When we raise our glasses or gift a bottle this holiday season, some of us might be seeking a non- or low-alcohol alternative – whether it be wine, beer or spirits. According to IWSR’s “No- and Low-Alcohol Strategic Study 2021” published in February 2021, demand in 2020 was challenging for alcohol beverages while the so-called No-Low segment gained market share. In fact, IWSR expects No-Low volume to grow 31% by 2024 in focus countries: Australia, Brazil, Canada, France, Germany, Japan, South Africa, Spain, the UK, and the US, together consuming 75% of the world’s No-Low volume.

The market has matured as the social normalisation of designated drivers, increased calorie consciousness, and the campaigns of “Dry July,” “Dry January” and “Sober September” have spearheaded growing demand for quality No-Low. The innovation of products and the broader focus on health and wellness, especially during the pandemic, has further enlarged the global market.

Notable in Australia, Endeavour Group, an owner of nationwide liquor retailers, reported a 100% increase in No-Low sales in 2020 with some suppliers challenged to keep up with demand, according to an online ABC News article. Growth may have been from a low base, but momentum is pervading. New Zealand Alcohol Beverage Council reported in January 2020 an overall reduction in alcohol consumption in Kiwis, with young adults (15-24 years) leading the biggest decline; the availability of 0% alcohol beer and mid-strength beer (1.151-2.5% alcohol by volume), and technological advances to dealcoholize wine have fostered this transition. Opened in mid-2021, Australia’s first bar specializing in non-alcoholic drinks, the Brunswick Aces, is within reach for our Melbourne principals and another testament to No-Low momentum.

Innovation in beers and ciders has long lead expansion in the No-Low market and it shows; these drinks comprise 92% of the alternative market, according to the IWSR 2021 report. However, on the back of consumers’ willingness to experiment and technology advancements, the No-Low spirits niche promises growth. Commanding only 0.6% of the total No-Low market, No-Low spirit volume sales were up 32.7% in 2020, the IWRS 2021 report said. Going forward, the IWRS expects No-Low spirits to increase volume sales around 14% CAGR from 2020 to 2024 with new product development in categories and flavours potentially championing growth.

Three Takeaways Working in the European Drinks Sector

Joe Dryer and I have learned insights from clients and work within the European drinks space; we also have exposure to the No-Low segment. We share a few takeaways here – some may seem obvious but merit mention:

1) Cap table and growth strategy

It is no surprise that No-Low producers attract ethical investors. Consider a No-Low spirits company with a sizeable investment from PE firm which does not invest in alcohol. When the No-Low spirits company looks to expand production, it finds a small, high-end spirits distiller. The technology behind the No-Low spirits production would allow the alcoholic brand and No-Low offering to be produced at the same site. However, because the No-Low company would be acquiring an alcohol producer (and even though the No-Low producer has plans to sell off the high-end brand), the non-alcoholic PE firm cannot support the transaction.

Jumpstarting expanded production via cross-category M&A could be a non-starter for some investor mandates. Building new capacity has execution risks, which may require sponsors to have expertise, patience, or both.

2) US market regulations in flux

The Three-Tier System in the US can frustrate M&A plans in the alcoholic drinks space, but note changes implemented during the pandemic have loosened regulations in certain States. The Three-Tier System broadly dictates that importers/ domestic producers are required to sell to distributors, and distributors sell to retailers. Regulations require all three parts have separate ownership (partial and wholly); although, exceptions exist (e.g., small brewpubs). Consider a PE firm that tries to purchase a stake in a known-brand spirits manufacturer; however, it already owns a US hotel franchise. Under the strict Three-Tier System, the transaction would fail to pass regulations after considerable initial work.

As IWSR’s article, “New technology drives e-commerce innovation in the US,” reported, laws governing alcohol delivery were relaxed in certain States during the pandemic when consumers were turning to online shopping. US regulations can be tricky and dynamic.

