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In this episode, Matt Bruhn, Chief Executive of Craft Standard and Alex Smith, Third Bridge’s Global Sector Lead for Consumer, discuss how the US alcoholic beverages market being reinvented.

Episode Transcript

Catherine (00:06): Welcome to the Signal, a podcast presented to you by Third Bridge, the world’s leading investment research provider exploring how some of the world’s most investible industries are facing upheaval. My name is Catherine Ford and I’m a journalist with a 20-year track record of reporting on a wide range of financial topics such as capital markets, developments and m and a. In this episode of the Signal, we are going to explore how the rise of the conscious consumer is disrupting the US alcohol industry. Joining me today are Alex Smith, third Bridge’s global team leader for consumer, and Matt Brun, chief executive across standard, a US-based draft cocktail solution. Hello to both of you. Thank you so much for joining me for what I’m sure is gonna be a really fun conversation. But before we get stuck in, can I ask you to introduce yourselves to the audience just in a few words? Alex, maybe you start off.

Alex (01:02): Yep, sure. My name’s Alex Smith. I’m the global lead for consumer at Third Bridge. Prior to third Bridge, I spent over 15 years as a sell-side analyst for a number of investment banks in London. My focus was very much on global consumer staples, companies across package food, home, personal care, and the beer and spirits industry.

Catherine (01:25): Super. Thank you so much. And also we’ve got Matt joining us today. Matt, tell our listeners a bit about yourself.

Matt (01:31): Yeah, thanks. Well, I’ve been in the beverage industry for about 16 years. Collectively, I spent 12 years with the global premium spirits business around the world, Australia, Asia. And then finally in the US after the stint at Diageo, I moved into the beer sector where I was the general manager and president of the perhaps brewing company, which is the largest independently owned brewery in America.

Catherine (01:59): Fantastic. Thank you very much gentlemen for taking the time to talk to me this afternoon. So over the next 45 minutes, I’d like to get a real deep dive into the US alcohol beverages industry and get a sense for what we are seeing there. And I’d like to kick off the conversation with a bit of an overview setting the scene of what the space actually looks like. So Alex, maybe you can come to us first of all and talk a little bit about why the US is such a focus for us on this podcast. And then also give me some facts and figures on who the key players are in the space.

Alex (02:32): Sure. Maybe to put the US into context, the global alcohol market it’s hard to cut a number on this, but I hear figures of up to around a trillion dollars. But if we take Chinese white spirits outta the equation, then the US market is by far the largest market. And I hear numbers around 220 billion. If we focus in a little bit more on spirits about somewhere in the high thirties percentage-wise of that market is now spirits. But importantly for spirits in the US it is a very profitable spirits market. It is the most profitable spirits market at scale. It’s also very premium market. If you compare that profitability and premium positioning compared to Europe for example, it’s also a very dynamic market. It tends to set a lot of the consumer behavioural trends that then eventually find themselves travelling around the world. Just to put a little bit of context around that, to illustrate how important the US market is, at least with spirits, if you look at Diagio, which is the largest western-style spirits company in the world it is a global business, but around 40% of its sales come from the US and around just under half of its profits come from the US.

Catherine (03:51): Matt, can you talk to us about some of the key players in this space?

Matt (03:55): Yeah, so from the beer psi, you’ve got Anheuser-Busch, Molson cause the Rising Star Constellation. Then you have the kind of newer entrance, which is Boston with the advent of truly Mike’s off the back of Whitelaw. And then you’ve got recent developments of monster energy taking and acquisition of Cany, the craft group which is entering into the market. Outside that you’ve got Gallo emerging, it’s an interesting one, it’s a wine and spirit’s got producer, but they’ve now got high noon, which is growing at a rapid rate. So that’s the beer side you’ve got below that perhaps Ling, you’ve got a litany of kind of lower side smaller beer players. You’ve got Heineken in there as well. Diageo factors on the beer side there a little bit with Guinness. And then you’ve got thousands of craft breweries below that. On the spirit side, you’ve got all the multinationals operating in the US, Diageo, Pero Kaari, William Grants, all operating promo Jim Beam, all operating standalone businesses within the US.

