The beer category’s evolution since 2003 and the shift from total beverage alcohol to total beverage business was the theme of the opening session of Beer Business Daily’s 2023 Beer Summit at the the Breakers in West Palm Beach, Florida.
Publisher Harry Schuhmacher posited that the beer industry changes every five to 10 years. In 2003, the change was the end of the mass brand. In 2013, it was the so-called “dance of the elephants,” as intrigue built around M&A activity and who would take over whom, with little focus on the consumer. At that time, Schuhmacher noted, it seemed as though the beer category would always be ruled by its three largest suppliers: Anheuser-Busch, Coors and Miller.
Now, the industry is in the midst of a “perfect” storm with carbonated soft drink giants Coca-Cola and PepsiCo viewing beverage-alcohol as a long-term play and “in it to win it,” Schuhmacher said. Those two companies alone have the market caps to purchase whichever large bev-alc player they want, and they probably will, he predicted. He pointed to Reyes, the largest beer wholesaler in the U.S. with the Constellation Brands portfolio of top Mexican imports and a major Coca-Cola bottler, being the link between those two beverage companies that could potentially signal a big-time deal.
The M&A activity between non-alcoholic producers and brewers — such as energy drink maker Monster (which acquired CANarchy a year ago), cannabis firm Tilray (which has built a portfolio of craft breweries including SweetWater, Green Flash, Alpine and most recently Montauk) and Keurig Dr Pepper (which invested $50 million for a minority stake in non-alcoholic beer producer Athletic Brewing last year) — has only just begun.
“We’re in a total beverage industry, not total beverage alcohol,” Schuhmacher said.
The COVID-19 pandemic and the rise of hard seltzers and ready-to-drink (RTDs) spirit-based products have opened the door to larger beverage producers getting into the business previously dominated by Anheuser-Busch InBev, Molson Coors and Constellation Brands. It could take a decade or two, but those companies are big enough to make an impact over time, Schuhmacher said
Within this blurred business, all roads lead to beer wholesalers, Schuhmacher added. Sazerac’s recent move to several beer distributors is about margin and velocity, with beer distributors capable of handling velocity and servicing smaller accounts such as convenience stores, he continued. And beer distributors are open for business to take on a total beverage portfolio.
The opening address gave way to a conversation on the future of this total beverage business with consulting firm head Bump Williams, Arlington Capital Advisors director J.B. Shireman and Independent Beverage Group founder Joe Thompson.
Here are some takeaways from their talk.
The Importance of Incrementality: Innovation may carry many definitions but retailers define it as incremental purchases, Williams said. However, the new products coming from beer suppliers now aren’t creating new occasions, attracting new shoppers or driving incremental dollars, and thus aren’t building the category, he added.
Today’s consumer, though, is only concerned about getting what they want, when they want, Shireman said. They’re not concerned with distribution difficulties or lack of shelf space.
Shireman argued that innovation keeps the consumer excited. He pointed to a slide depicting the top beverage producers’ market cap growth over the last 20 years, which he said was due in large part to innovation.
However, Williams countered that price increases were responsible for that market cap growth, which isn’t necessarily a good thing. Williams stressed to brewers and distributors in the room that price has negatively impacted the beer category and beer is at risk of losing its status as “an affordable luxury.”
Williams argued price increases have pushed core beer consumers to consider other categories.
“We are losing our heavy beer shopper because they just can’t afford it anymore,” he said.
In conversations with retailers, Williams said the consensus is that the U.S. is already in a recession. Malt liquor is growing like never before. Consumers are doing “stupid beer math” to find the most bang for their buck, seeking higher ABV at lower prices. They’re trading down in pack sizes and cutting back the frequency of purchases.
Williams expects the outcome of this in 2023 will be a win for convenience stores, while grocery retailers are worried about losing the beer shopper. To retain those heavy beer drinkers, Williams encouraged discounts and promotions to support premiums, budget beers and single-serve offerings.
To fortify their businesses, distributors should invest in other categories outside of beer and focus their efforts on strengthening their relationships with retailers, Williams suggested.
Beer Losing Share of Shelf to RTDs: There are more than 3,000 spirits-based ready-to-drink offerings in the pipeline, and retailers surveyed by Bump Williams Consulting say they’re taking as many as they can for their stores for the spring resets, Williams said.
Those RTDs are going to cut into about 20% of beer shelf space during the spring resets, Williams said. The shelf space will come at the expense of slower moving beer products and packaging configurations, and the prospect of beer’s losses “worries me a lot,” Williams said.
The challenge will persist in the coming years as Williams predicted success for spirits trade groups’ equalization efforts to bring excise taxes and market access in line with beer products of similar ABVs. Beer’s advantage in more than 170,000 stores across the U.S. is “going to go away” and the gap will “close considerably,” as spirits’ argument that not being able to sell similar ABV products penalizes the consumer, he added.
The only way for the industry to pushback against those efforts is through a unified front by craft brewers and distributors at a state level, which Schuhmacher called the “ace in the hole.”
Distributor Consolidation: Thompson suggested that “there are no lines anymore, period.” The big wholesalers are getting bigger, and as the business is more complex than ever before. Those changes have made it harder for smaller players to stay in the game. Players such as Reyes, Redwood Capital and Franchise Equity Partners have redefined “big” in the beer distribution business. Others, Thompson suggested, such as Amazon and Tesla, could join the fray as middle-tier consolidation continues.
The economic environment is leading potential acquirers to be more “risk averse,” which will affect deal flow this year, Thompson said. Buyers will pay for growth, and they’ll “discount way back for no growth,” he added.
“There’s more and more power and fewer hands,” Williams concluded.
Although power is more concentrated at one end of the spectrum, Shireman countered that on the other end are more legal-drinking-age consumers than ever before who are wielding their own control and driving convergence.
Declining Retail Service Levels: The decline in service levels from distributors to retailers is causing the most concern within the retailer tier, Williams said. Whereas retailers once could pick up the phone and receive a hot-shot order, not so much anymore as distributors focus more on logistics, profitability and efficiency, he said.
Meanwhile, the on-premise channel was once where brands were launched, but it’s become harder to deliver brands to on-premise retailers and build awareness, Williams said.
Sazerac’s Network Shakeup: Following Sazerac’s move away from Republic National Distributing Company to a mix of beer distributors and other spirits wholesalers, Thompson expects spirits distributors to become more active.
“Spirits distributors aren’t going to take that sitting down,” he said.
The Future: Calling back to Schuhmacher’s opening remarks about industry change, Shireman expects the pace to speed up. “Three years is an eternity in the beverage industry now,” he said.
For the companies who can’t adapt, they’ll get out, Thompson added.