Why 2024 is proving to be a sobering experience for the alcohol industry in the US - Market Intel

Read any recent headline on the state of the beverage alcohol market in the US and you’ll encounter recurring terms that could fill a bingo card: “challenging”, “headwinds”, “slowdown”, “cautious” and “tough comparables”.

After a disappointing 2023 that saw a dip in volumes across beer, wine and even spirits, the first half of this year has shown little improvement. Sobering statistics across multiple data sources point to a softening of growth and downtrading amid increased promotional activity.

The world’s most dynamic and profitable alcohol market is facing an uphill battle. Although the industry has been looking for normalisation post-pandemic, most are finding this elusive, instead contending with a host of economic, social and political issues that could shape the macro environment for alcohol for years to come: continued inflation, a rising anti-alcohol movement, impending changes to nutritional labelling, cannabis legalisation rescheduling and shifting consumer demographics, to name a few.

Those brand owners with a heavy reliance on the US, such as Diageo, Pernod Ricard and Anheuser-Busch InBev, are seeing their share prices slide. On a recent earnings call, the CEO of Brown-Forman, Lawson Whiting, put the situation into perspective: “Brown-Forman is a 154-year-old company,” he said, “so we have been through periods of complexity and uncertainty in the past.”

Across beverage alcohol, producers, wholesalers and retailers are all reflecting – and resetting – how they do business in a challenging environment.

Setting the stage

The biggest topic affecting all three tiers of the US’s alcohol industry is inventory levels. After the unpredictability of the pandemic, demand has not reconciled with supply, which has slowed suppliers’ shipment volumes. The US Census Bureau reports that current beverage alcohol inventories are 39% above 2019 average, 34% above the ten-year average, and 107% above the 30-year average. Monthly inventory for April 2024 was slightly down 0.6% versus March, however industry analysts expect the issue to remain throughout the rest of the year, with a rightsizing not expected until 2025.

This is all predicated, of course, by consumer spending. Despite an ease in inflation over the past year, rates are at 3.3% as of May, according to the Bureau of Labor Statistics’ latest Consumer Price Index, which is still higher than economists would like.

Between January 2020 and May 2024, consumer price inflation rose by nearly 22%, resulting in higher prices on everything from gas to groceries. The Federal Reserve is keeping interest rates high to slow down consumer demand for goods and services, which would then slow price growth.

With inflation for alcoholic beverages up 2.4% year on year, there has been a subsequent shift in alcohol purchasing patterns. In both the on- and off-premise channels, the cost of drinking is higher, which is affecting volume growth. Lower-income households with less disposable income are downtrading or cutting back on non-essential items all together.

At the other end of the spectrum, the surge in spending on high-priced spirits (which has been driving the category’s value for years) has cooled off, with SipSource analysts declaring in a 2023 year-end report that “spirits premiumisation is dead”.

Beverage alcohol performance

Last year, all of the major alcohol data sources that cover consumption or consumer takeaway (IWSR Drinks Market Analysis, Circana, NIQ) reported declines in overall total beverage alcohol volumes.

From a category perspective, using IWSR’s total market (on- and off-premise) data for 2023, wine suffered the most (-4.2%), followed by beer (-3.1%) and cider (-2.4%). Most surprising was the dip in spirits volumes (-2.2%), which represents spirits’ first decline in nearly 30 years. The ready-to-drink (RTD) category, meanwhile, posted a small gain of 0.7%.

The biggest disparity when assessing beverage alcohol performance is between volume and value, or dollar sales. NIQ recorded US$89.8bn in off-premise alcohol sales in 2023, up 1.1% from 2022. Although sales were up, the firm reports slowing growth, likely due to shopper fatigue from continued fragmentation of segments. Dollar sales in 2023 compared to 2022 were down for wine (-1.8%), flat for spirits (+0.1%) and up for beer (1.7%).

From a top-line view, RTDs and tequila are the major segments propelling the industry forward, with no-alcohol also posting gains as continued innovation and consumer interest in healthier alternatives drives trial. Across total spirits, wine and beer, the outlook is cautious as overall volumes stall and sales underperform early 2024 expectations. With RTDs carrying the growth, there’s concern for overcrowded shelf space and an inevitable shakeout of brands.

Most analysts are optimistic that the key summer and holiday selling periods will offer a much-needed boost to some categories, while others will continue to struggle.

Beer faces challenges

Beer has been steadily challenged by wine and spirits for the better part of a decade, and now RTDs are pulling drinkers away. Ironically, all the major brewers produce ‘beyond beer’ malt-based alternatives, with many also trying their hand at spirits.