Catherine (05:05): Okay. When Alex and I had a conversation about this podcast earlier on in the week, we spoke about, well, I quizzed him about what does the average consumer in the space look like? And Alex just said, well, anyone has a drinking age really. So rather talk to me about the average consumer. Talk to me about who are the influential consumers in the space and what do their consumption patterns look like At the moment, Alex,

Alex (05:27): It’s very much the millennial cohort that are driving the trends that we’re probably gonna talk a little bit more about. But what you find is younger consumers are tending to reject the brands that their parents or even their grandparents would drink. They tend to be a little bit more experimental a little bit more promiscuous less brand loyal. But a common theme you will have heard probably is younger consumers tend to drink less but they are very, very much prepared to spend more on that drink. Elder generations, the boomers they’re of course still drinking, but the categories and brands that they’re drinking have changed too over the last 10 years or so. Very different to what we saw in Mad Men for example, if anyone’s seen that particular program. But those boomer habits changing very much if anything on the back of the influence of the millennial generation.

Catherine (06:20): Great, thank you very much. Matt, you want to add something to that? Thinking about the influential consumer in the space?

Matt (06:26): Yeah, I don’t wanna disagree with Alex cuz maybe that’s not fair. But I think we’re starting to see the millennial influence start to peter out. If you look at white chlo truly that wasn’t driven by millennials, that was driven by certainly the younger end of the market and now you’re seeing tequila, mescal, these new spirit brands also be driven by the inner city urban dwelling cocktail curious group. So we’re starting to see millennials kind of still impact the market cause they are the largest cohort, but those subsequent generations are starting to lean in.

Catherine (07:00): Okay, great. Thank you very much. Can you guys talk to me a little about how the pandemic has impacted the space, how consumption patterns have changed, what people are consuming has changed? Alex, maybe you can kick us off there.

Alex (07:13): Well, when consumers couldn’t get to bars rather than reverting to drinking at home like they used to drink at home, they really tried to bring the bar to their home. So they started buying more expensive spirits, speaking from a spirits perspective, making more complex spirits, cocktails at home. And of course, drinking at home is much cheaper. So if you’re used to going out and spending 15, $16 in a cocktail in a bar, you can probably treat yourself a little bit more at home now in the pandemic. And that led to consumers trying new things. So a cons consumer might have gone to a bar in the past and seen a $50 cocktail shot the thought, I’m not paying that. But when in this situation at lockdown, they might think, actually I’m gonna go and try that drink cuz I can get it for $125 in retail and drink 20 shots of that at home. So really what the pandemic brought was a significant amount of premiumization to drinking at home.

Catherine (08:18): And Matt, have you seen that as well? On the beer side of things,

Matt (08:22): What the pandemic did was obviously as Alex said, forced people to home consumption. We saw that push craft beer kind of boutique craft beer pretty heavily through the pandemic as people premiumize as they got the opportunity to drink at a lower price at home. So there’s a similar correlation there, but post-pandemic, as the floodgates opened and on-premise reemerged people’s behaviours flipped back very quickly. It was quite interesting to watch in the belief that some behaviors would stick pretty fundamentally. A lot of those were pretty elastic and went back pretty quickly. Craft beer went very poorly, started to decline. Flavoured mal beverage went back to decline after it kind of grew dramatically through. So we’re starting to see the return to very what I would say long cultural trends. And I think the long cultural trends always eventually emerge to take over those fast cultural trends. So on the beer side we’re starting to see going back very quickly to what was happening pre-pandemic.

Catherine (09:28): Thank you very much Alex. Maybe from a spirit’s point of view, you talked about how during the pandemic people were treating themselves to higher quality of product at home than they would’ve maybe consumed in a bar. Can you give us a little bit more colour on that one?

Alex (09:45): Well I think premiumization is across alcohol has been the driver of value growth across all categories for many, many years. And just to give an illustration, if you look at spirits in retail, any bottle above $30 is growing pretty quickly. On the flip side, a lower price bottle, a value bottle at around 15 is that that category is probably in actual volume decline. And I guess if you look at spirits, every category is growing differently. But what is unanimous is the premium end of that category is growing more quickly than the value end. And to bring an analogy into it, if you look at the rum category, rum has been pretty stagnant. There’s a big category in the US pretty stagnant for many, many years because it’s over-indexed to mainstream. I’m thinking of brands like Captain Morgan, like Bicardi but what you’ve seen of late much more premium entrance like Zappa from Diageo. And this is really now beginning to bring a little bit of life back to the ROM category.

