Beyond Beer Taking Big Swigs from Big Beer's Bottle

Overview:

• We estimate the "beyond beer" category (i.e., flavored alcohol in a can) is US$22 billion in sales and 20% the size of beer, up from 6% a decade ago.
• Still, it represents only 6% of the sales of the big three U.S. brewers, which have struggled with beyond beer's high degree of market fragmentation, consumer churn and failure rate.
• Given beyond beer's rising importance to consumers, we think the brewers will need to increase their involvement going forward.
• We forecast that beyond beer will reach 32% of beer sales by 2030, assuming a 7% CAGR. This represents a 40 bp annual headwind to beer sales.

The TD Cowen Insight

The beyond beer category has grown to US$22 billion in sales over the past decade and has significantly cannibalized beer sales. The big U.S. brewers have struggled to penetrate the space due to its high degree of fragmentation and high churn. However, we think they need to figure out how to succeed here to offset the structural pressures on their core beer businesses.

Younger Generations Driving Growth of Beyond Beer Category

We estimate that the beyond beer category has grown to US$22 billion in sales, which makes it 20% the size of beer compared to only 6% a decade ago. Our research indicates that it has contributed to structural declines in conventional beer by catering to younger consumers seeking sweeter, more adventurous flavor combinations as they enter legal drinking age. This younger generation has grown up with more flavor variety across food and beverages than past generations, so it makes sense to assume that they will seek great-tasting flavor in alcohol drinks as well.

While beyond beer may look like a compelling opportunity for expansion for the big U.S. brewers, they have had a difficult time capitalizing on it in a material way. The category is highly fragmented with low barriers to entry, high consumer churn and high failure rates. Creating an authentic new-to-world brand in a grassroots manner requires a lot of patience, which the big public companies don't typically have. In fact, beyond beer represents only 6% of the sales of the big three U.S. brewers today. Given its rising importance to consumers, we think the brewers will need to increase their involvement going forward.

Success will require a more patient approach to innovation and a careful assessment of which acquisition targets will stand the test of time.

Our Survey Suggests Beyond Beers a Threat to Big Brewers

We surveyed a group of beer and beyond beer executives and used our proprietary and government survey data from 150,000+ respondents to dig deeper into the dynamics of the beyond beer category. The findings support our view that this category represents a significant threat to the big brewers' business models.

Financial and Industry Model Implications

Based on our consumer surveys, we estimate that beyond beer will grow at a 7% rate over the next six years and reach 32% of beer sales by 2030. We estimate that beyond beer's growth will pose a 0.4% annual headwind to consumer spending on beer. This assumes that 50% of beyond beer's volume comes at the expense of beer drinking occasions, and that the higher price points cannibalize the disposable income that consumers would have spent on beer.

What to Watch

We would not be surprised to see increased consolidation in this category in the year ahead. The race to the shelf has led to an influx of start-up brands, many of which are low quality and a confusing shopping experience for consumers. We expect retailers to discontinue underperforming brands and larger alcohol companies to acquire the few that have gained traction. We expect spirits-based RTDs (ready-to-drink) to fare better than their malt-based counterparts because they are growing faster, are more premium and offer higher gross profit per case versus traditional beer.