Liquor Companies See the Benefits of Sobriety
Strong demand for alcohol-free drinks is a promising trend for booze companies
Source: WSJ
By Carol Ryan
May 21, 2019
It’s early days, but alcohol-free liquor seems to be on its way in. Counter-intuitively, big liquor companies should reap the rewards.
Sales of traditionally alcoholic beverages with no or little alcohol content are still small. In 2018, they comprised 1.3% of the U.K.’s total alcohol business, IWSR data shows, and that includes alcohol-free beer, which is more widespread than booze-free gin, for example. Figures in the U.S. are lower still.
Yet the trend is catching on in West coast cities like Los Angeles-more so than harder-partying New York-and the U.S. is expected to be a major growth driver for the industry over the next few years. IWSR expects U.S. sales of ready-to-drink beverages such as nonalcoholic cocktails to increase by almost 40% each year between now and 2022.
The increasing demand is part of a wider shift toward healthier choices that is affecting all consumer products. In the same way that shoppers in mature markets now shun highly processed foods, they are cutting back on alcohol. And Generation Z, those aged 18-24 today, drink far less than their parents.
That is not necessarily bad for business, though. Non-drinkers still want to feel included when buying drinks for friends, so are willing to pay almost as much for a nonalcoholic drink as a traditional cocktail or short. The difference is the producer gets a larger chunk of the price, much of which typically goes to tax authorities that levy excise duty according to alcoholic content. At scale, alcohol-free drinks could be lucrative.
Unusually for a new consumer trend, public companies have been quicker to react than entrepreneurs backed by private capital. Davide Campari-Milano SpA, the Italian company that owns Grand Marnier as well as its namesake red liquor, already makes 6% of group sales from its alcohol-free aperitif Crodino and is creating a new brand in-house. Johnnie Walker’s parent Diageo owns a minority stake in Seedlip, one of the most successful alcohol-free brands to date, through its venture capital arm Distill Ventures. It has also given seed money to half a dozen entrepreneurs, but hasn’t made the details public yet. Pernod Ricard signed a U.K. distribution partnership with alcohol-free gin Cedars last year. Cognac specialist Rémy Cointreau is the odd one out, with no plans to grow sales booze-free.
Meanwhile, private equity and venture capitalists in the U.S. and Europe invested just $53 million in nonalcoholic beverages in 2018, according to PitchBook data, compared with the $4 billion they spent backing alcoholic drink startups. That could reflect the high level of skill and investment needed to make a zero-proof liquor that tastes as good as the real thing. And some venture capitalists are still trying to understand whether these assets will fetch a booze-like valuation when the time comes to sell, or the lower multiple of a soft-drinks brand.
Listed liquor companies are best prepared to profit if nonalcoholic liquor takes off. But the biggest beneficiaries could be non-drinkers, pregnant women and designated drivers, who may finally get better alternatives to juice and soda.