Catherine (10:43): Talking about those premium brands. How much of an impact is the cost of living crisis having on those kind of products? Because I would imagine if people are having to tighten their belts fundamentally they are not going to be turning to those lower-end and cheaper products rather than the high-end ones.

Matt (11:01): We saw this a little in the credit crunch crisis in oh eight. What people tended to do is defer big purchases through high inflationary periods. So the highest inflation in the US is cars travel. So you don’t buy the new car, you don’t upgrade the house, you don’t go on that trip. But if you’re at the local store and it’s four or five bucks between something that’s okay and something that’s nice but you deferred that big purchase, then yeah, okay, let’s do that. I think we gotta go micro when we think about the macroeconomic headwinds and people tend to put off big things and then treat themselves in the little things. Coca-Cola branded Coke tends to do better during a downturn when people go, well I won’t buy generic, I’ll trade up a little bit. It’s only an extra dollar. So we’ve gotta be a little careful not to assume that these macro headwinds will end up impacting alcohol because the inverse was true during the credit crunch for sure.

Catherine (12:04): Thanks Matt. Can you also talk to us, Matt, about the impact of premium products in the beer category?

Matt (12:10): Yeah, so having done a very long stint in spirits and then a short-ish stint in beer, it kind of never fails to kind of amuse me about how many ways the spirits companies have to demonstrate value, age, providence, model, shape distillation method, maturation method, location, the ability for you to show value in spirits is infinite, right? Talk about Zeka for a minute. Solar aged and cognac barrels above the sky in Guatemala. Okay, I’m paying 60 a hundred bucks for that. Are you kidding me? 12-year-old scotch laid down 12 years ago in the Highland or from a single cast, particularly handcrafted by one individual, the romantic of spirits is incredible and that’s why it captures people’s attention. Beer, beer’s, beer and the industry got enamoured by craft beer. But IPA’s awful. It suits one single strain of consumer behaviour and it’s not particularly romantic.

(13:24): There’s only so many ways you confirm it yeast and stick it in a can and pretend it’s gonna be like better. So the beer industry has very little mechanism by which to premiumize people. Now people are premiumizing beer, they’re going out of sub-premium Bud Light and moving toul. But what’s Michel Ultra trading on one primary benefit, 95 calories. It’s a reductive premiumization. And so the beer industry, whilst it is premiumizing, doesn’t have the same infinite possibilities of coercing and convincing consumers. And that’s why you see this litany of innovation in beer, which is really completely confusing. Like Bud Light comes out with Bud Light next a de-positioning product of their primary product. It’s basically saying what you currently drink is for yesterday and this one’s for tomorrow. And the only benefit was a reduction in Cal and carbs. So yeah, there’s some willingness for people to trade up but to what you know.

Catherine (14:29): And yet we are seeing this move away from beer at the moment, aren’t we? Yeah. And is that because there is no romantic exciting story? I love the analogy that you drew there about the handcrafted ca that has been made by one single person from the same family over the last 50 years. I mean that is such a beautiful story to keep in your mind as you’re having your glass of whiskey or whatever it is with beer. What is keeping people consuming beer, but why are they also moving away, Matt?

Matt (14:59): There’s a lot of stuff wrapped up in here. It started at the cultural level because long culture is important here. Individualism is shaping the world versus group behaviour. If you go back to the nineties, everyone drank or connected with everyone else and there was a group acceptance. You drank what your brother drank, what your old man drank. There was a real grandfathering in of behaviors, drinking behaviours. It was a rite of passage behind having your first beer in my country at 18 in this country, 21 in the uk, I think it’s 18 as well, right? There was a certain guaranteed beer behaviour being manifest, generational multigenerational. Well that got blown up right? Individualism is now on the rise and then you’ve got this explosion of incredibly cool spirits and cocktails and ready-to-drink cans. And so now I just get experimentation and once people experiment outside of the beer category, what they unfortunately find is beer isn’t that tasty, especially for younger people. If you are 18 or 19 in Australia or UK or 21 here, just straight up and down, the taste of a cocktail wins nine outta 10 times over a beer. So beer has this now kind of vexing issue of not guaranteed next-generational consumption and then fighting to try and find liquids that fight against spirit’s industry. And that’s why to go to the kind Segway why beer companies are trying to be total egg, total alcohol, beverage businesses and spirits companies aren’t. Cuz one’s got a tailwind, one’s got a headwind.

