Beverage industry chases changing consumption

Joseph Goode is Senior Vice President and Beverage Industry Manager for Truist. With extensive experience in beverage industry strategy and finance, he offers his assessment of the recovering economy and the opportunities it presents for the beverage industry.

The pandemic and recovery are accelerating shifts in the beverage market as consumers embrace changing consumption patterns, particularly in the alcohol sector.

The direct-to-consumer alcohol trend, which was already established and moving before 2020, increased dramatically—with 232% more in sales and 167% growth in customers —during the pandemic, as consumers avoided retail stores and had more time at home to savor alcoholic beverages.

Yet the big news is the growing demand for hard seltzers and ready-to-drink (RTD) cocktails, which not only represent billions of dollars in sales but also show changing customer preferences.

COVID-19 encouraged people to think about buying things online they historically have not—like beer and spirits. Seltzers and RTDs were already gaining momentum within the alcoholic beverage industry, but now they’re the product of the moment.

In 2020, total sales of alcoholic beverages grew more than 3%, although wine and spirits sales increased by about 5%. But consider the sector’s ecommerce growth. Even with few states allowing direct-to-consumer sale of beer and spirits, the ecommerce share of spirits soared by nearly 400%, followed by beer at 233%. Wine, where direct-to-consumer is allowed in 45 states, grew by 198%.^{Disclosure 1}

In the first three months of the pandemic alone, the industry saw an explosion in online sales some analysts said equaled 10 years of growth. And once consumers experience that kind of convenience, many won’t ever go back.

For example, craft breweries, historically reliant on taproom business, have been quick to embrace ecommerce—when permitted by law—seeing the potential for strong margins and good cash flow. Their efforts have paid off. Their market share of online beer sales is 25%, compared to 12% with offline sales.^{Disclosure 1}

More importantly, the growing popularity of hard seltzers and RTDs has blurred the beer, wine, and liquor categories, which traditionally have been fairly segregated in how they’re presented to the consumer for purchase.

Consumers are ready for innovation

Innovation has been a driving force in the beverage industry for years—coming in all forms and from companies ranging from the largest global corporate entities to the smallest neighborhood nano-breweries. Change and innovation have sparked the popularity of craft beer, craft spirits, small batch and single barrel liquors, and even functional beverages in the non-alcoholic arena. 

Innovation is everywhere and, more important, gaining momentum just as hard seltzers and RTDs are entering the alcoholic beverage market. As a result, we have this emerging product category that mixes everything up. These drinks are carbonated like beer, clear in color like many spirits, and sweet and fruity like wine.  They are sold like beer in 12-ounce cans, and consumers are willing to spend $20 for a four-pack or six-pack.

While cans were long considered a cheaper product, craft beer taught the consumer that a can could be a premium vessel boasting versatility. After all, you can drink it in more places—by the pool, on the golf course, wherever you want. It’s user-friendly, recyclable, and doesn’t have the same restrictions as glass.

With beer, wine, hard seltzers, and RDT cocktails in the same packaging, there’s a new alcoholic category that’s blurring the old lines. We have an inflection point where these wine-based and spirit-based drinks are starting to get attention, shelf space, and the ability to be truly competitive. In other words, they’re absolutely coming up.

Beer, which has overshadowed the seltzer/RTD space, still accounts for the majority of the market, but it’s under pressure as wine and spirit-based RTDs are becoming more competitive. Another major development is the rise of the promiscuous consumer, who enjoys all types of alcoholic beverages and enjoys different categories at different times.

For years, beer consumers, wine consumers, and spirits consumers were extremely loyal to their preferred drink, down to the brand. Now they’re trying more flavors and styles, shifting between products, and adding seltzers and RTDs to the mix.

There may be specific occasions when they consume beer, specific occasions when they consume wine, and specific occasions when they consume spirits. And within each category they may not prefer the same brand for every occasion. It’s shaking long-standing loyalties.

RTD products aren’t new. They've been on and off the market for years. It’s all about timing, and now they’re hitting at the right time when consumers are open to innovations—like more alcohol by volume in a canned RTD. With consumers ready for the product and the product in the right package with the right quality at the right moment, we’re seeing a pivotable shift in the industry that has generated billions of dollars in business.

Do those billions of dollars take sales away from traditional categories or are they incremental dollars?

The answer is some of both. Some consumers are choosing new products over old, and some are buying new products in addition to what they were already purchasing.

As direct-to-consumer sales exploded throughout 2020, ecommerce and technology firms took notice. The long-lagging beverage industry was entering the digital world. Ripe for change, this burgeoning online sales space was a catalyst for a new twist on a legacy model. 

Traditionally, we have the three-tier system of manufacturer, distributor, and retailer where the consumer buys the product in a store or establishment. But now we’re seeing new models emerge. We have online sales models that are effectively “e-tailers” with online storefronts sourcing product from distributors and shipping to consumers. We also have emerging ecommerce platforms that by-pass the distributors and connect consumers directly to the manufacturers and brand companies. And now we have another emerging model that is perceived as direct-to-consumer but is more of an online delivery service because the product still goes through the three-tiered system.

Laws are crucial

Many of the new models, and their potential for further growth, depend on states allowing direct-to-consumer sales and delivery, so this shift is in its initial stages.

The only benchmark is how the wine industry, with production mostly concentrated in three states, has successfully developed direct-to-consumer sales in more than 40 other states. The beer and spirits sectors are nowhere close to that, and we aren't sure what those systems will look like for quite some time. Yet the dynamics are strong, and the trade groups for beer and spirits are starting to focus on the direct-to-consumer segment and support efforts and legislation to expand into more states.

Across the industry, manufacturers should look for more ways to cross categories and become total beverage companies. Anheuser-Busch, which for more than 100 years marketed six brands of beer, now has more than 40 brands in different alcohol segments.

Smaller and start-up companies, however, can capitalize on consumer’s promiscuity and willingness to find and support authentic brands they can connect with. With today’s technology, consumers are better informed about products they might not have heard about in the past, especially those from smaller companies working hard to be the best.