Despite this, beer still maintains the overwhelming volume share of TBA at 68.8%, followed by RTDs at 12.1%, wine at 10.3% and spirits at 8.1% (IWSR). Citing 1992–2023 Gallup poll data (below), the National Beer Wholesalers Association’s chief economist, Lester Jones, maintains that beer continues to be preferred alcoholic beverage of choice for US consumers of legal drinking age.

But the picture is less rosy in volume, according to analyst Bump Williams, who reports a 2021-23 CAGR decline in total beer of 3.4% (which also matches 52-week trends through 18 May 2023 using NIQ data). While imports such as Modelo and sub-premium brands such as Busch Light are performing well, Williams says the premium segment “continues to suffer shockingly consistent volume declines”.

Much of this was driven by Bud Light’s significant loss of sales that began in April 2023 with a boycott of the brand. While showing some recovery, Bud Light still accounts for a healthy share of the premium segment, which makes up 75%-to-80% of beer’s overall volume in the country.

But RBC analyst Nik Modi believes beer doesn’t have a category problem – it has a brand problem. “AB InBev and Molson Coors have also been roughly a 2pt annual drag to category volume growth over the last nine years as some of their largest brands have been in decline,” he says.

Bart Watson, chief economist of the Brewer’s Association, which represents 9,761 craft brewers in the US, addressed the softening of the segment during his annual ‘State of the Industry’ presentation at April’s Craft Brewing Convention. Since 2019, Watson said, there are fewer craft beer drinkers, more breweries are closing than opening, and there is more competition across occasions. This contributed to a 1% decline in 2023 craft beer volumes, with dollar sales positive at 3% (somewhat due to pricing).

His advice to the audience was to look at future growth not just in terms of volume, but around brewery processes, profitability and operational efficiency.

Consumers turn to RTDs

Consumer behaviour is top of mind for the entire alcohol industry. Over the past decade, the growth of spirits has impacted the consumption occasions for wine and beer. The sudden rise of RTDs, meanwhile, has both helped and hindered traditional categories by driving innovation and subsequent value, but also by redefining what we drink. RTDs filled an unmet consumer need not only around flavour and convenience, but also transparency on ABV, calories, carbohydrates and sugar.

In the RTD space, the alcohol base has become a factor in understanding trends as the category becomes increasingly crowded and shows signs of deceleration. In 2023, spirit-based RTDs were up 44% in sales and held 8% value share of the entire spirits category, according to NIQ, with vodka-based RTDs representing almost one-fifth of off-premise spending on vodka. Top-selling RTD brands across all alcohol bases include High Noon, BeatBox, BuzzBalls, Nütrl and Twisted Tea. Original category leader White Claw Hard Seltzer, however, still commands the majority of volume share.

Circana reported $10.3bn in retail sales in the RTD segment in 2023, with $4.3bn for hard seltzers alone. The firm believes that even though pre-mix cocktail and hard seltzer sales are softening, the flavour and convenience aspect holds broad appeal across consumer age and household income cohorts. RTDs also resonate with 21-plus Gen Zers, especially those with higher ABVs that come from familiar beverage brands and have packaging that taps into a variety of occasions.

The convenience channel has been the strongest performer for total beverage, including alcohol, and is driven by high-income shoppers. Beer/cider/FMBs grew the strongest in dollar sales in convenience versus all other channels in 2023, according to Circana.

Spirits sales stall

Coming off decades of consistent volume growth, the spirits category has surprisingly stalled. Without spirit-based RTDs or tequila, at a subcategory level, there’s little to celebrate – even US whiskey showed 1.2% declines in volume, according to IWSR. Over in cognac, which was boosted during the pandemic, there have been two consecutive years of volume losses because of financially strapped consumers and some cross-category pressure from the popularity of aged tequilas.

One bright spot is the cordial & liqueur segment, which has benefited from flavour-forward serves such as the Aperol spritz and espresso martini.

Starting off 2024, the spirits category is showing some improvements. NABCA control state data, which covers 18 states, showed volumes through April up 0.7% and sales up 1.5%. NABCA also noted a “deceleration of premiumisation”, a trend also present in SipSource data.

At the end of 2023, SipSource measured a 6.8% decline in the US$50+ price tier compared with a 5% drop in under-$50. Interestingly, 90% of the volume of $50+ is across tequila/agave, cognac, bourbon and single malt scotch. Within this price segment, bourbon and reposado tequila over $50 posted gains last year.

The nuances around premium brands are likely a result of pricing pressures and some slowdown in overall consumption, although IWSR forecasts the overall premium-plus segment of spirits will grow over the next five years.

