Beer companies lead distillers in the canned cocktail market

RTD sales by value rose 28% through Oct. 17

If canned cocktails appeared at a Halloween party, The Wall Street Journal reported, the drinks were more likely to have come from a brewer than a traditional liquor company. Beer companies built an early advantage in the U.S. ready-to-drink cocktail market, leaving major distillers such as Diageo and Pernod Ricard to catch up.

Ready-to-drink cocktails, or RTDs, are a rare bright spot in an otherwise weak U.S. alcohol market. Americans’ per-capita alcohol consumption has dropped to the lowest level in 60 years. Pernod Ricard, which owns Jameson Irish whiskey, said its U.S. business shrank 10% from a year earlier in its latest quarter. Diageo told investors that some of its top brands, including Casamigos tequila, are losing share in North America.

Market valuations also separate the companies. The Wall Street Journal reported that Diageo and Pernod Ricard stocks trade at valuations last seen after the 2008 financial crisis. Over the past five years, the two companies lost more than half their value, while AB InBev shares rose nearly 40%. AB InBev, the Budweiser owner, also holds 18% of the spirits-based RTD market by volume.

NielsenIQ data show sales by value for RTDs rose 28% over the 52 weeks through Oct. 17. The category grew from 4% of the total U.S. alcohol market by volume in 2019 to 10% today. Trevor Stirling, a Bernstein analyst, said RTDs had evolved from “rocket fuel for young people to a convenient drink for adults.”

The pandemic was one factor in changing social habits. Drinking is happening earlier in the evening, leading consumers toward lighter drinks with low alcohol content instead of heavy spirits such as cognac or whiskey. More drinking occurs away from bars and restaurants, including at sports events, picnics and music festivals, where portable premixed cans are more convenient than large bottles of liquor used to make cocktails from scratch.

Affordability is a factor, although Bernstein analysis shows RTDs are not good value for money. A 12-pack of High Noon RTDs costs $15.99, or $142 per liter of pure alcohol. A 750 milliliter bottle of Tito’s vodka costs $17.99, which works out to $69 per liter of pure alcohol. Consumers are choosing RTDs to limit their total cash spend even though the larger liquor bottle offers more alcohol for less money.

Diageo had more than two decades of experience with RTDs through Smirnoff Ice, a brand that now generates around $500 million in annual U.S. sales. The company did not prioritize the product at launch because the drinks were less lucrative than selling large bottles of liquor. RTDs are now a priority, but the format does not fit distillers’ established operations: making the drinks requires canning facilities, while distillers are more likely to own bottling lines; the products have shorter shelf lives than full-strength spirits; sales move faster; and delivery must be as frequent as beer’s. Pernod Ricard recently overhauled part of its U.S. distribution to become more nimble.

Big brewers moved sooner because they had been losing customers to RTDs earlier. AB InBev is now among the fastest-growing companies in U.S. liquor, helped by strong demand for its Cutwater canned cocktails. Boston Beer owns spirits-based cocktails such as Sun Cruiser and has pushed so deep into RTDs that traditional beer now represents just 15% of its volume. Privately owned Gallo Winery owns the popular High Noon brand.

Barriers to entry in RTDs are low, so new canned-cocktail brands and flavors reach the market frequently. Privately owned Sazerac is one of the few distillers to establish a foothold. Its BuzzBallz RTD brand has drawn controversy because of its popularity with young drinkers. Sazerac recently overtook Diageo as the largest distiller by value in the U.S. for the first time.

Diageo is betting that large distillers can use the recognition of legacy spirits brands as an advantage. Bernstein data show that RTDs based on existing spirits brands have less than a 5% share of the fourth category in the U.S., while brands built from scratch fare better with consumers. The Wall Street Journal said Pernod Ricard and Diageo are showing up late after beer companies already wooed cocktail drinkers.

Closing the gap hinges in part on how Pernod Ricard and Diageo perform in RTDs. The Wall Street Journal said their late entry will continue to weigh on their valuations unless they gain ground in the category.