Struggles in the beverage alcohol industry turn to green shoots in 2024

After battling challenges on multiple fronts in 2023, areas of opportunity and growth are emerging in the beverage alcohol industry. That’s welcome news for beverage industry businesses who’ve seen their share of ups and downs over the past several years, not counting the operational scrambling they’ve had to do to simply stay in the game. As 2024 unfolds, examining the most recent trends offers clues to where beverage alcohol is heading next.

Recapping 2023

The post-pandemic reset of conditions continued in 2023, resulting in three trends that affected beverage alcohol companies:

Excess inventory

Clearing retail overstock was critical for beverage companies in 2023. Both retailers and distributors wrestled with the pressures that excess inventory put on their businesses. Not just straining physical storage capacity but also testing working capital and profit margins—the carrying costs from excess inventory expanded because of rising interest rates throughout 2023.

Consumer buying patterns

Buying patterns for beverage alcohol are normalizing as Americans increasingly return to pre-pandemic behavior. Overall volume dropped in 2023 as inflation increased prices, and consumers pulled back on their beverage alcohol purchases.

Conversely, higher prices across categories helped increase total beverage alcohol dollar sales. This discrepancy between volume and sales extended across all beverage alcohol categories in 2023, with beer, flavored malt beverages, and cider exhibiting the widest volume-to-sales gap. Ready-to-drink (RTD) proved a notable exception as the only beverage category to avoid a decline in volume sales.^{Disclosure 1}

Consumers still preferred staying home to drink throughout 2023. Higher prices coupled with persistent labor shortages slowed the recovery of on-premises beverage sales.

Premiumization

Premiumization drove beverage alcohol sales higher. Even as many consumers reduced their beverage budgets, premium-plus beverage consumption held steady. Premiumization was strongest in the spirits category, with tequila and U.S. whiskeys displaying the most pronounced impacts. Imported beer also showed a strong premiumization effect,^{Disclosure 1} along with the super-premium-and-above subcategory of still wine. Even premium-plus RTDs bucked the prevailing trends, making strong gains in volume along with boosting sales.^{Disclosure 2}

Variation across beverage alcohol categories

A closer examination of the broad trends reveals considerable variation between beverage alcohol categories.

Distilled spirits

For 2023, U.S. spirits claimed the biggest portion of the total beverage alcohol sales pie (measured in dollars), though sales in this category didn’t move much relative to previous years.^{Disclosure 3} While sales in most spirit categories declined, a few standout subcategories performed quite well—RTD spirit-based beverages, U.S. bourbon and rye whiskeys, and Japanese whiskey all made positive gains, as did agave-based spirits like tequila and mezcal. Premium-priced tequilas and U.S. whiskeys also displayed ongoing growth.^{Disclosure 2}

The spirits category led the way in terms of mergers and acquisitions activity as well, with a particular focus on tequila and whiskey brands. While global strategics and private equity firms were the major players, 2023 saw companies with no beverage alcohol brands buy into the market, boosting demand for attractive acquisitions.

Agave and American whiskey have driven both growth and premiumization. That growth has led to a premiumization of brand valuations for agave and American whiskey companies whose brands fit the strategic objectives of the right buyer. Truist’s M&A database reports average revenue multiples for recent agave acquisitions at ~8x, while those in American whiskey have traded at ~9x on a blended average over the last several years. Agave and American whiskey have, on average, obtained valuation premiums of 2-3x revenue multiples higher as compared to the broader spirits category.^{Disclosure 4}

Our analysis finds that premiumization pays. Targets at the top pricing tiers generally see the highest multiples, while strategic fit, portfolio fit, filling of pricing tier gaps, and distribution synergies all play into buyer valuation methodology.

