An analysis of structural changes in the consumption patterns of beer, wine and spirits applying an alternative methodology

Transcription

1 An analysis of structural changes in the consumption patterns of beer, wine and spirits applying an alternative methodology 1. Introduction Jan BENTZEN, Valdemar SMITH Department of Economics and Business Economics The Tuborg Centre for Globalization and Firm Dynamics Aarhus University Denmark A very preliminary manuscript, not to be quoted May 2017 Changes in drinking patterns of wine, beer and spirits have traditionally been of interest in the alcohol literature. Economists have normally analysed the topic in classical microeconomic models where partial demand functions for beer, wine and spirits have been estimated, see Colen and Swinnen (2011) for a study of the demand for beer. In line with microeconomic theory the majority of the empirical studies suggest that own prices, prices of substitutes and income play a significant role for the of the various alcohol beverages. However, only few studies take the mutual interdependence in the demand for the respective beverages into account, e.g. include overall demand restrictions into the empirical models. Another direction in the literature of demand changes focuses on whether convergence in alcohol consumption has taken place. In these studies overall consistence is often fulfilled and it is found that former differences in the level of per capita intake of beer, wine and spirits among the majority of OECD countries have diminished. Still, the convergence studies can be criticized for not offering much explanation. Furthermore, a critical characteristic in the convergence studies is that the level of consumption usually is measured as the simple sum of the per capita consumption of beer, wine and spirits (measured in alcohol equivalents). Thus, total alcohol consumption is adding the specific beverages as if they were perfect substitutes, which of course is a restrictive assumption. The aim of this paper is to analyse and explain structural changes using a holistic methodology, see Bentzen and Smith (2010) who suggests an alternative point of departure for a study of convergence and analyses of drinking patterns. Let total alcohol consumption be represented by a vector including the 3 elements, beer, wine and spirits where the length of this vector in a Euclidian space is interpreted as a measure of total alcohol consumption. When assessing or evaluating the structural component in alcohol consumption the angle between this vector and a vector of unit values is an obvious alternative to traditional measures. From this methodology the total consumption of alcohol (A) 6a_bentzen_smith.docx Page 1/10

2 can be decomposed into a component representing the length of the beverage vector and a structural component of beer, wine and spirits having a value between zero and unity. In the empirical part of the paper we construct a model for structural changes in the alcohol consumption patterns, i.e. the elements of beer, wine and spirits. The model is tested on data for 21 OECD countries covering the period from 1960 to The preliminary results suggest that between as well as within differences in the consumption patterns among the included countries have declined. Separating the countries into beer, wine or spirits drinking countries only reinforces the evidence of diminishing, structural differences. The second part of the paper focus on some explanatory factors. The results indicate that income per capita, trade openness and the degree of outbound tourism in the countries are significant factors behind more even or similar drinking patterns among the OECD countries. 2. The empirical model The methodology 1 to be used in the empirical part of the paper can shortly be described as follows. The alcohol consumption is normally measured in liters of pure alcohol per capita for the respective beverages and thus. Total alcohol consumption is therefore the simple sum of beer, wine and spirits: (1) A = B + W + S An implicit assumption behind this aggregation is full substitutability among the beverages as the structure of total consumption defined by the relative size of the beverage components - does not matter as beer, wine and spirits are just added as stated in (1). An alternative measure of total alcohol consumption might be the length of the vector (B, W, S) defined from the respective beverages. Hereby, alcohol consumption is defined by A L : (2) A L = B 2 + W 2 + S 2 According to this definition the structure of alcohol consumption will also influence the measure A L in (2). Countries with a highly skewed distribution between the wine, beer and spirits components will have higher values of A L than other countries. Still, this result will not have an intuitive interpretation as A from (1). Evaluating the structural component can be done as depicted in figure 1. The angle between the vector b = (B,W,S) and a vector of unit values a = (1,1,1) is an obvious alternative to traditional measures of the structure of alcohol 1 This part builds on Bentzen & Smith (2010) 6a_bentzen_smith.docx Page 2/10

3 consumption. If we only have wine and beer the measure can be shown in a twodimensional space and the structure is defined by cosine to Θ from the graph. Figure 1. Measuring the beverage structure: Cos Θ. W 1 a b Θ 0 1 As a consequence the structural component will be defined from the dot product between a and b, and the length of the vectors: (3) Cos Θ = a b a b The concept can be expanded to the n-dimensional space where the measure 2 is denoted the angular separation and with no obvious graphical exposition when n exceeds 3. In the present case n equals 3 and the structural component calculated from (3) is simplified due to unit values in the vector a, and becomes: (4) A S = B+W+S 3 B 2 +W 2 +S 2 If the alcohol consumption is evenly distributed A s equals 1. The lower bound for A s is 3 (-1/2), which is the value when consumption of two out of the three types of alcohol approaches zero. Combining (1), (2) and (4) gives: (5) A = 3 A L A S Consequently, the total consumption of alcohol (A) can be decomposed into a component representing the length of the beverage vector b and a structural component A S having a value between zero and unity. As noted above the primary aim of this paper is to analyze changes in the alcohol consumption structure. In (6) we set up a model using GDP per capital, B 2 The use of angular separation comes from Jaffe (1989), applied in relation to R&D topics, and also used by Anderson (2009) concerning grape varieties. 6a_bentzen_smith.docx Page 3/10