Catherine (16:43): I fear that we are upsetting lots of beer brewers with our podcasts at the moment, but well, we’ll take that. Well

Matt (16:49): I mean that they know it though, right? I worked in beer for almost four years in this country and the beer country companies sit and they know it and they sit at their conferences and this is not new news to them. They all know it inside out and it’s, but just knowing it is not always the answer. Sometimes you gotta know it and do something and that’s really hard. Right, 

Catherine (17:11) : I’d like to move on for a second now to spend some time talking about another trend that we’re seeing in the industry low and no alcohol offerings that we are seeing. And I think we’re seeing them in a variety of categories throughout alcoholic beverages. Matt, do you want to talk to us about some of the trends that you’re seeing there and where they’re coming from and what’s fueling that movement?

Matt (17:34) : Yeah, I mean moderation or the idea of moderation is massively on the rise. For many of us a little older. Our behaviours as an early drinking age person were held tightly within a group of small friends. And for this generation, your behaviours and actions at 21 are projected to the world via social media. So there are consequences to our behaviours that we’ve never seen. And you can just ask a fewer celebrities in America around the consequences of their behaviour on social media. So this generation, this next generation, especially this completely digitally native generation, understand the consequences for their behaviours. So moderation is on the rise for a lot of social reasons, but also a lot of health reasons. They’re also more in touch with the data and the understanding information that helps ’em understand the role of alcohol in their life and in their health.

(18:33): So moderation is certainly on the rise significantly. And what that’s done is created opportunities for better quality non a beer. You saw a 50 million transaction yesterday with Dr. Kerick and athletic brewing. Athletic brewing is at the forefront of reinventing what non a beer looked like. Previously. A beer was derivative or dilutive of an existing franchise. So it was Bud Light non A, which was the worst version of Bud Light. What athletic did was make non a beer, it’s what it is. So it’s not less than something else, it is what it is in itself. Great. So you’re seeing the rise of beer for sure satisfying people who enjoy the taste of beer slightly, usually slightly older who drunken for some years and now getting a really quality non alk beer experience. So we’re seeing that we’re also seeing broadly massive opportunities for consumers to choose to moderate their alcohol consumption.

(19:38): A lot more non alk sodas with real ingredients coming through that they can use instead of alcohol. And we’re also seeing now with the increased acceptance and legalization of cannabinoids C B D particularly cuz of the farm bill, we’re seeing the rise of CBD beverages. We’re obviously seeing the rise of THC beverages in legalized states. So you are seeing the ability for consumers again in this individual estate to play around with how they combat and deal with stress without use of alcohol. So there’s so many interconnecting trends here that help people reduce their consumption of alcohol.

Catherine (20:23): Okay, thank you very much there Matt. Alex, did you want to add something from a spirit’s perspective when it comes to low or no alcohol offerings?

Alex (20:31): Not only that, the spirits is way behind the curve in terms of adoption. I’m not sure whether they just couldn’t find the right replication of a particular product or whether those consumer demand on the spirits occasion but we’re certainly getting there. Now you’ve got a scale brand and seed lip owned by Diageo. I think the interesting thing is it the non-spirits version is probably cannibalizing on a traditional spirits occasion. I don’t think you’re converting non-alcohol drinkers into an alcohol occasions. But the important thing I think from a corporate perspective is you price your non-alcoholic version very similar to the alcoholic version. So c lip will be priced as a premium gin but don’t the supplier, the manufacturer doesn’t have to pay tax on that. So spirit companies, I don’t think my consumers moving away from a spirit’s drink to a non-alcoholic spirit drink as long as it’s, it’s theirs.

Matt (21:34): To undermine your point, Alex, on the site, the size of the marketplace, non-alcoholic beer is an 18 billion category. On a global level, wine is 6 billion and spirits is 300 million. So as a percentage of business spirits is way behind in terms of its consumption. It will be interesting to see what occasions are being moderated. I’m seeing wine particularly be hit in the US from terms of category decline. I’m curious if the wine occasion, especially for millennial women is being retracted post covid and this non-a potentially non-A beverages, spirits, et cetera, start to enter into that wine-based occasion as people look to moderate their wine consumption.

