With 2023 around the corner, beverage alcohol analysts have begun tackling questions about holiday season sales and the outlook on spirits for the new year: How will economic conditions impact premiumization? Which spirits will continue to lead the way? And how will moderation trends continue to evolve?
The overall message from several analysts is that while spirit growth rates may look more optimistic than other segments, the outstanding rise of off-premise spirit sales spurred during lockdowns and carried into 2021 will create tough comparisons — although growth on any level is still positive.
“I will say over the next six to nine months, I would look for much lower growth rates for spirits than we had seen last year,” said analyst Danny Brager during a SipSource webinar in early November. “You’re going to get 8% on 8% growth, so I think that’s going to come down to those lower single digit levels.”
If the data excludes ready-to-drink (RTD) cocktails, that number may get into the negative, he added. But within spirits there are several categories and price segments that will build on emerging trends.
Agave and RTD Poised to Lead Spirits
Ready-to-drink products will continue to have driven growth in spirits and are expected to continue to do so in 2023. Since 2018, the segment’s share has gone up 9.3% and has risen 27% in the last 12 months, as reported in SipSource’s Holiday Trends and 2023 Drinks Preview. The number of spirit-based SKUs on the market in the U.S. has risen by approximately 70% between 2020 and 2022, according to drinks data company IWSR.
That echoes feedback from retailers: 71% of respondents surveyed for BevAlc Insights’ 2022 Retail Report said that RTD cocktails and hard seltzers have permanently changed how and where they stock products. RTDs and hard seltzers finished second and third, respectively, in terms of categories that have outperformed retailers’ expectations this year. And next year 63% of respondents expect to carry more RTD inventory, with only 13% planning to stock less. As for what types of RTDs might end up on those shelves, expect to see more products featuring one of the overall spirit category leaders: agave.
While vodka reigns as the base for RTDs at 59% YTD dollar share, Brager added that number is possibly well over tequila (at 16%) thanks to vodka-based High Noon’s dominance in the category. But tequila-based RTDs may be poised for an explosion.
“There’s a number of major manufacturers that are now rolling out tequila-based RTDs, and some of those are beer companies doing that as well,” Brager said.
Those include future tequila seltzers from HighNoon, Molson Coors’ Topo Chico Spirited which includes two tequila-based RTDs, and Stone Brewing’s recent tequila-based margarita line.
Retailers will also be bringing in more tequila on it’s own: 64% of retailers surveyed for the BevAlc Insights report plan to give the agave-based spirit more shelf space than any other spirit next year, edging bourbon by nearly a point and a half, and switching places with it from last year. A little over half of retailers said that tequila has over-performed their expectations this year, outpacing all other spirits.
“We do know that there are two categories that have driven most of that [spirit] growth— premixed cocktails and tequila and agave based spirits,” said analyst Dale Stratton during the SipSource webinar.
Both of those categories have experienced growth based on the demand for more premium products.
Premiumization expected to continue for certain categories
Overall, the first half of 2022 saw spirits with premium-plus prices gain 6% year-over-year, and up 13% compared to the first half of 2019, according to the IWSR’s latest report. While premium-plus spirit growth remains relatively broad across categories, agave is a key driver. Tequila has experienced strong year-to-date growth for segments over $25.00, followed by whiskey.
“Those are good, strong, robust trends. We expect those to continue,” said Stratton.
Premiumization will also continue to impact the makeup of canned cocktails. RTD growth is slowing globally, and the U.S., which holds over 40% share of global RTD volumes, is experiencing a general shift to more premium products (on a smaller volume base), as hard seltzer growth moderates, according to the IWSR. Spirits-based RTDs are leading the shift in premium plus RTD growth.
“RTD is really the only category that has not yet had a fully premium rise to the degree of other categories,” said Brandy Rand, IWSR chief strategy officer in a press briefing. “So 90% of the volume of RTD really kind of sits in that value and standard segment, so one of the reasons we see such investment and growth in this category is its opportunity for premiumization.”
While not directly tied to premiumization, a consolidation of spirit-based RTDs may be forthcoming as well. Compared to hard seltzer, spirit-based RTD brands are less consolidated at the top, possibly pointing to merger and acquisition activity as bigger companies evaluate the potential for smaller brands to fill in portfolio gaps, said Brager.
As for the economy’s condition impacting the demand for high end products? Most analysts agreed the luxury consumer is more insulated, but that inflationary pressures may impact how mid-to-lower income consumers shop.
Moderation Goes Beyond Wellness Trends
In response to tougher economic times, analysts are seeing early signs of consumers reducing quantity, not quality. IWSR consumer data shows a bent towards downtrading and category switching, with consumers primarily moving away from high volume, lower value beverages, such as wine and beer, and moving into lower volume, higher value categories such as whisky, tequila, gin and Cognac.
Retailers are worried: 82% of retailers polled for BevAlc Insights are at least somewhat concerned about rising prices’ impact on holiday sales, and 63% believe that inflation has impacted their sales this year. As for those spirit shoppers that will get in on the gift action, retailers anticipate they will favor bourbon (62%), tequila (57%), and scotch (39%). RTDs were also expected (at 37%) to outpace up and comers like non-alcoholic spirits.
In addition to pockets of down-trading, IWSR data found that drivers for the emerging moderation trend have evolved from wellness concerns to economic ones. While no/low alcohol is popular among millenials and higher income groups in the U.S., Canada, UK, Australia and China, the category has a mixed reception among other consumers who are looking to moderate.
“Another aspect of moderating certainly is cutting back on quantity, but maintaining quality, which is what we see in terms of spending on what people perceive as sort of the best lifestyle choice for them,” said Rand. “So alcohol is sort of an affordable luxury or a lifestyle choice.”