Wine fights back

The wine industry is fighting back after years of declines in volume and the widely publicised notion that the category is losing relevance with younger LDA consumers. Though wine consumption dropped 8.7% in 2023, according to the Gomberg Fredrikson Report, wines priced between $18 and $20 grew 4% (NIQ data), signalling a sweet spot for premium purchases. The newly formed US Wine Industry Partnership released a report stating that “consumers have increased spending on wine despite total volume declines” and it expects the wine market to revert to more normal trends.

Another challenge facing the wine industry is the oversupply of grapes from the 2023 California harvest, which could lead to lower prices. With wines priced under $10 losing share as Baby Boomers reduce their spend and consumption, excess inventory could hamper the industry’s focus on premiumisation.

Wine has historically benefited from direct-to-consumer sales across tasting room visits and wine clubs. Silicon Valley Bank’s ‘State of the US Wine Industry’ report noted that D2C volume and value dropped in 2023, as did tasting room visits.

Multiple consumer surveys have concluded the loss of regular wine drinkers is largely due to competition from other categories. As wineries look for ways to attract new drinkers, some are diversifying their offerings across no- & low-alcohol options, RTDs and even spirits.

Demographics point to Baby Boomers as the largest consumers of wine, but collectively, Gen X, Millennials and LDA Gen Z offer enormous potential for wine if the industry can capture their attention. As the SVB report warns: “For every consumer over 60 who stops consuming wine, they are replaced by younger consumers with a mindshare of wine half that of their elders.”

Consumer drinking behaviour

Alcohol is generally seen as a stable sector; as the adage goes, “When times are good, people drink and when times are bad, people drink”. But a confluence of factors is putting this to the test, or at least how much people drink.

A long-running Gallup poll (above) reports that the number of Americans who drink alcohol has remained relatively steady at 63% since the mid-1980s. However, fewer young adults in the US drink today than two decades ago. This fact has been a topic of much debate across the industry – will the next generation of drinkers actually drink less, or will they fall into similar consumption patterns of older generations?

The moderation trend could spur growth in no-alcohol alternatives. According to IWSR, no-alcohol showed strong growth in 2023, with volumes jumping 29% versus 2022. The no-alcohol beer/cider segment has 81% share of serving across total no-alcohol and was up 30%, while no-alcohol wine volumes increased 18% and no-alcohol spirits at +32%. Although volumes are relatively small compared with traditional alcohol categories, the segment continues to see new brands and wider distribution both at retail and across the on-premise.

One thing most can agree on is the need to better address occasions, which are not tied to the same category-specific norms of the past. Circana tracks purchasing across categories and shows that 25% of consumers buy a combination of beer, wine and spirits. Today’s consumer not only drinks across categories in the same occasion (even moving sometimes between alcohol and no-alcohol), but they are often category agnostic, meaning they may think about flavour or function first.

The rise in crossover brands – soft drinks or juice brands extending into alcohol – is appealing to consumers, particularly LDA Gen Z. In 2023 alone, these crossover brands netted $600m in sales, according to Circana, with Topo Chico Hard Seltzer the No.1 selling and Jack Daniel’s & Coca-Cola the top spirits crossover. The firm also shows that because consumers are looking for more variety and flavour across all beverage types, carbonated soft drinks, sports/energy drinks and water are gaining share against beer, wine and spirits.

This trend has not gone unnoticed by alcohol companies. In May this year, Mark Anthony Brands announced a Liquid Refreshment Beverage Division with the launch of a hydration drink named after soccer star Lionel Messi. And in 2019, Molson Coors Beverage Co debuted its new corporate name to reflect its commitment ‘beyond beer’, while also launching several non-alcoholic products: a plant-based diet soda and a grain-based milk alternative, among others.

The new total beverage consumer is also reflective of the changing US demographics: the population is becoming older and more multicultural. The US Census Bureau reports that “by 2029, older adults will outnumber children, with 71m US residents aged 65 and older and 69m residents under age 18”. By 2050, less than 50% of the US population will be white, non-Hispanic.

Future beverage alcohol consumption is likely to decline as the number of white Americans (who have higher per capita alcohol consumption) decreases and the average age of Americans increases (older populations drink less).

Looking ahead

The sentiment across the alcohol in the US remains cautiously optimistic, even though forecast volume CAGR is set to decline 1% between 2023 and ’28 according to IWSR. As known factors (inventory levels, pricing, inflation) stabilise, the unknown factors (consumer recruitment, innovation, moderation intent) become even more critical to prioritise.

The market is vastly different than it was five years ago, and brand owners must retool not only their strategies, but their execution. With innovation agendas at the forefront, we’re likely to see more companies rebalance their portfolios and fill gaps across total beverage to have a drink for every consumer occasion.

The endurance of core alcohol categories, then, is dependent on brand leadership to increase engagement and drive trial.