Cocktails Sip Away at Beer’s Market Share

Liquor industry makes remarkable comeback, helped by TV ads, fickle young drinkers

Source: WSJ

By Tripp Mickle

Feb. 15, 2016

Shortly after finishing a full-bodied India pale ale, Jack Knauss asked the bartender at Atkins Park Tavern for a cocktail.

“I love beer,” the 28-year-old sales executive said, but he doesn’t drink too much of it because of what he calls “belly fill. It fills me up,” he says.

Mr. Knauss is symbolic of a big problem for the beer industry-and a big boon for liquor. Despite the craft beer craze, beer lost a portion of its share of U.S. alcohol revenue in 2015 to liquor for the sixth consecutive year and the 12th time in the past 15 years, according to data released this month by the Distilled Spirits Council of the U.S. Beer’s market share fell to 48% last year from 56% in 2000. Liquor has risen to 35% from 29% and wine to 17% from 16%.

The liquor industry-once the pariah of the alcohol world-has been steadily gaining popularity due to a major cocktail renaissance, a return to television advertising, and because of fickle young drinkers like Mr. Knauss whose generation switches between beer, whiskey and wine more frequently than ever before.

“Among baby boomers, the guy who has been drinking beer since he was 25 years old is still drinking beer, but younger generations consume differently,” said Eric Penicka, an analyst with Euromonitor, an independent research firm. “They’re not loyal to an alcohol type.”

Total alcohol revenue for producers rose 30% over the past 10 years to $68 billion from $52.2 billion. Of that, liquor increased 40% to $24.1 billion; wine rose 35% to $11.6 billion; and beer rose 23% to $32.3 billion.

It is a remarkable comeback for liquor, which for decades was dogged by concerns about its higher alcohol content and a 1980s increase in drunken driving accidents. By contrast, beer, the first alcoholic drink to be legalized after prohibition, became “America’s Beverage of Moderation,” and got stacked high in grocery stores nationwide.

Attitudes began to shift, though, as cocktail bars migrated from New York to San Francisco and Los Angeles, said Philip Dobard, director of New Orleans-based Museum of the American Cocktail. One of the forces behind the change was Dale DeGroff, the bartender at New York’s famous Rainbow Room atop 30 Rockefeller Center.

Mr. DeGroff was trying to achieve for spirits in the 1990s what culinary pioneers like James Beard did for food in the 1950s-introducing people to new flavors and old recipes like the cognac-based Between the Sheets and gin-based Fitzgerald cocktails. “Now there’s virtually no market of any size.where you cannot find a quality craft cocktail bar,” Mr. Dobard said in an interview from Los Angeles.

The rise of the cocktail movement coincided with a period of consolidation in the liquor industry. Major players, such as Diageo PLC, began pushing to have liquor treated the same as beer and wine. A sign of its success is that spirits tastings are now allowed in stores in 38 states compared with 22 in 2001-a change the industry said has fueled sales of new and more expensive liquors much as wine tastings fueled sales of new wines.

TV advertising also surged after the industry dropped a self-imposed ban in 1996. Initially, liquor companies advertised on cable and local TV, and then spread the message to network TV in 2011. About the same time, television shows like “Mad Men” and “Boardwalk Empire” fueled the popularity of liquor and helped ignite a surge in popularity of American whiskey, sending sales of bourbon and Jack Daniel’s up 45% to more than $2.9 billion last year from $2 billion in 2011, according to the Distilled Spirits Council.

“All those things have made [spirits] cool,” said Bryan Fry, president of Pernod Ricard USA.

Beer tried to push back. At different times, August Busch III, Anheuser-Busch’s former chief executive, gave congressional leaders a booklet saying, “A drink is not a drink,” implying that consuming beer and liquor is not the same because liquor has a higher alcohol content by volume than beer. His company pressed networks to decline Smirnoff-related advertisements.

Now beer is trying a new tack: if you can’t beat ’em join ’em. Brewers are creating what they call “near beer” products. Anheuser-Busch InBev NV, the nation’s largest brewer, has rolled out hybrid brews like Bud Light Lime-a-Rita and Mixxtail, which are made with malt in a brewery but taste like cocktails.

This year AB InBev and MillerCoors LLC, the nation’s No. 1 and No. 2 brewers, are expanding into alcoholic soda with Best Damn Root Beer and Henry’s Hard Soda. So far, though, nothing has succeeded in arresting beer’s market-share decline.

“They’re in a predicament,” said Mr. Penicka of Euromonitor. “They’re working everything they can to reignite interest in the beer they do produce.but it’s never going to be enough to offset the slow decline.”