenIQ. Globally, fine wine, champagne and spirits sales are expected to increase by around 6% to $155.2 billion in 2022, according to Euromonitor.

Meanwhile, sales of luxury tobacco products – cigars, cigarillos and smoking tobacco – are expected to rise 7.5% to more than $95 billion, according to Euromonitor.

British American Tobacco (BAT) has raised prices more than competitors in some categories and is investing more in its premium New Port and American Spirit brands, chief executive Jack Bowles said in an interview. He highlighted the growth of BAT’s organic American Spirit line.

Price increases and luxury brands helped BAT beat first-half revenue and margin forecasts on Wednesday.

“Consumers are sticking to their brands (of cigarettes) a lot more and that’s why we haven’t seen a drop in price. We’re seeing premium growth in many places,” Bowles said.

Outside of alcohol and tobacco, earnings on Thursday continued an upward trend in affluent consumers.

Stellantis said strong pricing power and high-margin car sales, including electric cars, helped it beat first-half profit forecasts, despite rising energy costs and raw materials and semiconductor shortages.

While production issues have hampered Volkswagen’s mainstream business, premium brands have boosted the automaker’s finances, with Audi recording a 51% increase in operating profit and Porsche 22%.

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