4 trade openness and a number of control variables (Z i ) in order to test of model for A s : (6) A s = f(gdp/capita; Export/GDP-ratio; Z i ) In line with other convergence studies it is expected that within as well between countries GDP/capita has a positive influence on the structure of alcohol consumption in direction of a more even structure. Furthermore, it is expected that between differences for countries decreases as the income level increases. However, the influence from trade openness may be either positive or negative. For countries with a highly skewed alcohol consumption structure a more open economy may open up for imports of other beverages e.g. wine imports in the Nordic countries since the 1960s and thus a more even structure of alcohol consumption. Still, trade may also cause vertical substitution meaning that countries with preferences for e.g. beer continue to drink beer and increase the import of beer. 3. Data The data to be used in the analyses comes from various sources. Information on the alcohol consumption, i.e. wine, beer and spirits measured in 100% alcohol equivalents comes from The World Health Organization (the WHOSIS database) and from World Drink Trends (1999, 2005). This part of the data set covers the period 1960/1961 to Secondly, the national account variables like per capita GDP, trade openness (exports in per cent of GDP) are an extract from the OECD National Account and WDI databases for the share of the population living in rural areas. Not all variables are available for the wholesample period and for all countries, but the alcohol variables more or less cover all of the period In order to pool data GDP has to be measured in the same currency, which in the present case will be PPP data from OECD. 3 Table 1 includes the results from calculating A S for the years 1961 and 2014 for the twenty-one OECD countries. Except for Austria and Japan it is easily seen that the alcohol consumption structure has become more even in all of the countries. Looking at e.g. Denmark the wine share of the alcohol consumption was rather low in the beginning of the 1960s, around eight per cent. Since then 3 In the experimental phase a number of other variables were included in the models. Per capita final consumption expenditure of resident households on the territory and abroad where included as an alternative to per capita GDP and furthermore final consumption expenditure of resident households abroad where tried in order to account for openness of the economy. However, if including these variables the data set will be shortened considerably. 6a_bentzen_smith.docx Page 4/10

5 the wine consumption has increased significantly and in 2014 wine accounted for forty-five per cent of the total Danish alcohol consumption. Table 1. The structure of alcohol consumption (A S ) and the share of wine, 1961 and Structure, A S Share of wine Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain * * Sweden Switzerland UK USA Canada Australia NewZealand Japan * * Notes: Alcohol consumption is the number of (pure) alcohol litres per inhabitant (+15 years). + data from1962; * data for Source: The World Health Organization (the WHOSIS database). World Drink Trends (1999, 2005), Bentzen & Smith (2010). For almost all cases the structural variable (A s ) has increased in value indicating a strong tendency towards more even alcohol consumption patterns. Figure 2 shows the development in the alcohol consumption structure (A s ) since 1960 for the twenty-one selected OECD countries. As compared to the significant differences in the beginning of 1960s there has been a clear case of convergence in the consumption patterns over time and furthermore, this development has taken place towards a more balanced consumption patterns in 6a_bentzen_smith.docx Page 5/10

6 most of the countries, i.e. the values for A s ranges between 0.80 and 1.00 except for the atypical development in Japan. Figure 2. The structure of alcohol consumption in 21 countries, Note: The structural variable calculated from the expression (4). In order to gain further insight into the dynamics of alcohol consumption the countries are classified after the share of alcohol type preferred around the beginning of the 1960s. Thereby the twenty-one countries are separated into initial beer-, wine or spirits drinking countries. The figure 3 to 5 show the development in the alcohol consumption for each of these groups. Focussing on the countries which initially were beer drinkings countries there is a clear tendency towards a more balanced alcohol consumption. 4 The main explanation is the growth in wine consumption on behalf of beer consumption. For most countrist the share of spirits is relatively constant over time. It is remarkably that A s ends between 0.9 and 1 for all countries, i.e. the underlying factors of influence in demand may have worked in similar fashions for all countries. Accordingly, the results indicate that within as well as between varation in drinking patterns vanish over time. 4 The atypical development in Ireland is due to a large drop in the wine share in 2000 and a similar increase in the spirits share. 6a_bentzen_smith.docx Page 6/10

7 Figure 3.The structure of alcohol consumption in beer drinking countries, Note: The structural variable calculated from the expression (4). For the group of countries who are defined as wine drinking countries the same tendency can be seen in figure 4. Greece and Switzerland are dissimilar to the other countries which is mainly due to a more balanced drinking pattern from the very beginning. But looking at the traditional wine producing countries the within differences become smaller. The picture is less clear when comparing across countries. Here it seems less clear that the differences in the alcohol consumption structure have become significantly smaller. Obviously Spain has an atypical development as compared to the other countris in this group but the same can to a certain degree be see for Portugal. Figure 4. The structure of alcohol consumption in wine drinking countries, Note: The structural variable calculated from the expression (4). 6a_bentzen_smith.docx Page 7/10

