We are inundated with reports of wine sales softening and heading for decline, and even hard seltzer sales waning as consumers look to non-alcoholic beverages and recreational cannabis products now legal in most states.
I’ve worked in this industry for over 30 years, the last 25 at MHW Ltd., where we assist new brands entering the U.S. market, and I see a more optimistic future unfolding for the beverage alcohol industry—one fueled by an explosion of new products, consumer demand, increased market access, favorable tax rates, and improved federal and state regulatory efficiencies.
For professionals across the ecosystem of beverage alcohol, I believe we are entering a golden era of opportunity and profitability.
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Consumer Demand Is Growing, and Lines are Blurring
While we will continue to deal with shifts between off- and on-premise due to the COVID-19 pandemic, total consumption by volume is on the rise. In 2020, according to data from the Beverage Information Group, U.S. alcohol consumption increased by 45 million cases, with wine adding 3.5 million cases, spirits adding 15 million cases, and beer/malt-based beverages adding 25 million cases (hard seltzers in this category added 130 million cases in 2020 alone).
Consider also that we continue to add almost three million potential consumers each year (those turning 21) who are well-versed in digitally learning about products and the companies and personalities behind them.
It’s no secret that brand loyalty is not easy to maintain today, and new entrants with a good product, good package and credible story can grab customers quickly. Social media and digital marketing are critical tools used effectively by many new brands. Consumers are now very comfortable jumping across categories, often in the same day. Given the blurring of lines across spirits, wine, and beer categories, I see a category “tug of war” coming. Today’s hard seltzer consumers (200 million+ cases) can be reeled in by marketers of traditional spirits, cocktails, spirit-based ready-to-drinks (RTDs), and wines, as well as traditional beer brands. There’s little doubt that the folks at large brands like White Claw and Truly will do their best to make sure they control that tug of war. It will be an interesting marketing battle.
An Explosion of New Products—Domestic and Imported
As a leader in assisting new brands entering the U.S. market over the last 25 years, MHW Ltd. has become an excellent barometer of trends in new entrants and product types. At our company, we have seen an increase of 36 percent in new brand entrants through June 2021 versus the prior year.
A major factor behind this increase is the federal excise tax relief program (referred to as the Craft Beverage Modernization and Tax Reform Act) for both domestic and foreign qualifying producers passed permanently in 2020. This represents a huge permanent economic opportunity for new, emerging, and established brands. Designed to help create jobs and provide investment incentives for American distilleries, wineries, and breweries, the program also benefits importers of foreign producers.
“At our company, we have seen an increase of 36 percent in new brand entrants through June 2021 versus the prior year.”
Consider what this means for spirits brands: A qualifying producer making a product at 80 proof can save over $1 million in excise taxes for their collective brands at approximately 50,000 nine-liter cases. This represents a 70 percent reduction in taxes, allowing producers to invest in people, marketing, and other brand building activities.
Foreign producers from all over the world have never seen an incentive program like this before and are excited to be collaborating with their U.S. importers to invest in this marketplace. Imported spirit brands represent a significant portion of the U.S. market (approximately 42 percent) and tend to be in the rapidly growing premium segment. Now, more than ever, foreign producers from around the globe see the U.S. as the most important place to be.
Fortunately, the Alcohol and Tobacco Tax and Trade Bureau (TTB) has done a commendable job in the timely processing of both operating permits for businesses entering the industry and label approvals required before brands can enter the market. In recent years, many producers experienced long lead times, but they have been dramatically reduced, which is particularly impressive considering the record-setting demand for new business and brand submissions.
For example, U.S. craft distilleries increased by nearly 11 percent last year, closing in on 2,300 according to the American Craft Spirits Association. The number of licensed importers and wholesalers is also growing rapidly. On the supply side, a good indicator of new brand initiatives and activity can be seen in the number of alcoholic beverage formulas submitted and processed by the TTB. For 2020, formula submissions covering primarily spirits and malt products surpassed 24,000, up 70 percent from five years ago. Another metric, from industry research group bw166, indicates that the TTB has approved over 21,000 spirit labels over the last 12 months ending July 2021, up 20 percent for the year and up 33 percent within those last three months.
As it relates to imported spirit brands, roughly half of the brands we see entering the market are created primarily for the U.S., even if they are sold elsewhere. One of the major drivers of new spirit brands entering the country is the potential for a lucrative sales opportunity. Global drinks companies like Diageo, Constellation Brands, and Pernod Ricard pay hefty premiums to entrepreneurs who can build a brand—it’s one of the reasons why so many celebrities have entered this industry in the last few years. With their social media power, they can create demand and therefore build a brand almost overnight.
Our company has provided import and distribution services to many brands that have sold for remarkable multiples in the past, such as Casamigos and Tequila Avión, leading to an influx of new brands and industry players that want to replicate that success. Non-celebrity brands also create tremendous valuations. Just a couple of months ago, a brand we serviced, RumChata, was sold to E. & J. Gallo for an undisclosed sum which we can safely assume was a handsome price.
Greater Market Access and Regulatory Assistance
Spirits have never enjoyed the direct-to-consumer (DTC) sales option that consumers in many states have today with wine, particularly across state lines. Spirit brands that did not have any presence on an ecommerce platform were at a huge disadvantage when the pandemic hit. I was involved in a full-court press to get many of our client brands connected to one or more of the ecommerce platforms. Many of the state governors and their state liquor control agencies were extremely helpful in finding ways for in-state producers to enhance their distribution options.
One byproduct of the pandemic will be a movement to grant spirits limited DTC sales opportunities, consistent with the way wines are handled. Craft distillers and importers want the ability to ship bottles to customers within and outside their state.
Wines use a controlled system that tracks the shipments of products directly to consumers, ensures state taxes are collected, and mandates receipt signatures by only those aged 21 or above. Spirit players want that same opportunity, and it may be coming: Kentucky has already initiated a program where licensed distilleries throughout the U.S. and importers representing foreign brands can ship spirits directly to consumers on a limited basis. It will be interesting to see which other states initiate similar models.
Recognizing that the Biden administration is currently seeking input on whether there are existing competition and trade barriers at play in our industry, I see DTC programs for spirits and beer as complementary to the existing three-tier system that has proved so successful.
We have a great market with record-breaking consumption demand supported by a record-breaking supply infrastructure that is fighting to keep pace.
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John Beaudette is the founder and president of MHW, Ltd., based in Manhasset, NY, a company that has assisted in the distribution of thousands of new, emerging, and established beverage alcohol brands for 25 years. He also serves on the boards of both the Distilled Spirits Council of the United States (DISCUS) and the National Association of Beverage Importers (NABI).