Beer

The domestic beer market endured an unexpected shakeup for all of 2023 after Bud Light inadvertently triggered a landslide of controversy that knocked sales down by more than 20%. Bad news for Anheuser-Busch InBev (ABI) turned out to be good news for Mexican beers. Depletion volumes rose on an increasing base by more than 7% for Constellation Brands’ Modelo and Corona families.^{Disclosure 5} That increase allowed Modelo to briefly dethrone Bud Light as America’s best-selling beer. But the victory was short-lived. Bud Light had regained its place at the top by year’s end. Benefitting from ABI’s marketing challenges, domestic brand families Miller Lite and Coors Light both reversed declining trends.

Negative volume sales in craft beer continued to challenge small brewers. There were only a moderately higher number of craft breweries opening than closing in 2023, indicating the segment is maturing.^{Disclosure 6}

The broader category of beer endured its eighth year of declining sales.^{Disclosure 2} Volume-wise, the U.S market still consumes more beer than any other beverage alcohol, but the number of individual consumers who drink beer remains on a downward trend.

Ready to drink

Many moving away from beer view RTDs as an alternative, helping the RTD category continue its strong growth path—2023 marked the eighth straight year of volume gains.^{Disclosure 2} More dollars went to innovation in RTD than any other beverage alcohol category.^{Disclosure 1} Still, 2023 was a year of mixed performance within the category; spirit RTDs drove almost all growth while sales of malt hard seltzers were down.^{Disclosure 2}

Wine and low/no alcohol

For wine, 2023 marked the third consecutive year of lower sales by volume. Only two segments within the wine category grew last year: Prosecco and fortified wine.^{Disclosure 2}

The no- and low-alcohol market, however, keeps trending upward. Moderation, health, and wellness values underlie consistent growth for these categories. Younger generations primarily drive this trend. Millennials drink less alcohol than their parents once did, and Gen Z seems happy to abstain more often as they reach the legal drinking age.

Green shoots emerging for 2024.

Economic uncertainty continues to cast a shadow over consumers. Looking for green shoots of opportunity becomes a combination of anticipating how 2023 storylines will play out, predicting the effect of macro trends underway, and keeping an eye out for innovative products or disruptive events that might signal new opportunities.

Agave and American whiskey lead the way. While the overall spirits category shows some softness, we expect the agave and American whiskey segments to continue their growth paths in 2024, particularly with premium-plus priced brands.

RTDs continue to grow. We anticipate expansion in spirit-based RTDs, which have grown tremendously over the past several years and now constitute a meaningful portion of the broader RTD category. Spirit RTDs have higher tax rates due to excise tax differences for spirits versus malt and wine, and they also contend with restricted channels that limit or prohibit sales of spirit-based products. Despite these challenges, spirit-based RTDs have grown exponentially, and at higher price points.

Spirit-based RTDs should continue to outperform the malt- and wine-based segments in 2024. Anticipated moves to ease regulatory restrictions and relax limits on this segment should expand and hasten further expansion.

Sazerac’s recent acquisition announcement of RTD brand, BuzzBallz, is an indication that growth-oriented, spirit-based RTDs will gain increasing attention from strategic capital and M&A activity, likely boosting the segment with deeper capital sources and broader distribution.

Beer imports get a lift from premiumization. The upward trajectory of premiumization shows no signs of slowing down. Beer imports will continue driving strong volume growth at premium price points, and Mexican beer imports—especially Modelo and Corona brands—will likely see continued strength throughout the U.S. to the detriment of core domestic brands. Meanwhile, Bud Light should stabilize at a new baseline and begin its rebuilding phase.

Health and wellness guide consumer choices. Younger generations' health and wellness lifestyle focus favors growth in the low- and no-alcohol category, especially as more Gen Z consumers reach the legal drinking age. Consumers who have dialed back their alcohol consumption may be drinking less—but better—as they splurge for premium brands when making purchases.

M&A outlook. Growth-driven acquisitions will always have a place filling gaps in product portfolios or price tiers. In today’s market, agave and American whiskey businesses are most sought after for their growth potential. Value-driven combinations that lead to marketing, distribution, or production synergies, and enhance profitability, still make up the bulk of industry acquisitions.