Profitability of spirit and beer brands under threat by failure to respond to modern day consumers, finds OC&C Strategy Consultants

Legacy drinks and alcohol brands are risking their long-term profitability by not responding quickly enough to changing drinking habits, according to a new report launched by OC&C Strategy Consultants.

The report, titled ‘Sobering Up’, underlines the extent that the industry is being disrupted by major market forces; namely the changing of traditional drinking habits, sky-rocketing global inflation, and a growing societal and government focus on brands’ ESG credentials. This is resulting in consumption of traditional alcohol falling, or stagnating in Europe and the U.S. OC&C’s analysis of NHS Health Survey Data showed that almost 30% of 16-24 year olds are abstaining from alcohol, up from 19% in 2011, while average annual beer consumption in the US, UK and Western Europe fell by 1% for 15 years up until 2021, from 76 to 66 litres per person.

As a result, many of the industry’s traditional powerhouses are risking being left behind by not accommodating these significant behavioural and macroeconomic shifts, and if they aren’t already, losing out to emerging products and brands.

Marek Zdziech, partner at OC&C Strategy Consultants, comments: “The behemoths of the drinks industry have tended to sail through previous market pressures, as baby boomers and early millennials continued to lap up the traditional offerings. This has without question ingrained an element of complacency, and as our report shows, the old way of doing business is now not quite as fool proof. Granted, some companies have demonstrated recognition and the number of alcohol-free options across the industry has grown, but incrementalism will not be enough.”

OC&C’s report specifically identifies 5 radical changes affecting the drinks industry:

  1. Drinks innovation is failing to recruit younger consumers

With younger consumers drinking less, and an increasing proportion abstaining from alcohol altogether, there is a growing demand for a broader variety of drinks that cater for modern day drinking habits.

But innovation remains broadly lacking amongst the industry’s major players, with aping, the impersonation of existing market products, currently winning out over large-scale innovation. This is exemplified by the significant investment behind hard seltzers in Europe, which have been extremely popular in the US in line with its low-calorie alcohol culture, with OC&C forecasting the market share for hard seltzers in the U.S. to reach 20% by 2025, up from 0% in 2016. However, to date they have struggled to gain traction in Europe due to fundamental differences in consumer habits, specifically a general air of scepticism towards low-calorie alcohol.

  1. Inflation is threatening margins

The drinks industry has not escaped the impact of rising global cost inflation. Rising commodity and energy prices are eating into margins, and profitability of many of the industry’s major players will come under threat.

In order to withstand the pressure on squeezed household budgets, brands need the confidence to set higher prices and must convince consumers to trust them that they are providing value. Suppliers need to de-clutter their propositions and then invest behind these winning brands.

  1. Reaching consumers has become complex

The ways that brands need to reach consumers is also changing. Over the course of the lockdowns in 2020 and 2021, when consumers were forced to move away from drinking in pubs and bars, supermarkets and discounters capitalised, and in 2021, increased their share of the drinks market by 16.9% in the UK according to OC&C analysis.

Brands can no longer safely rely on creating an emotional relationship with consumers in upmarket bars and hotels. The grocery environment is becoming increasingly functional and transparent thanks the rapid rise of discounters and greater market digitisation, with eCommerce, qCommerce, the industry term for the rapid delivery model, and Direct-to-Consumer on the rise. This has created fresh challenges for brands looking to entice consumers to try new or more premium products in a functional shopping environment, while also seeking to protect their margins.

  1. Societies and governments are getting serious about ESG

Consumers are demanding more socially conscious and environmental behaviours from the brands whose products they consume. Worryingly for brands, when consumer sentiment shifts, it is easier for regulators to enforce action they deem appropriate.

It is projected that the drinks sector will go the same way as petrol and tobacco by soon having to combat tougher advertising regulations. Ireland’s recent banning of alcohol advertising at sporting events in 2021 indicates a sign of things to come.

  1. The ‘Beyond Drink’ market is getting crowded

A growing suite of companies from both the alcohol and soft drink sectors have taken note of the potential of the adult ‘Beyond Drink’ market, which counts low alcohol and alcohol free drinks.

Products released by The Coca Cola Company (Top Chico Hard Seltzer) and Pepsico (HARD MTN DEW) suggest the traditional soft drink powerhouses are sensing opportunities to grab market share in the traditional domain of the alcohol players.

Zdziech, continues: “We can expect to see profound change in the drinks industry in the next decade. In this new world of more discerning drinkers and sky-high inflation, the major drinks companies need to channel their focus on to their brands which will be winners over the long term, rather than spreading resources thinly. These important decisions come at a time when the industry is bracing itself for more regulatory scrutiny and pressure to demonstrate tangible progress on their ESG strategies, specifically in relation to their social impact and making a difference in local communities.”