Why Did Diageo Invest In A Non-Alcoholic Drinks Company?

July 8th, 2016 by Trefis Team
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After over 250 years in the spirits and beer business, Diageo (NYSE:DEO), the world’s largest distiller, made its first investment in a non-alcoholic drinks company. It acquired a minority stake in Seedlip, a British company, launched in November of 2015. The company is the “world’s first” distilled non-alcoholics company created by entrepreneur Ben Branson, to solve the dilemma of “what to drink when you’re not drinking.” This investment was made through Distill Ventures, a vehicle set up by Diageo to help fund innovations within the spirits world. Such a vehicle offers Diageo the ability to place small bets on upcoming brands at a time of constantly changing tastes and preferences of consumers.

One such shift that has been witnessed is that of reduced alcohol consumption, at least in the mature markets of Western Europe and parts of North America. According to the latest available data, the estimated total alcohol consumption in the UK is at 9.4 liters per head for those aged 15 years and older and 7.7 liters per head on average throughout the entire population in 2013. This reflects the downward trend from a peak of 11.6 and 9.5 liters per head in 2004.

UK Alcohol Consumption

In the face of declining consumption trends, Diageo has tried in the past to convince consumers to pay a higher price for better quality alcohol. According to Helen Michels, director of global innovation at Diageo, the company recognizes the “opportunity of non-alcoholic drinks,” with continued exploration and investment in this area. Diageo already sells non-alcoholic variants of its own brands, such as Guinness Malta in Africa, and Guinness Zero in Indonesia, launched in 2014. Further, this year it introduced Orijin Zero, a soft drink version of its bitter-sweet spirit in Nigeria. Besides consumers who don’t drink, those who can’t or chose not to drink alcohol make up a sizeable segment that Diageo can’t currently target with its existing portfolio of alcoholic brands. Diageo’s competitor Anheuser-Busch InBev (NYSE:BUD) has also seen tremendous growth in its alcohol-free beer brand – Beck’s Blue. Research released by the company showed a 5% growth in the brand, with a 10% year-on-year growth in outlets stocking the product. While non-alcoholic beers account for just 0.6% of the global beer consumption, this category’s share is substantially higher in some regions, such as 6.6% in the Middle East and North Africa. Moreover, this category recorded a five year compound annual growth rate of 2.54% in 2015, as compared to just 1.57% for the total beer market.

Non Alcoholic Beer Stats

Another factor that could have piqued Diageo’s interest is the gaining popularity of Seedlip’s brand. The brand has caught on with high profile chefs such as Gordon Ramsey and Heston Blumenthal, and is already available in top London restaurants, including the Ledbury, The Savoy, and Selfridges. Currently the brand is only available in the UK, and has only two varieties – Seedlip Spice 94, a spicy version produced with cloves, lemon, and cardamom, and Seedlip Garden 108, made with sweet pea, cucumber, and meadow grass. Keeping in mind the increasing health consciousness among consumers, these products are free from sugar, sweeteners, and artificial colors. The company has had to quadruple production since its launch late last year, after stocks were sold out several times. The company also has plans to launch in Western Europe and in the US later this year.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Diageo.