28/07/2021

Investments in tourism infrastructure will help beverage alcohol recovery in the Caribbean islands

One of the few bright spots in the region has been the performance of hard seltzers, particularly in the US Virgin Islands and British Virgin Islands.

Caribbean islands devastated by the loss of tourism during Covid-19 are set to see the beginnings of a recovery this winter – but it is likely to be 2024 before the region’s beverage alcohol markets reach pre-pandemic volume levels.

Industry stakeholders are especially keen to see the return of high-spending stayover tourists to the region, but in the meantime, they are having to contend with a number of pandemic-related issues, including a surge in illicit alcohol sales, a shake-out of the on-premise channel and a series of disruptions to the supply chain.

“The combination of a lack of tourism and financial hardship has led to downtrading across spirits and wine throughout the islands,” says IWSR research analyst Chris Budzik, with local and value-priced products, and hard seltzers, among the few winners.

According to Tourism Analytics figures, air arrivals, stopover visitors and tourist arrivals to 23 Caribbean markets fell by 66.1% in 2020, with cruise visitor arrivals down 70.9%. The declines have continued into 2021, with air arrivals, stopover visitors and tourist arrivals down by 43.8% in the first three months of the year – and cruise arrivals stopping altogether.

But the picture varies: some territories, such as the British Virgin Islands, the Caymans, and St Kitts & Nevis, have maintained stricter quarantine/entry measures into 2021, resulting in continued steep declines in visitor numbers. By contrast, the US Virgin Islands benefited from the lack of travel restrictions on US tourists, with arrivals slightly up in the first quarter of 2021, and only falling by 37% in 2020.

“It is believed the winter months of 2021 will see a significant rise in tourism compared to 2020, helping to slightly recover volumes from the dramatic losses seen in 2020,” says Budzik. “For the region overall, however, a closer return to pre-pandemic levels is not forecast until 2023.”

A return to normal cruise passenger levels in the Caribbean isn’t expected until 2024, but this cohort is typically less valuable to beverage alcohol brands. “Cruise passengers don’t spend as much money on alcohol on the islands due to all-inclusive packages on the ship,” says Budzik.

According to local reports, per-passenger onshore spend has been falling in recent years as well, as highly discounted cruise fares attract less affluent passengers. “Most industry stakeholders are not worried about cruise ships in terms of industry recovery,” says Budzik. “They are all concerned about stayover tourism.”

The slump in tourism is likely to lead to a shakeout of the on-premise during 2021 as operators struggle to make rent payments. While some islands, such as the Caymans, only closed bars and restaurants briefly before reopening to local customers, other territories remain entirely shut down, or subject to heavy restrictions.

“On some islands, the on-premise had already been facing increasing costs prior to Covid-19,” says Budzik. “The pandemic has only worsened the situation for operators, which is likely to lead to slight off-premise gains in the long term.”

Exposure to the on-trade is one of three key factors governing the impact of the crisis on individual beverage alcohol categories, along with price-point and exposure to tourist consumption.

There has been widespread downtrading to value brands in the highly popular rum category, with local products on rum-producing islands able to recoup some of the volumes lost by imported brands, thanks to their freer availability and more attractive pricing.

However, categories traditionally more focused on premium price-points, such as Cognac/brandy and Scotch whisky, have seen greater volume losses.

One of the few bright spots has been the performance of hard seltzers, particularly in the US Virgin Islands and British Virgin Islands.  “These products are most popular among tourists,” says Budzik. “However, it is reported that locals are starting to accept them. Distributors in the British Virgin Islands reported that local consumers often use hard seltzers as a mixer instead of sodas and juices for value-priced rum and/or vodka.” IWSR forecasts hard seltzer volumes to grow by over 60% in the Caribbean (2021-2025), off a smaller base.

In beer, stouts generally withstood the crisis better, because of their popularity among local residents, but lagers were more impacted by the loss of tourism. Meanwhile, standard and value-priced wine brands benefited from downtrading, and there was widespread discounting as retailers cleared excess stocks of white and rosé wines.

As well as facing declining consumption levels, local distributors have had to cope with a number of external pressures, including Covid-related disruptions to the supply chain in numerous locations, including Italy, Chile, Argentina and South Africa, resulting in shipping delays and out of stocks across multiple categories.

“Some suppliers began asking for payment for shipments upfront, as opposed to the usual billing method,” adds Budzik. “This caused cash flow problems for distributors, who typically pay 30-60 days after delivery.”

As usual channels were disrupted or shut down altogether, local distributors reported having to source products via Jamaica and St Maarten, leading to rising costs and shrinking profit margins. With consumers suffering a loss in disposable income, distributors had little option to but absorb the additional costs involved.

They were also impacted by an upsurge in illicit alcohol sales and production as governments took action to tackle the pandemic. This has been an ongoing issue since before the pandemic, though Covid appears to have accelerated the problem.

Looking ahead, pre-pandemic investments in tourism accommodations and infrastructure, while delayed, are anticipated to come online over the next few years. This will simultaneously increase tourism arrivals and improve domestic job markets, leading to overall increase in consumption and premiumisation.

Covid quarantines left numerous travellers plotting their next international holiday with the Caribbean top of mind for many American, Canadian, and European visitors which have received the some of the most generous economic stimulus, while increasing personal savings, and are looking to fulfil pent-up travel demand. Together, these factors will help lead to the region surpassing 2019 total beverage alcohol volumes in 2024.

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