Broadcast advertising and U.S. demand for alcoholic beverages.

• Author: Nelson, Jon P.

1. Introduction

   The debate over the advertising and promotion of alcoholic beverages is an important part of public policy toward alcohol. There are two general issues. The first issue is the competitive effect of advertising on market structure and thus the level of price relative to marginal cost. The second issue is the consumption effect of alcohol advertising on market demand and its possible role as a contributor to alcohol abuse and external costs of consumption, such as drunk driving, liver cirrhosis and other health effects, binge drinking, and underage drinking (Fisher 1993). Although the advertising-consumption issue has been debated for many years, there is a limited body of empirical research on the relationship between advertising and alcohol demand in the United States.(1)

   A more specific issue is the possible effect of broadcast advertising on alcohol consumption. An especially strong view has been expressed by the policy watchdog organization Center for Science in the Public Interest (CSPI), which called for advertising bans and other restrictions on the messages and content of ads, especially those that might reach large numbers of youth or heavy drinkers (CSPI 1995). In 1983, CSPI and other groups petitioned the Federal Trade Commission (FTC) for a complete ban on broadcast advertising of alcohol (CSPI 1983), but the FTC ruled against the petition on the grounds that there was "no reliable basis to conclude that alcohol advertising significantly affects consumption, let alone abuse" (FTC 1985, p. 2). The implication is that advertising alters brand shares but has little or no effect on beverage or total alcohol consumption. The CSPI petition was followed by related efforts by other groups, including passage of the Alcoholic Beverage Labeling Act of 1988; congressional hearings on health warnings in alcohol advertising (U.S. Congress 1990); a second CSPI petition in 1992; and restrictive advertising bills introduced in the 101st and 102nd Congresses by Senators Gore, Thurmond, and Simon and Representatives Kennedy and Conyers. In addition, during 1991 and 1992, Surgeon General Novello spoke publicly on the possible dangers of alcohol advertising targeting youth, commissioning reports on youth and alcohol and the mass media and alcohol abuse. Finally, in June 1996, Seagram Distillers Company began airing local television ads for several of its brands. These ads broke the industry's 60-year voluntary ban on broadcast advertising by producers of distilled spirits. This action quickly drew criticism from various groups and individuals, including President Clinton, Representative Kennedy, and Chairman Hundt of the Federal Communications Commission. Some spokespersons called for additional restrictions or complete elimination of all forms of alcohol advertising, but none of the critics seemed to question the effectiveness of broadcast advertising of alcohol.

   Does broadcast advertising affect alcohol consumption, including total consumption of pure alcohol (ethanol) and consumption of each of the three beverages? The objective of this paper is to provide an answer to this question. In addition, the paper will examine the possible interaction between demographic changes in the United States and alcohol advertising. Most previous empirical studies exclude demographic variables and use annual data on aggregate advertising expenditures and consumption for individual beverages (Lee and Tremblay 1992; Goel and Morey 1995), total consumption of ethanol (Duffy 1990; Nelson and Moran 1995), and systemwide demand for the three beverages (Selvanathan 1989; Duffy 1991; Nelson and Moran 1995). These studies fail to account for possible differences in advertising effects across media and substitution among media. A second shortcoming is the failure to account for seasonal patterns of alcohol consumption and advertising, and annual aggregation tends to obscure this source of variation (Clarke 1976; Bass and Leone 1983; Saffer 1993). Further, some advertisers are known to vary expenditures during the year to offset diminishing returns. Annual data on aggregate advertising fail to reflect important variation by media and season, and any resulting effects on total or beverage demand are obscured.