Erykah (22:25): Hi, my name is Erica Gomo and I’m ant the Bridge. If you’d like to know more about the subjects discussed today, our forum team have over 30,000 company and sector transcripts available on demand. They offer extensive insight into the US tequila market for Nora Carr and a development of the US alcohol e-commerce industry. Each transcript features a one hour interview between an unbiased analyst like me in an industry executive who can find this And now back to the podcast.

Catherine (22:59): Now Alex, I’d like to come and talk to you a little about a trend that we saw pre-pandemic but has definitely picked up in speed post-pandemic is the ready-to-drink cocktails. What can you tell us about that market development?

Alex (23:12): I think you need to look at the ready-to-drink or RTD category holistically because the explosion we’ve seen in the last three years is not been so much driven by ready-to-drink spirit-based cocktails, but by malt-based beverages, which is closer to the beer category. Hard seltzers, in other words Matt can probably speak more authoritatively about hard sells, but they are falling by the wayside or at least they’ve, they peed and ready to drink spirits cocktails are now beginning to mop up some of that category. I mean if you use Australia as a benchmark, I think if I’m not mistaken, Matt, that’s got a high penetration of do cocktails. Maybe that would be illustrative of where the US could get to. But consumers like it. It’s easy consumption, you don’t have to mix things, it’s there, grab and go to a party. Greater portability. The issue in the US is again, this comes down to a tax issue. The supplier has to pay a higher tax on ready-to-drink cocktails, whereas malt-based beverages or hard sell is have an exemption. So that needs to somehow be unlocked for ready to drink cocktails to really explode. If they can get equivalency on tax, then I would expect, I guess our experts that we talked to would expect the ready-to-drink cocktail, spirit-based cocktail occasion or format to take off.

Catherine (24:33): Mark, would you like to add something to

Matt (24:35): That? So yeah, I have plenty of experience from Australia. 20 years ago when the government did equalize tax it changed the bill around 2000 and spirits-based RTDs tax was equal, was equalized or close to equalized to beer and spirits-based RTDs absolutely exploded. So now if we talk about the US, the US regulatory environment, which is both taxation but also three-tier system has held back Spirits RTDs in America for 20 years. Access to marketplace is weaker. I can’t put it in every store, in every state. And the system of delivery here is split. So obviously a manufacturer can’t deliver direct to store, they have to go through the third, that middle tier. That middle tier was constructed and bifurcated very much post-prohibition. You have the beer distributor who delivers highly frequent deliveries, primarily focused on cold box beer. That is a system. There are a thousand distributors in America that just do beer and they do it by county, not by state, not by <inaudible>, by county.

(25:46): And those contracts and positions have been in place since 1936. The spirits distributors, they do infrequent drops, they don’t access the cold box and they put it on the ambient shelf. So here in layers, the problem on how to get your spirit’s RTD to market, you need it in the fridge because principally Spirits RTD sell predominantly cold. So how do you get it to market? You put it Crock RTD through a spirits distributor will be impacted by, in it’s inability for their distributor access to cold box. Because Anhe Abu and Molson course control the cold box. But then if you put it in the beer distributor, they don’t understand spirits and they really don’t want spirits RTDs to really impact the beer category. So they held it back, they’ve held it back for 20 years but then came along thing called whitelaw. And truly that’s completely changed the game because now you have a product that’s defined as beer because it’s, it’s brewed from corn, but it’s meant to mimic a vodka and soda, which is what consumers want.

(26:54): But it goes through the beer network and then suddenly it unlocks consumers to what they’ve been missing for the last 20 years. And you get a 200 million case category emerge within three years. And now we’ve got Pandora boxed open because now consumers know what they’ve been missing. Now high noon is 20, 30 million cases, it’s spirits based. So now the beer companies, the beer industry, beer distributors are like, wait a minute, why were we holding this back? We can make a lot more money cuz these are a lot more expensive. Our margin enhancement is huge. We’re talking about distributors making two x margins on Spirits RTDs versus beer RTDs.

Catherine (27:37): But Matt, the way that you’re describing the industry, it sounds like an industry that is really ripe for disruption for someone else to come in with no association either direction, not into spirits, just come into it as an entirely new product offering. Why hasn’t that happened so far then?

