Trading up: Smokers and drinkers buying premium brands amid soaring inflation

From British American Tobacco to Tanqueray gin maker Diageo, cigarette and alcohol companies this week cited strong demand for high-end products that people cannot seem to shake when they reported results.

Far from buying cheaper alcohol and tobacco, shoppers are instead trading up. 

“In hard times, I think people just want that little moment to celebrate, you know, to unwind with family, with friends with colleagues,” Diageo’s finance chief Lavanya Chandrashekar told Reuters.

The trend contributes to a pattern of affluent consumers spending big on luxury items following the COVID-19 pandemic. Lockdowns resulted in average bank balances rising and record stock markets boosted wealthy people’s investment portfolios.

Diageo, the world’s biggest spirits maker, on Thursday (28) beat full-year sales forecasts, 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 roughly 40 pounds on Amazon.co.uk and go up into the hundreds, as do several special edition versions of Johnnie Walker Blue Label. 

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

People who smoke cigarettes, buy luxury products and drink alcohol, however, tend to stay loyal to their brands even if they’re more expensive.

“There is a fundamental difference in how consumers think about something like baked beans versus a cocktail when you’re celebrating a special occasion,” Chandrashekar said, adding that Diageo doesn’t have much competition from supermarket-owned brands.

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

“As consumer budgets come under pressure, we may see some downtrading, so still buying a bottle of spirits, but maybe the next price tier down,” Frikkee said.

AB InBev, the world’s biggest brewer and maker of Stella Artois and Budweiser, on Thursday (28) reported higher-than-expected profits, helped by many drinkers switching to premium beers.

British American Tobacco (BAT) has raised prices more than its competitors in some categories. Price hikes and luxury brands helped BAT beat first-half revenue and margin forecasts on Wednesday (27).

“Consumers are sticking much more with their (cigarette) brands and that’s why we didn’t see downtrading. We see premium growing in a lot of places,” Bowles said.