August 14, 2008
Despite Woes, Consumers Keep ‘Sins’
By Jane Wardell
LONDON - As a global recession looms, what better way to cope than to eat, drink and be merry?
Even as consumers face soaring energy costs, rising food prices and higher mortgages or rent, it seems clear they're not prepared to forgo many of life's little treats - alcohol, cigarette and candy makers are all reporting healthy sales amid the gloom.
"I would never give it up, not unless I was dying of alcohol poisoning or something," said Kelly Piggeln, a 62-year-old retired nanny, as she indulged in her favorite two vices of a cigarette and a glass of wine on the patio of a London bar.
Piggeln's stance is being echoed by cash-strapped consumers around the world, a trend that is reflected in strong financial reports this season from some of the biggest so-called "sin stocks" even as banks and many retailers report sliding income.
Sin stocks, ranging from gambling to liquor, are usually a safe bet in hard times. While shares in some of those companies have fallen along with stock exchanges this year, lots are still seeing strong revenues and sales.
"It's inelastic demand as far as many of these stocks are concerned," said Hargreaves Lansdown analyst Keith Bowman, using the economists' term for consumption that is not deterred by higher prices. "So far there's signs that they are holding up, although there's still concern that these industries will see some impact."
Among the winners, though: Anheuser-Busch Cos. Inc., the biggest brewer in the United States, turned a profit in the most recent quarter despite fears that rising costs for raw materials like glass, barley and wheat and fuel would cut into The King Of Beers' bottom line.
The company is so confident that consumers won't abandon the beer that it plans to increase prices for popular brands like Budweiser and Bud Light to stay ahead of the higher costs.
Similarly, Denmark's Carlsberg A/S reported a 36 percent rise in second-quarter net profit, saying stronger sales, particularly in eastern Europe and Asia, helped offset rising costs.
In Milwaukee, Katie Brozovich - a teacher who also works three part-time jobs - said she makes choices in her spending, such as not having her hair and nails professionally done, so she can keep drinking the pricier craft brews she prefers. Craft beers are those traditionally brewed from small, independent breweries.
"I'd rather spend $4 or $5 on quality beer than $3 on hopped up water," said the 46-year-old, who was sipping on a craft beer from nearby Michigan. "It's worth the extra buck or two to get quality."
Diageo PLC, the world's largest producer and distributor of spirits, dubs many of its brands - including Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum and Guinness stout - "affordable luxuries" that people are loath to give up, even in an economic downturn.
London-based Diageo expects its Scotch whisky business to continue to grow at least 8 percent to 9 percent annually, amid growing demand from emerging markets in Asia and Latin America.
Those emerging markets, particularly the developing economic powerhouses of China and India, are playing a key part in the buoyancy of such companies in the current turbulence, boosting demand for alcohol and cigarettes, which are increasingly used as status symbols denoting success and wealth.
But much of the demand is also still coming from the United States and Europe, which have been hardest hit by the credit squeeze, with price rises not dissuading many consumers in those regions - Constellation Brands Inc., the world's largest wine company by volume, posted a 35 percent rise in branded wine sales in North America in the first quarter.
Sam McQueen, a 29-year-old teacher taking a lunch break outside Starbucks in Camden in north London, said she and her boyfriend had recently revised their spending strategy - and stop buying prepackaged foods at the supermarket to free up money for the treat fund.
"We're going to stop buying silly things like that as opposed to giving up going out for a drink," she said.
And while people can't smoke at the bar because of spreading smoking bans, tobacco companies are doing just fine.
Philip Morris International said its earnings rose 23 percent in the second quarter and it raised its earnings forecast for this year, saying it had not been affected by inflationary pressures like other consumer products companies.
"Cigarettes in general can withstand such an environment better than many consumer products," Chief Financial Officer Hermann Waldemer said at the time.
British American Tobacco PLC posted a 15 percent rise in its first-half profits with help from higher prices and increased sales of premium brands. Sales of BAT's most expensive brands, such as Dunhill and Lucky Strike, grew 7 percent.
"While not immune from the consequences of an economic slowdown, we can certainly look to the future with more confidence than most," Chairman Jan du Plessis said when announcing the results.
Imperial Tobacco Group PLC, which recently acquired rival Altadis, says it remains on track for a successful year. Altria Group, the owner of tobacco company Philip Morris USA, saw second- quarter profits slide because it spun off its international unit. But earnings from its continuing operations rose, and the maker of Marlboros reaffirmed its outlook for this year.
Not all the vices have profited. There are signs that Lady Luck has deserted gambling stocks while the pornography industry is also not proving immune to the downturn. Moody's has downgraded the debt of almost 20 gaming companies and four U.S. casinos have filed for bankruptcy this year. The pornography industry, which is largely privately owned, is also struggling amid slowing sales of DVDs.
But a drink and a smoke do not appear to be the only ways that consumers are comforting themselves in tougher economic conditions.
Cadbury PLC, the world's biggest confectionary company, reported a 7.3 percent rise in first-half sales in its first results since spinning off its U.S. drinks business. Among the big sellers in its candy store was Dairy Milk chocolate, rising 9 percent.
In the United States, the Hershey Co. reported dramatically higher second-quarter sales and profit and reaffirmed its 2008 guidance of sales growth of 3 percent to 4 percent.
"The odd bar of chocolate is not going to break the bank," said Louise Hill, 33, a London office worker. "I always have a piece a day and I can't see that changing."
Associated Press writers Emily Ristow in London and Emily Fredrix in Milwaukee contributed to this report.
Originally published by The Associated Press.
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