Drinks Suppliers Try to Keep Spirits Up
Subject Price, Income, and Cross-Price Elasticity of Eemand
Topic Elasticity
Key Words Recession, Sales, Consumption, Consumers, Sales, Retailers, Revenues, Producers, Market, Brand
News Story

The recession is hitting alcohol sales, like most other products. The consumption of spirits had been expected to grow by 1.5 percent this year, but will only inch up by 0.5 percent.

Also, consumers are drinking at home more, and imbibing cheaper drinks. Restaurant and bar sales are down, as people decide to stay home. As a result, retailers should benefit, but they, like restaurants, are finding that consumers are spending less per bottle. Instead of buying $12 to $20 bottles of wine, they are buying bottles under $10. Retailers are finding that revenues are flat or declining, overall.

Retailers are responding by changing the allocation of shelf space from liquors priced at $30 and above to those in the $17 to $21 range. For example, Finlandia, in the lower range, has seen its December sales rise dramatically. Liquor producers are also promoting their brands through liquor tastings in stores, and by encouraging gifts of alcohol in the holiday season. Some subscribers of the New York Times and the Chicago Tribune have been given a free Absolut vodka bottle sweater, dubbed the "Absolut Cozy" to induce more gifts of the vodka brand.

Exceptions exist, however, at the very high end of the market. For instance, sales of $60 Glenrothes Scotch Whisky are up by 20 percent. It is surmised that rich people are still rich.

(Updated January 15, 2002)

1. What has happened to consumer incomes in the recession?
b) What has happened to the demand for alcohol, other things being equal?
c) Given this, what sign does the income elasticity of demand for alcohol have? Why?
d) What does this imply regarding the nature of the product?

Assume that there is no difference between different brands of vodka.
a) As retailers have changed the allocation of shelf space, what has happened to the typical price of vodka?
b) What has happened to the quantity of vodka demanded?
c) If revenues have remained constant, what does this imply about the price elasticity of demand? Why? Draw a diagram to illustrate.
d) If revenues have decreased, what does this imply about the price elasticity of demand? Why? Illustrate in a diagram.
e) Rich people show less of a change in buying habits. What does this imply about their price elasticity of demand? Why would this be?
f) Free Absolut vodka bottle sweaters have been distributed. If the quantity of Absolut vodka rises as a result, what sign would the cross-price elasticity of demand between vodka and bottle sweaters have?
g) What kind of economic goods would vodka and bottle sweaters be, therefore?

Source Theresa Howard, "More spirits of holiday season sipped at home," USA Today, December 7, 2001.

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