Nov. 14 (Bloomberg) -- Robert Munro buys his booze at London liquor stores these days. As his expenses rise and Britain teeters on the edge of recession, the house painter is cutting back on nights out and pouring drinks at home.

``It's gotten more and more expensive to just head down to the pub for a drink,'' said Munro, 55, who is self-employed. ``You're paying silly prices for a pint -- you can drink at home for half the price.''

Five British pubs are closing their doors every day, according to the British Beer & Pub Association, as pound- pinching drinkers embrace staying in as the new going out. That may hurt beer companies like Heineken NV and Carlsberg A/S more than distillers, such as Diageo Plc, because the brewers generate the majority of their U.K. sales at bars, where profitability can be double the level in retail outlets.

Beer sales at pubs, known as ``on-trade'' in Britain, fell 8.1 percent in the third quarter, meaning 1.1 million fewer pints drunk per day, the BBPA says. ``Steep declines in the on-trade are a problem for margins,'' Joergen Rasmussen, chief executive officer of Carlsberg, said in relation to the U.K. market in a Nov. 5 interview. ``Being the most profitable segment, it's a problem for us and for everyone.''

Britain, whose economy contracted last quarter for the first time in 16 years, accounts for about 3 percent of the global beer market, according to researcher Canadean, and almost a tenth of the European market. Valby, Denmark-based Carlsberg's British sales by volume will fall 3 percent next year, according to the average estimate of two analysts surveyed by Bloomberg.

Amsterdam-based Heineken, which bought Scottish & Newcastle Plc assets this year to become the U.K.'s biggest brewer, will see its volume sold in Britain fall 4.4 percent in 2009, according to the average of three analysts' estimates.

Spirit Sales

By contrast, Diageo sales for western Europe will increase 2.3 percent in 2009, and margins will widen by 45 basis points, according to the average of two analyst estimates. Both analysts said the U.K. market would be in line with that figure.

Brewers aren't faring much better at the so-called ``off- trade'' -- supermarkets and liquor stores, where 45 percent of all beer is sold, according to the BBPA, and beer sales declined 6 percent last quarter.

To be sure, spirits sales have dropped 6 percent in pubs this year, though the total increase in Britain is 2 percent, according to Nielsen data, driven by a 4 percent off-trade gain. About 80 percent of liquor sales are outside bars and pubs.

Brewers have less clout with big food sellers to negotiate prices and shelf space than liquor companies because grocery chains consider beer discounts a major draw for customers, said Trevor Stirling, an analyst at Sanford C. Bernstein in London.

Supermarkets' Power

Britain's supermarkets have also been driven to step up discounts and squeeze suppliers as they fend off inroads by German discount chains Aldi and Lidl.

Tesco Plc, the U.K. retailer that accounts for 7 percent of all beer sales, in October discounted 18-bottle cases of Carlsberg Export lager to 5 pounds ($8) from 15 pounds, or 27.8 pence a bottle. The average price of a pint of lager in a U.K. pub -- a quantity less than two 330-milliliter bottles -- is 2.76 pounds, according to BBPA figures.

``If the brewers stood firm and said `we're not prepared to supply you with the products at those prices,' they'd be off the shelf,'' said Graham Page, a Nielsen analyst.

Beer companies have also had a harder time resisting discounts because they haven't been retaining the value of their brands, instead ``commoditizing'' their products in the U.K. market, said Miller Brands' John Littleton.

Commoditization

Littleton, a director for the London-based unit of SABMiller Plc, says many brewers sought volume growth in healthier times with larger-sized cans and by-the-case discounts. That left them with less leverage with retailers when volume dropped off and costs for brewing ingredients and packaging began soaring in the past two years.

SABMiller's top five brands in the U.K., including Peroni Nastro Azzurro, marketed as an upscale Italian brand, have all increased market share and escaped discounting this year because their ``brand equity'' has not been tarnished, Littleton added.

The shift away from pubs has a smaller effect on distillers, which traditionally generated most of their sales from store shelves rather than relying on bartenders.

Spirits such as Diageo's Smirnoff vodka, the best-selling liquor brand in the U.K., and Pernod Ricard SA's newly acquired Absolut, won't see a significant decline in sales by volume as cost-conscious supermarket shoppers are less likely to experiment with discount brands they don't already know, said Rob Mann, an analyst at Collins Stewart Plc in London. Shoppers dropping 20 pounds or more on a bottle of premium vodka also tend to be more affluent, he added.

Liquor Outlook

The outlook for liquor companies is ``considerably more positive than the brewers, and part of it is the consumer of premium liquor is less affected in times like these,'' said Mann, who recommends buying Diageo.

Diageo has been spending more on marketing collaborations with supermarkets and liquor stores to retain consumers, according to Russell Jones, a director at Diageo's U.K. unit.

``We knew the waters were going to be choppy this fiscal year,'' Jones said in an interview. ``We planned for that, and we'll come out with a stronger market share on the other side.''

Some investors agree, including Hugh Yarrow, who helps manage about $500 million, including Diageo shares, at Rathbone Unit Trust in London.

Liquor makers ``won't be entirely immune from what's going on in the economy,'' Yarrow said. ``But the business model has the resilience in terms of pricing power and the level of profitability to cope with a bit of pressure.''

Cost Pressure

To be sure, some analysts have picked beer over liquor as the better hedge in hard times. Heineken was upgraded by Exane BNP Paribas analyst Nikolaas Faes on Nov. 12, who said ``beer consumption is largely immune to economic conditions in developed markets,'' while spirits demand is tied more closely to how economies are growing or contracting.

Still, brewers face greater commodity-price headwinds than liquor makers, regardless of how demand holds up. The average profit on a pint of beer sold in the U.K. has now shrunk to 0.7 pence, according to Rob Hayward at the British Beer & Pub Association. The organization doesn't break out profitability for on-trade versus off-trade.

``To say it's very difficult for brewers to pass those higher costs on to supermarkets would be the understatement of the century,'' Hayward said.

To contact the reporter on this story: Andrew Cleary in London at acleary7@bloomberg.net.

Last Updated: November 13, 2008 19:01 EST