How will Trump’s election impact the spirits industry?

By cbadmin on December 14, 2016

As the world comes to terms with the US election results, The Spirits Business investigates what a Donald Trump presidential victory spells for the future of the international spirits industry.

In November, the world experienced one of the greatest political shocks in modern history – billionaire businessman Donald Trump was voted 45th president of the United States of America.

Republican Trump fought off competition from Democrat nominee Hillary Clinton during a heated election campaign, the bitterness and controversy of which has thus far been unmatched in US politics.

The reasons for Trump’s victory have been debated and reported at length, and need no further exploration here. However, the president-elect’s promise of more protectionist trade policies and the abolition of major free-trade deals, combined with the economic turmoil that followed his election, could have significant implications for the global spirits industry.

Just two weeks after his election, Trump vowed to pull the US out of the Trans-Pacific Partnership (TPP), a trade agreement signed by 12 nations in February this year.
Outgoing president Barack Obama and his administration spent seven years negotiating the pact, which includes nations such as Japan and Australia and aims to strengthen economic ties between participating countries and boost industry growth by cutting tariffs. In its most advanced form, the deal could have the potential to create a single market, similar to the EU, and challenge China’s economic dominance in Asia.

However, Trump, along with a number of other critics, believes the TPP would thwart job prospects for US citizens. “[I] am going to issue our notification of intent to withdraw from the Trans-Pacific Partnership, a potential disaster for our country,” he said in a YouTube video last month. “Instead, we will negotiate fair, bilateral trade deals that bring jobs and industry back onto American shores.” Since participating countries have not yet ratified the TPP, the withdrawal of the US could void the whole endeavour.

Throughout his campaign trail, Trump also slammed the North American Free Trade Agreement (NAFTA) – a zero-tariff pact between the US, Canada and Mexico – but has yet to announce a withdrawal. Nevertheless, he appears to be pursuing considerable changes to the agreement, which could have vast implications for Mexico’s national spirit – Tequila.

Mexico has also been hit hard by the devaluation of the peso, which plummeted by as much as 13% immediately after the election result. Concerns over NAFTA and an unambiguously anti-Mexican sentiment from Trump most likely contributed to the dramatic fall. The currency failed to stabilise and at time of writing and had fallen to an eight-year low against the US dollar.

For Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor International, while Tequila producers should be prepared to navigate economic turbulence, drinking trends will not change. “Tequila has been ubiquitous in the US for a very long time now, so to say Americans will stop drinking Tequila is like saying that they will stop eating tacos,” he says. “Cultural integration goes further than one electoral process.”

However, if Trump makes good on his hardline immigration promises, Malandrakis sees potential for a demographic shift in the US – by far the largest market for Tequila. “There are about 12 million undocumented immigrants the US, a large number from Latin America, so this could obviously have an impact on consumption rates,” says the analyst. “Not because Middle America would stop drinking Tequila, but because of potential demographic changes.”

The future of one Tequila brand could be affected more than any other following the election – Jose Cuervo. This autumn, the parent company of the world’s largest Tequila brand delayed its initial public offering (IPO) because of market volatility in the run-up to the vote. Cuervo has remained tight-lipped since Trump’s victory, but sources say the group will reassess its position in January 2017. Estimates place the value of the IPO at around US$1 billon.

Another brand whose future has become arguably more uncertain after 8 November is Pernod Ricard-owned Havana Club. The French drinks group is poised to launch the rum brand in the US should a long-running trade embargo between the States and Cuba be lifted. Only Congress can lift the embargo – meaning Havana’s prospects are far from certain. Obama led the restoration of diplomatic ties between the two nations and urged for the embargo to be scrapped, but Trump has not yet made his stance on the issue clear.

Building business

Pernod Ricard remains optimistic, on the face of it at least. “As a global actor of our industry with a very strong footprint in the US, our number one market, we will keep on investing in the [top] global market for wine and spirits in order to support our solid growth as we have been doing for decades,” a spokesperson for the group
said. “We hope the new US government will continue to build bridges between Cuba and the United States.”

Diageo issued a similarly confident, if coy, statement, and New York’s Constellation Brands, maker of Mexico-produced Corona beer, shrugged off the fact that immediately after the election its shares tumbled 7.6%. “Over the years, we’ve worked very effectively with representatives from all levels of the US government and from both political parties, and we fully expect that to continue,” a spokesperson for the firm said. “Consumer demand for our iconic beer brands remains very robust and we have no reason to expect this to abate.”

Kraig R. Naasz, president and CEO of trade body the Distilled Spirits Council, meanwhile, seems somewhat heartened by Trump’s business background, saying the president-elect “clearly understands the importance of the hospitality sector”. Furthermore, Margie Lehrman, executive director of the American Craft Spirits Association (ACSA), says the promise of more protectionist trade policies could positively affect domestic craft distilling. Trump’s opposition to the TPP would “directly impact” the export market for grain, she says, which “may make available more corn for US production of spirits”.

For Malandrakis, Trump’s election highlights an “anti-establishment” and “inward-gazing” electorate, which may be a sign that the 0ised for further growth. However, international brands are “at a disadvantage, both because of Trump’s suggested policies and the zeitgeist of the electorate at the moment,” he adds.

A storm is coming

The analyst stresses that it is too soon to tell the impact of Trump’s election on the sector. However, he does not believe producers will change their US investment plans in the immediate future, and forecasts that any alterations will most likely be in the second half of 2017, “when things are a little clearer”.

“I heard someone describe Trump’s polices as like Schrödinger’s policies – they are there and they are not there,” he says. “[But] the question remains how the developed markets will perform and some boats will do better than others in the upcoming storm, but I don’t doubt there are clouds on the horizon, and they will affect everyone in some way.”