3) Diversified portfolios preferred

M&A anecdotal evidence showed us SMEs with spirits portfolios tend to focus on building a diversified portfolio. This approach de-risks seasonal fads, caters to consumer experimentation and can leverage distribution networks. In a similar vein, we note recent efforts to diversify by the likes of Asahi Beverages (purchased Allpress Expresso, a supplier of fresh roasted coffee beans, mid-2021), E&J Gallo Winery (bought Liqs, a producer of ready-to-drink cocktails, mid-2021), and Heineken (to acquire Distell, a South African producer of ciders, flavoured alcoholic beverages, wines and spirits).

According to Adrian Clarke, founder of Delarki Limited, an investor in alcoholic and non-alcoholic producers:

“The non/lo alcoholic space remains one of the fastest growing segments in spirits, yet the race is still wide open to establish a category leader. This means lots of opportunity [for] PE.”

For strategic investors, investments into non-core No-Low beverages can offer insight into consumer trends and a chance to premiumise portfolios; they can also provide investment dollars for producers with differentiated products and routes to market.

Joe Dryer
Principal

Joseph (“Joe”) Dryer is a Principal at Eaton Square. He is based in London, United Kingdom and has worked with Harestock Capital, London. He previously worked at RiverRock Securities, London where he headed up the Advisory & Capital Markets business. Mr. Dryer joined RiverRock in October 2013 to launch the business.

In most recent and smaller roles, he led a team of bankers and analysts to advise family run businesses looking to optimize growth, manage risks and create terminal value. His focus is on Corporate Finance, Private Equity, Business Strategy, and Capital Markets.

joe.dryer@eatonsq.com
Ph:+44 7968 850192

Consumer demand shifting to premium beverages and cocktails

Premiumization has had a strong impact on alcohol and related beverages, where the term originated in the 1990s. In the United States, sales of premium whiskies (priced $24 or more) grew 5x faster than the total whisky segment in 2017 as “changes in drinking habits and preferences benefited many dark spirit brands, especially super-premium brands,” noted Mintel, a global market intelligence firm. In Australia, Roy Morgan Research echoed that “consumer trends have shifted from mainstream whisky brands to more premium brands, particularly in the growing 25-34 age segment.” In China, the leading premium spirits producer, Keichow Moutai, has become the world’s most valuable spirits company (its baijiu was proudly served to Nixon and Kissinger when they visited China).

The demand for premium spirits is also driving the growth for premium cocktails and their mixers. Premium mixers are already a USD 2.5bn market, though still only 20% of the global mixer market. The world’s largest premium mixer brand is Fever Tree which has grown to USD 310 million in sales with a market cap approaching USD 4 billion earlier this year.  Previously niche products are outpacing traditional brands and getting attention.

Large beverage and spirits companies using M&A to capture innovation

Innovation in the spirits and beverage industry is increasingly driven by small, dynamic companies that are agile at identifying and filling premium market niches. Their success has caught the attention of the global leaders, who have stepped up their M&A activities. Constellation Brands has had a “consistent focus on premiumization” and pursued that strategy through active M&A, such as the USD 160 million acquisition of High West Distillery. Pernod Ricard announced in April 2019 an agreement to acquire Malfy, a super-premium Italian gin brand launched in 2016, as part of an effort to strengthen its fast-growing portfolio of premium craft spirits under its “transform and accelerate” strategic plan. Many other examples exist.

Innovative companies tapping international markets for capital and growth

While M&A may be an attractive exit strategy, founders of innovative premium beverage and spirits companies are focused on developing their brands, securing their home market presence and expanding globally. More companies are tapping international sources for growth capital and expanded global reach. With the right partners and capital, an international plan becomes more straight forward: develop the brand, penetrate key accounts, generate buzz, and grow.

Eaton Square is a believer in the “premiumization” trend and is assisting companies to find the right equity partners to join the journey. We would be happy to discuss if you are interested to invest in the premium drinks market and ride the wave of this broad shift in consumer preferences.

For more information, please contact:

Matthew Pritchard
Principal                                                                        
E: Matthew.Pritchard@eatonsq.com
P: +852 3978 5122

Eaton Square is a cross-border M&A and capital services firm focused on services, technology and growth sectors in the United States, Canada, Australia, New Zealand, Mainland China and Hong Kong, Singapore, the United Kingdom and Switzerland.