Dry January: investors raise a glass to ‘alcohol-free’
December was a time of celebration, togetherness and indulgence. For many of us, it was also time for reflection and making New Year’s resolutions. As Earth starts a new cycle around the sun, we feel inspired to release old habits, with limiting alcohol consumption being one of the most popular resolutions.
A word from Dea Shehu, Portfolio Manager at KBC Asset Management. Welcome to ‘Dry January’.
The market for non-alcoholic alternatives is expanding and large breweries and beverage brands are jumping on the bandwagon, offering opportunities for investors as they look to acquire other companies, diversify their product range and invest in innovation.
Dea Shehu, Portfolio Manager at KBC Asset Management
For anyone who is not familiar with the term: Dry January participants take a break from alcohol for the entire month of January. In Belgium, Dry January is followed by Tournée Minérale in February, launched by Stichting tegen Kanker (Foundation Against Cancer) and the Flemish centre of expertise on alcohol and other drugs (VAD). Aiming to achieve the same goal – to raise awareness of alcohol consumption and give momentum to the initiative of an alcohol-free period – the campaigns reinforce each other as one is conducted on an international scale and the other has a local focus.
Challenge accepted
In addition to the success of Dry January, in the past few years we have also noticed a fundamental shift towards health and well-being, boosting ambitions to maintain a healthy diet, exercise regularly, prioritise sleep and limit alcohol consumption. In August, Gallup reported that the share of American adults who drink alcohol had dropped to 54%, the lowest level in almost 90 years. This steady reduction in self-reported drinking testifies to a clear and accelerating trend that is mainly driven by young adults, who are significantly less inclined to drink alcohol than young adults were ten years ago.
The US Surgeon General has recommended that a cancer warning label be placed on alcoholic beverages, which further underlines growing concerns about the health risks associated with alcohol consumption. The underlying message emphasises that even moderate drinking may pose potential risks.
Consumers are clearly receptive to this and alcohol consumption continues to fall, especially among young adults. The data shows steadily declining volumes in the spirits, wine and beer categories, presenting an additional challenge for alcohol producers in the past two years.
The shift towards non-alcoholic drinks has been a blessing for soft drink companies, which successfully capitalised on this trend.
Dea Shehu, Portfolio Manager at KBC Asset Management
Healthy pop
Carbonated drinks are trending, but not the traditional sugary ones. A new niche market in carbonated drinks has arisen that promises not only refreshment but that is also advertised as ‘the better option for you’. This emerging category, known as functional soft drinks, offers more than just great taste; the drinks also contain added ingredients such as prebiotics, antioxidants and adaptogens, thereby combining refreshment and well-being.
Prebiotic soft drinks, for example, are said to support intestinal health. These new functional beverage brands have disrupted the market. Take Olipop, founded only in 2018 and already valued today at 1.85 billion dollars.
Large soft drink brands do not wait for disaster to strike; they embrace the trend instead.
Dea Shehu, Portfolio Manager at KBC Asset Management
PepsiCo recently acquired Poppi, a competitor of Olipop, for 1.95 billion US dollars. Traditional soft drink brands also experiment with alternatives of their own, with PepsiCo launching a limited edition of Prebiotic Cola last summer and Coca-Cola introducing its own prebiotic alternative.
These takeovers mark a major step in the continuous transformation of the brands.
‘Buzz without booze’
The energy drinks category has expanded rapidly in the past decade. Whereas energy drinks used to be popular among teenagers, the target audience has now become far more diverse and this category currently accounts for almost 20% of the total market for non-alcoholic beverages. Energy drinks companies have moved beyond simple, caffeine-rich formulations, tackling sugar problems and regularly adding functional drinks to their portfolios.
The strategy for marketing energy drinks was simple, yet highly effective. The companies’ aim was to gain visibility in gyms and on university grounds and to present their drinks as viable alternatives to traditional morning coffee.
Dea Shehu, Portfolio Manager at KBC Asset Management
The recent increase in coffee bean prices has only added to their appeal.
Energy drinks are often criticised for providing insufficient warnings about the presence of caffeine or other stimulants and for failing to inform consumers sufficiently clearly that the products in question are in fact only intended for people aged 18 and over. At the same time, their integration with functional drinks – with active ingredients that are thought to provide health benefits, relieve stress, lift your mood and please the senses – has proven highly successful. Despite ongoing discussions, this category continues to experience rapid and sustained growth.
Taste and quality above all else
Health-conscious Gen Z consumers and Millennials are increasingly refraining from alcohol and choosing non-alcoholic alternatives instead. But make no mistake, they are highly critical when it comes to taste and quality. An entire industry has even emerged to retain the delicate aromas in non-alcoholic drinks during the alcohol removal process.
Givaudan, an authority in the field of fragrances and ingredients, uses cutting-edge fractional vacuum distillation to isolate ethanol from aromatic compounds. These non-alcoholic elixirs, inspired by techniques from the high perfumery industry, are positioned as premium products. In high-end bars, they sell at a price that is equivalent to their alcoholic counterparts. They are also presented in sustainable packaging that stresses their artisanal origin, which is an attractive sweet spot for the new generation of consumers.
In terms of beer, the reasons for switching to non-alcoholic options reflect the well-known trends, being a desire to reduce alcohol consumption, more stringent rules for driving under the influence, religious considerations and – not to be underestimated – growing social acceptance among traditional beer drinkers themselves. And yet, taste remains decisive. Remarkable progress has been made in imitating the flavours of their alcoholic counterparts. The current product range is almost nothing like the early attempts to produce non-alcoholic beer, which lacked inspiration. And although it still represents a relatively modest market share, sales in this category are growing at a substantially higher rate than those of traditional beer.
Brewers are focusing on new investments in no-alcohol or low-alcohol innovative drinks to supplement the range of traditional beers. The ultimate ambition is to grow the no-alcohol segment to 20% of total beer sales. That target is still a remote prospect, but the message is clear. The industry has understood it and is energetically adapting to a changing landscape.
While non-alcoholic options are still gaining in popularity, we see an equally convincing trend towards premiumisation of the drinks landscape.
Dea Shehu, Portfolio Manager at KBC Asset Management
Consumers prefer increasingly refined options. From ultra-premium spirits to low-alcohol ciders and hard seltzers, and from non-alcoholic functional beers to carbonated soft drinks produced according to traditional methods – there is a drink to suit all tastes. Today’s offers have been carefully composed to meet changing expectations. As investors, let’s raise a glass to that as well.
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The information contained in this publication is for information purposes only and should not be considered as investment advice.
