Lure Of The Non-Alcoholic Beverage Market For Liquor Companies

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Until recently, it was a rare sight to see liquor companies dabbling in the non-alcoholic beverages segment. But that doesn’t seem to be the case these days. As millennials become the largest consumers of alcohol in the US, their preferences have been guiding the decisions of these alcoholic beverage makers. This slight shift is being done mostly through acquisitions, with a hope to have a positive impact on the top-line. The focus is particularly on energy drinks, premium sodas and mixers, and cold brew coffee.

What’s The Need For The Shift?

Many of the large liquor companies have been struggling with improving their top-line performance, as a result of a decline in alcohol sales. According to data provided by IWSR, “the rate of decline in global alcohol consumption is accelerating.” After an average rate of decline of 0.3% in the preceding five years, the global market for alcoholic beverages fell by 1.3% in 2016.

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Moreover, as mentioned earlier, millennials of legal drinking age have become the largest consumers of alcohol in the country. While they only account for a quarter of the population, they represent 35% of the beer consumption, 32% of the spirit consumption, and 42% of the wine consumption. Hence, given the importance of this segment, they are no doubt an inevitable consideration in the decision making of big alcohol companies. These consumers think more about what they are drinking, and though they focus on value and quality, they also look into the ingredients and nutrition facts. This trend is, in fact, prevalent even in the non-alcoholic beverage market, where a shift towards healthier drinks has forced a change in strategy for giants such as The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), and resulted in the acquisition of Bai Brands by Dr Pepper Snapple (NYSE:DPS).

What Are Some Notable Examples Of This Strategy?

After over 250 years in the spirits and beer business, Diageo (NYSE:DEO), the world’s largest distiller, made a 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.”

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. Further, it also introduced Orijin Zero, a soft drink version of its bitter-sweet spirit in Nigeria. Besides consumers who don’t drink, those that can’t or choose not to drink alcohol make up a sizeable segment that Diageo can’t currently target with its existing portfolio of alcoholic brands. Moreover, keeping in mind the increasing health consciousness among consumers, these products are free from sugar, sweeteners, and artificial colors.

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, and a 10% year-on-year growth in outlets stocking the product. The company also aims to ensure no-alcohol and lower-alcohol beer products form at least 20% of its global beer volume by the end of 2025. Today, the company’s expanding portfolio of these beers includes more than 15 brands, including Beck’s Blue, Brahma 0.0%, Jupiler 0.0%, and Corona Cero. While non-alcoholic beers account for just 2% of the overall beer consumption, this category’s share is substantially higher in some regions, such as 6.6% in the Middle East and North Africa. Moreover, the compound annual growth rate for beer overall was less than 1% between 2010 and 2016, but low and no alcohol beers provided a semblance of hope at 5.2%, according to insights firm GlobalData.

Anheuser-Busch also recently announced the acquisition of organic energy drinks and Alta Palla sparkling juices and waters maker Hiball, which is expected to close in the third quarter of this year. While this is a small deal (Hiball has 20 employees and had sales of $40 million in the past 12 months), it is newsworthy as it implies a move towards non-beer categories. The company may also want to jump on the organic/natural drinks bandwagon. Anheuser has the distribution network to make Hiball increase its scale immensely. Furthermore, BUD also struck a deal with Starbucks last year to make, bottle, and distribute the ready-to-drink Teavana tea line.

We have a $126 price estimate for Anheuser’s stock, which is 5% above the current market price.

 

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