8 The third group of countries is the socalled spirits drinking countries in figure 5. This group consists of the three nordic countries that are quite homogenuous in many aspects, culture, living condition etc. Obviously, Japan is totally different from these three countries and with no tendency of convergence to a balaced dinking pattern, cf. also table 1 with the still very low share of wine consumption. Figure 5. The structure of alcohol consumption in spirits drinking countries, Note: The structural variable calculated from the expression (4). Focussing solely on the Nordic countries it is well known that sales of alcohol have been restricted to special state owned liquor stores which are monopolies. During the recent years the alcohol policies in the three countries have been lessened meaning that normal beer can be bought in groceries and other retail shops. 4. Results The theoretical model for the alcohol consumption structure (A s ) is estimated from the data discussed in the former section 3. The estimation period covers a more than a 50 years long time span which is remarkable. As can be seen from table 2 the final model includes three explanatory variables. First of all the per capita income is chosen because higher levels of income facilitate changes in the demand structure, i.e. the income elasticity of demand cannot be assumed to be negligible for various kinds of alcohol. As mentioned above the per capita income is measured by GDP in PPP terms. A particular issue that has to be addressed is how to deal with the choice of currency for the various countries. Additionally, pooling data without including fixed effects in the estimation model would obviously result in parameter values which depend on the units of the respective country currencies. This calls for using a common standard like e.g. measuring GDP for all countries in constant PPP dollar terms. However, such a procedure is problematic because it may create noise in the 6a_bentzen_smith.docx Page 8/10

9 within country dynamics of real income. All the parameters presented in table 2 are the results of fixed effect estimations which eliminate some of the between country differences. Secondly, in line with Colen & Swinnen (2011) trade openness is included in the model. Trade openness is measured by the export share, i.e. export values relative to GDP. We expect open economies to be potentially more inclined to changes in demand. Thus, a tradition for high levels of trade facilitates and opens up for a more differentiated supply of goods. Supply of alcohol is a unique example for many countries, e.g. Denmark which is an open economy importing wine and thereby creating a high level of wine consumption, although not being a wine producing country. Finally, various control variables for other factors that may influence on the alcohol consumption patterns have been tested. A demographic parameter showing the share of people living in a rural area have been maintained in table 2 as estimates are significant. Another candidate for measuring the impact of an open economy on drinking patterns is the share of household final consumption expenditures that take place abroad. Unfortunately this will reduce the data set considerable as the data do not go that far back in time, and are not included in the model 5 presented in table 2. T. 2. Regression models: the structural variable of alcohol consumption variable (A s ) All countries Beer drinking countires Wine drinking countries Spirits drinking countries Per capita GDP (logs) * (0.0079) * (0.1087) * (0.013) * (0.0120) Trade openness * * * export/gdp (0.0001) (0.0002) (0.0002) (0.0002) Share of population * * * * living in rural (0.0005) (0.0007) (0.0007) (0.0007) areas R-squared Regression F 124,9* 76.1* 291.3* 180.4* Significance Observations Notes: OLS Estimation by fixed effects (21 countries). Standard errors in brackets below the estimated parameters. * denotes significance at the 1% level, ** at the 5% level of significance. 5 The share of consumption spend abroad might replace the export/gdp-share in the model as a measure of openness. 6a_bentzen_smith.docx Page 9/10

10 Looking at the first column all parameters are highly significant and the same is the case for the overall model fit. Per capita GDP has a notable positive influence on A s, which means that increasing population income tends to even out the alcohol consumption with respect to beer, wine and spirits. From column 2 to 4 it can be seen that the effect mainly comes from the countries which initially could be classified as beer drinking nations. Income does not seem to influence changes in the alcohol consumption structure in especially spirits drinking countries suggesting that tradition plays a larger role in these cases. In fact the only non-significant parameter in the table supports this conclusion, i.e. trade openness does not play a role for the spirits countries. However the parameters for trade openness is highly significant for the pooled sample and for the subsamples of initially wine and beer drinking countries. The size of the parameters suggest that the effect from openness is modest but as expected strongest for the beer drinking countries. 5. Conclusion Since the 1960s there has been a strong tendency for convergence in alcohol consumption patterns among OECD countries. This relates to both the levels of alcohol consumption as well as structural changes concerning more even relative shares of beer, wine and spirits. It has to a high degree been influenced by the consumption of wine where wine producing countries have experienced declining wine consumption and with the opposite tendency for the initially beer drinking countries. In conclusion, a common feature seems to be a movement towards a more balanced structure of alcohol consumption in the OECD area, and this is most likely driven by the development in real incomes i.e. economic growth and convergence have also impacts on consumption patterns. Literature (to be extended) Anderson. K. (2009): Terroir rising? Varietal and quality distinctiveness of Australia s wine regions. Enometrica Bentzen. J. and V. Smith (2010): Developments in the structure of alcohol consumption in OECD countries. Wine economics workshop. Adelaide. Colen. L. and J. Swinnen (2011): Beer drinking nations - The determinants of global beer consumption. AAWE Working Paper no. 79. Jaffe. A. B. (1989): Real Effects of Academic Research. American Economic Review a_bentzen_smith.docx Page 10/10