Matt (27:55): That seems like a very large question. I mean, Whitelaw did exist. If you go back five years ago, it didn’t exist, right? We’re talking about Lon, truly two brands that did not exist, actually a product category that did not exist five or six years ago become a two or 300 million case category in. So they did completely disrupt the industry. Now we’re gonna see lots of additional High Noon is disrupting, it’s high Noon is a vodka-based basically Whitelaw. You’re gonna see Pac Chico, tequila launch, it’s already been announced. So you’re gonna start to see big brands with spirits in them continue to disrupt that 3 billion cases of beer that sat there under attack. You don’t have to be stealing much beer to get a big category here. So I don’t know if you’re gonna see you’re, lots of new brands attempt to crack it. Mountain Dew just launched Mountain Dew Hard here from Pepsi. That’s an insane concept. You’ve seen Coca-Cola launch their brands top of Chico and their lemonade brand. You’re gonna see Pepsi add more brands to the market. You’ve seen Monster make an acquisition of a beer company. They’re gonna be launching Monster. I mean they’re launched Monster Hard as well or their version of it. So you’re gonna see some pretty wild stuff come from the industry in the next four or five years as the floodgates have opened to allow new format cans into the marketplace.

Catherine (29:39): Okay, we’re gonna spend some time talking about diversification to gain market share in a minute. But e-commerce has exploded over the last 10 years and over the course of the pandemic, the importance of having an e-commerce offering has only grown even more. Talk to me about what we’ve seen in the alcohol space and why it has been comparatively slow to embrace.

Matt (30:07): Yeah, direct-to-consumer alcohol is incredibly problematic to start with age verification and delivery. I mean, it’s impossible right now to get drivers to make deliveries because every other category is exploding with exploded with deliveries. You’ve got Uber, you’ve got everything delivering to your house. It’s just how can you get a workforce. I mean America runs it basically full unemployment and there are too many jobs and not enough people. So just pure delivery systems are hard to come by. And then if you add age verification at the endpoint, you add costs through the roof. So economically, does it really make sense for anyone to do it? So that’s, that’s a big barrier. And second, traditionally speaking beer has been a grab to grab, grab, grab to consume. I’m not waiting around. I’m not pre-ordering my beer a week early. I’m going to the shops. I’m getting it cold and I’m taking it to a party. So beer is really not a planned purchase. It’s still massively part of the trip or the destination for a shopper. So Walmart doesn’t really want anyone not coming to the store. It’s preferential. They get them in cause they’re gonna sell them more. So they’re not particularly interested in driving beer, beer direct to consumer.

Catherine (31:20): Thank you very much. Now another trend that I picked up as we were doing sort of research for this was celebrity-owned brands and endorsements. There’s a number of celebrities out there that have their own spirit brand, either that they’ve developed themselves or where they’ve associated themselves with a particular existing brand. Alex, talk to us about what we are seeing there and if we’re gonna see more of that.

Alex (31:45): Yeah, for sure. As you alluded to, I think celebs of some time now have been either investing behind brands, investing their own money behind brands or starting up brands whether that’s Sean Coombs with, whether that’s Kendall J with her 8 1 8 eights. I can only assume it’s a way fun way for them to spend their cash and make more cash. But I think the way to think about it is, even before the pandemic brand building and spirits was already moving away from investment in the brand’s investment at big events, it was migrating to digital and online and online influencers. And if you have a celebrity digital influencer that’s really not probably going to hurt you. Tequila has been prolific in terms of celebrity support. And I guess it’s a bit chicken and egg is the way I think about it. And celebrities want to be associated with a hot spirits category but it’s also celebrities that have contributed to the growth of, and the boom of the tequila segment within spirits.

(32:55): And again, this comes to tequila being a young cat, being very online, very digital. And that’s really what you’ve seen in terms of tequila. I think what’s interesting though is a lot of these celebrities supported brands, I assume they’re going to continue to pop up, but they’re increasingly landing in the laps or being acquired by the big spirits companies. And if you go back, I think it was probably about four or five years ago people fell off their chair when the AIO paid a billion dollars to George Clooney and his pals for Casamigos. But five years on, they’ve done a lot with that brand and I think very few people will dispute that they’ve probably made a pretty good return on that investment.

Catherine (33:35): But how good are these products? I mean, how much is it actually? It is a great product and a celebrity has added their name to it. And how much is it? It’s Snow Kay product that’s doing well because it’s associated with a celebrity.

