Research
We Welcome Our New Hard-Seltzer Overlords
Flavored malt beverages have a poor and faddish history in the US, but the massive growth of hard seltzers demands a new evaluation. Upon a closer look, we see one important reason why the category can be huge: it is a substitute for mainstream light lager. Perhaps more importantly, we see three reasons why it will have staying power: the power of the sparkling water segment, the timelessness of low-calorie and low-carb offerings, and the gender-balanced nature of the category.
Why Is the Opportunity So Big?
Mainstream light lagers are in permanent, serious decline. Brand equity has been eroded by sophomoric advertising and price decreases in a world of premium products and younger consumers looking for new stories. In our note Who Can Rescue Mainstream Beer?, we proposed that new premium light lagers (Corona, Michelob Ultra) and craft lagers were positioned to capture the share being lost by mainstream lagers. We were clearly right about the opportunity but missed the potential for the hard seltzer category to take over the light beer occasion.
The light lager category is an affordable and easy-drinking entry point to the world of alcohol. Mainstream/value lager brands from AB InBev and Molson Coors still account for 50% of the market (see Figure 1). But we feel those brands fail the pool-party test – a drink affordable enough to buy in large quantities yet upscale enough to proudly bring to a party. It’s not just that hard seltzer easily passes this test, but, as Jennifer Maloney pointed out in the Wall Street Journal, seltzer can pass the frat-house test too.
While alcohol remains intensely competitive, seltzers are entering by taking share in both the weakest and largest segment of the beer market and by winning young consumers who have no loyalty to beer.
Three Reasons Why Hard Seltzer Is Here To Stay
Leaning on the Ascendance of Bottled (and Sparkling) Water
A generation ago bottled water was barely a beverage category in the US, and it is now the largest category in the US and expected to account for the largest share of growth over the next five years (see Figure 3). The rise of brands like LaCroix, bubly, and Spindrift represent consumers’ desire for light, low-calorie refreshment, as bottled water continues to take occasions from categories with a less healthy image, like soft drinks and juice.
Which is all to say hard seltzer works as a category precisely because it plays into the prevailing drink trends. The growth of hard seltzer is the natural extension of the sparkling water movement. Unlike the intense flavors and sweetness from classic sodas and flavored malt beverages, the attributes of both sparkling water and hard seltzers have staying power driven by clean labels, natural branding, and refreshment.
Low Calorie and Low Carb
Hard seltzer is singing the right tune, and it’s classic. Across beverages, brands that can achieve the right flavor profile with less calories are winning. In soda, Coca-Cola Zero Sugar is on the rise, and in energy and sports drinks, a whole new wave of powerful competitors featuring low- and zero-calories, like BODYARMOR and Bang Energy, have taken significant share from long-established market leaders. And if calorie counts on beer ever take off in the US, this could become a bigger issue for consumers.
Low carb is a trend with staying power, whether the diet is called Atkins, paleo, keto, or whatever the next version will be. Indulgence drinks still abound in the marketplace, but hard seltzers are winning on flavor (OK, more likely pure drinkability) without extra calories and carbs, positioning it extremely well for the long haul.
A Gender-Balanced Approach
This comes as no surprise to anyone, but ignoring half of the population is not a good business strategy. After years of advertising like the Coors Light “Love Songs” (and twins) campaign, mainstream light lager is stuck with a boys-only image.
The ‘beer’ brands at the top of the growth charts (see Figure 4) are largely playing with a gender-neutral approach to advertising, explicitly looking to be more inclusive of all types of younger drinkers. That brands like White Claw have managed to do this while still being a popular tailgating, frat-party drink shows the power of the category to not just capture traditional occasions/consumers but to branch out.
Though the triple digit growth rates driving the huge sales gains won’t last long, we believe the hard seltzer category is drawing from a large mainstream-beer pool and has significant room to grow. Hard seltzer, of course, isn’t limited to pulling beer share. It could be an easy replacement for rosé or vodka sodas as well.
In order to take major share from light beer, it needs to be able to draw from the same tool kit, and we expect the business side of hard seltzer’s growth to look like the light beer category. It’s happening already as BON & VIV is now the hard-seltzer sponsor of the NFL, and Boston Beer has plans to develop a robust on-premise draft plan for Truly.
We think this category is just getting started. We expect new entrants from both large brewers (like Natural Light Seltzer and the rumored Bud Light Seltzer) and from the craft/artisanal side. Those with skills in the distribution side of traditional beer will have a strong advantage, and it is definitely not too late to enter the market.
That brewers can go after the hard-seltzer space with scale and mainstream-beer techniques makes this an especially interesting opportunity. Where small and local start-ups are taking share in craft beer and other beverage segments, seltzer is designed for big brands (no brewers’ collective needed). But if hard seltzer becomes this generation’s Bud Light, the big question becomes whether these young consumers stay in the beer category or graduate to gin and tonic?