   None of the previous empirical studies employs quarterly data, disaggregate advertising by media, demographic variables, and a systemwide approach to estimation.(2) This study attempts to fill this void by estimating a demand system for consumption of beer, wine, and spirits and total consumption of ethanol. Quarterly data for 1977:3-1994:4 are employed. Using the Rotterdam model of a differential demand system, the empirical model explains the growth rate of per capita consumption dependent on growth rates for beverage prices, real income, demographic variables, and real advertising by media and beverage. Real advertising expenditure is broken down into broadcast advertising messages (television, radio) and print advertising messages (magazines, newspapers, outdoor). Given strong separability of consumer preferences, the empirical analysis in the paper takes place in two stages. In the first stage, an analysis is conducted on the demand for the three beverages conditional on total alcohol consumption. Within this three-equation system, advertising serves to allocate a predetermined total consumption among the beverages, other things held constant. In the second stage, a composite demand function is estimated wherein the growth rate of total alcohol consumption per capita is the dependent variable and several different specifications of real advertising by beverage or media are included as explanatory variables. Both the conditional and the composite empirical relationships are important for public policy, the first for the controversy surrounding broadcast advertising and the second for the effects of all forms of advertising on total consumption. No other empirical study has addressed both of these concerns.

   The remainder of the paper is divided into five sections. Section 2 provides a brief overview of recent trends in alcohol consumption and advertising. Section 3 develops the systemwide demand model. Section 4 reports empirical results by beverage, and section 5 reports results for the composite demand function for total alcohol. Section 6 presents the study's conclusions. The conclusion is that alcohol advertising, including broadcast advertising, has little or no effect on alcohol demand.

2. Background

   Alcoholic Beverage Consumption and Advertising

   During the past 20 years, important changes have taken place in alcoholic beverage consumption and advertising. Table 1 displays basic data on consumption and advertising by beverage. On a per capita basis, spirits consumption has been declining since 1975, beer since 1980, and wine since 1985. As a result, total consumption of pure alcohol has declined since 1980. In part, this is due to a shift in consumption toward beer and wine, which have lower ethanol contents.(3) In 1975, 46% of ethanol consumption was in the form of beer, followed by spirits, (42%) and wine (12%). In 1995, the breakdown was beer (57%), spirits (30%), and wine (13%). In contrast to consumption, nominal beverage prices have increased steadily over the past 20 years. While beverage prices rose at average annual rates of 2.5% to 3.1% during 19851995, the consumer price index increased on average by 3.5% per annum. Thus, the price of alcoholic beverages has declined relative to all other goods and services.

   Table 1 also displays basic data on alcohol advertising. For beer, nominal and real advertising expenditures peaked in 1985, about five years after the peak for per capita consumption. The trend in beer advertising in the early 1980s can be traced in part to efforts by several leading brewers to win back market share lost to Miller Brewing during the 1970s. For wine, nominal and real advertising peaked in 1985 along with per capita consumption. The change after 1985 reflects the substantial decline in the demand for wine coolers, a product introduced in 1981. For spirits, nominal and real advertising peaked in 1980, about five years after the peak in per capita consumption. This trend reflects in part a belated attempt by spirits producers, especially Seagram, to win back some of the market share lost to beer and wine during the 1970s. In addition, there have been important changes in the use of different advertising media. Since 1980, beer and wine advertising have increasingly used broadcast media, especially television, whereas spirits advertising has focused more on print media relative to outdoor ads.

   Table 1. Alcoholic Beverage Consumption and Advertising ACGR (%)(a) Beverage 1975 1980 1985 1990 1995 1985-1995 Fluid Gallons (Millions) Beer 4598.6 5512.2 5677.3 5984.9 5881.0 0.35 Wine(b) 361.6 471.8 569.0 516.1 469.0 -1.91 Spirits 423.4 449.4 416.3 374.5 328.0 -2.36 Fluid Gallons per Capita' Beer 29.3 32.1 31.1 31.2 29.2 -0.63 Wine 2.3 2.7 3.1 2.7 2.3 -2.94 Spirits 2.7 2.6 2.3 2.0 1.6 -3.56 Ethanol Gallons per Capita Beer 1.32 1.44 1.40 1.40 1.31 -0.66 Wine 0.33 0.35 0.40 0.35 0.30 -2.84 Spirits 1.19 1.10 0.90 0.81 0.68 -2.76 CPI (1990 = 100) Beer 51.4 68.6 86.4 100.0 110.9 2.53 Wine 57.2 78.3 87.8 100.0 117.3 2.94 Spirits 60.0 71.4 83.8 100.0 113.8 3.11 Nominal Advertising (Millions of Dollars) Beer 139.6 419.6 770.0 659.3 720.0 -0.67...