Matt (33:49): So the cost of launching a brand with advertising is too high. So startups or new brands to market launch our aviation gin, spend years knocking on doors, walking through bars to get very little volume. And then along comes Ryan Reynolds with 30 million, 50 million Instagram fans, makes a few funny ads and suddenly it’s hip and cool and he gets bought for hundreds of millions. He just breaks the algorithm because what you would’ve cost you 50 million in ad spend he can do in a heartbeat because he’s already got the audience. So these guys are just breaking the ad revenue, the ad spend model, and they just explode a brand.

Catherine (34:37): So it’s more about the celebrity giving a great product an extra leg up.

Matt (34:42): Yeah, and that’s what the Rock did with Terra. Terra is a pretty good tequila for its price point. It’s a good tequila. I mean is it a boutique luxury tequila? No. But is it good for the money? Sure. And does the Rock have a hundred million fans through all these socials? Yeah. So immediately you go from no one knows who you are to like 20, 30, 40 million people know who you are. So if you can combine authentically good products with a celebrity that has influence, you have a really strong chance of success, which you also get which people under underestimate. You get the attention of distributors because when the Rock does an energy drink or the Rock does, Terra Southern r and d c Johnson Brothers, any of the major spirit guys go, I wanna do that, I want that. And suddenly you are not on 2000 stores, you’re in 20, 30, 40,000 stores.

Catherine (35:39): Thank you very much. Now Alex, I’d like to wrap off this conversation about industry trends with a look at sort of in the future what is really going to drive growth in the spirits segment. And then Matt, I’ll come to you and talk to you about what is gonna drive growth in the beer segment. Although I think we established earlier on that there isn’t gonna be that much growth in the beer segment. But Alex let’s start with you first.

Alex (36:01): Well, I mean certainly at the moment it’s all about agave spirit. So very much tequila to a certain extent. Me mezcal, that’s a little bit smaller right now. Just to put things into a little bit of context, I think tequila is around 15% of the spirits market today by value. But over the last couple of years it’s driven about a third of the growth. I mean it’s just seen as being a little bit cooler, trendy. Has that sort of youthful exuberance you, we’ve just discussed the role of celebrities in the category. But I think if you think about it, it’s anything that you can do with vodka, which is a big category in the US you can replicate with tequila, but you’re just getting a much more flavoursome, a much more complex cocktail or neat drink experience. And that’s probably looking at just the wide scale. If you think about the darker the age and yay tequilas, they’re probably beginning to encroach on a very large dark spirits pool and has the ability to take market share from there, from things like blended scotch, for example.

Catherine (37:13): Thank you very much, Matt. Talk to us about beer.

Matt (37:16): Yeah, I think it’s pretty clear that the beer, traditional beer category is under threat, under duress from a very powerful spirits category. The chances of total beer growth are very low. I mean, will it eek out moderate growth based on population expansion perhaps? Will it e out some premiumization? Absolutely. Through Mexican imports, Milo Baltar and some pathways to premiumization for sure. So it can eek out some revenue growth, but it’s unlikely to out significant volume growth. The craft renaissance is over so it won’t drive any significant value creation. And the question is for the beer industry collectively, can it reignite a fire amongst Gen Zs? What brands, actions, and behaviours can reinvent beer and put it back into the 21 to 24-year-old cohort? Cause right now it’s lost that. It’s lost that generation. And as that generation ages in, it’s gonna further exacerbate its performance.

(38:25): The response from the beer industry is to diversify. Each of them have now a stated position of total Bev Mosson. Cause reinvented itself as not a brewing company but a beverage company. Anheuser-Busch has the beyond beer segment, which has been aggressively acquiring and driving into spirits, cut water included to the beer industry. I think with its scale and its money will diversify itself to see growth in the spirit sector and everyone will exit wine because of it’s, but yeah, that’s how I think it goes, Alex. You make an absolute bang-on-point as it relates to tequila and vodka. Vodka is the most vulnerable category in the US and tequila is the new vodka. And I don’t think if we look too far into the future, maybe 10, 15 years, tequila will be the category of spirits in the US because it is the on-trend flavour.

(39:19): If vodka is the reductive flavour, i e no flavour, tequila is the flavour. So I think we’re gonna see that. And then off the back of that, you will definitely see mescal rights because mescal is the early adopters, innovators version of tequila. I mean we’re seeing it undercurrents right now but I think we’ve also gotta keep our eye on the rum category because this industry never stops the search by bartenders to be ahead of everyone else. There’s 230,000 bars in America, there’s maybe 10,000 of them that set trends. Every one of those bartenders work in there is trying to get a spirit that you’ve never heard of to give you a cocktail you’ve never tried. So this industry will never stop its search for what’s next. So while you keep your eye tequila going mass, mass behind, there’ll always be one category that’s emerging very quietly that’ll emerge in five years time as being the next hot thing.

Catherine (40:18): So if we think about the winners and losers in the space, I mean listening to what you guys have said, it sounds like the tequila segment is the winner at the moment. Losers beer. Is it as simple as that or is there a bit more nuance to it?

Alex (40:31): I think if we look at category shifts, it, it’s pretty clear that spirits is gaining market share from beer. It’s gaining market share from wine. If we look within spirits, tequila is a clear winner. I’d say dark spirits and aggregate probably continue to gain market share with the exception of blended scotch for whatever reason. And vodka is for decades been the bedrock of us, the US spirits industry, that’s the most vulnerable and that’s where the new on trend categories are gonna take market share

Matt (41:03): From. I agree with that Alex. I think you spot on that point and time will tell who eventual winners and losers are. Catherine, because the beer industry still has opportunities given its size, its power. If they can diversify smartly, who knows? Knows where they can take themselves. So I don’t wanna say that the beer players will be losers, but certainly the beer category, it’s hard to see it being a winner in total terms. Cause facing down so many strong headwinds and so many tailwinds exist for the spirits industry and the spirits players are great.

Catherine (41:41): So thanks to both of you. Now a key element of everyone of our podcasts is the one-to-watch segment where I ask my speakers to tell me about the one to watch in the space. It might be a company, it might be a product, a technology, a development, anything that our listeners should really be keeping an eye on when it comes to the future of that industry. Alex, can you give me your one to watch?

Alex (42:04): I’m gonna go with the spirits company, David Campari, not just from a US perspective, but I guess from a global perspective. They’ve never enjoyed the benefits of scale like a Diageo or a per, and whether that’s an advantage or not to them is obviously debatable, but it’s probably made Campari be a little bit more clever around innovation, around marketing, around acquisitions. I think it’s a company that’s been very good at spotting trends. It’s a company that’s been very good at buying tired, dusty brands, turning them around, creating a new occasion and rolling them out globally. If you think going back around the Negroni with their Campari brand, if you think App Spritz and they’ve been very busy buying up other brands in very niche areas, which might be an opportunity for them to exploit down the road.

Catherine (43:02): Brilliant, thank you very much, Matt. From your perspective, the one to watch,

Matt (43:06): I’m gonna give you one to watch, but it comes with a caveat that I’m involved in it. So I just have to be front check out air company. It’s carbon capture technology that converts carbon to ethanol. Now it’s been verified by the TTB to be able to call itself vodka. So it literally just takes away all the distillation system and it converts carbon from the atmosphere of carbon into ethanol. I think the other one to watch in the US is Monster and Beer. I don’t know man, those guys are crazy. I love the energy that an energy drinks company could bring to a beer category that’s lost its way with 21 to 20 fours. If any company knows anything about 21 to 24-year-olds, it’s an energy drink company. I think their acquisition of Cany was simply to get it to market. I don’t think any of the brands they bought were really that next generational, but at some point, someone’s gonna have to drop something in beer for next-generation consumers and it is rife for transformation. So the first company that really cracks the next generation for beer could win a big amount of share. And I got my eye on those guys cuz they’re pretty interesting from their background.

Catherine (44:34): Thank you both so, so much. Unfortunately, that’s all that we’ve got time for today, but I’d like to once again thank Alex and Matt for sharing all your experiences and insights and all those great companies that you’ve mentioned throughout the podcast. Thank you also to all of you listening to this episode of The Signal presented to you by Third Bridge, the world’s leading investment research provider. Join us in a fortnight for the next episode. And in the meantime, please rate, review or follow our podcast. Indeed, if you like it, tell a friend. You can find us on Spotify, apple podcast, and wherever else you get your podcast from. And obviously also from third For me, Katherine Ford. That’s goodbye. And until next time,


Episode Guests

Matt Bruhn

CEO of Craft Standard

Alex Smith

Third Bridge’s Global Sector Lead for Consumer