United States: 5 Undercurrents Reshaping The Future Of The Alcoholic Beverage Industry

The alcoholic beverage industry is being shaken up—and there's no cocktail-making involved. Shifts in consumer attitudes and behaviors, alongside lower barriers to entry, have enabled the emergence of new categories and brands. The result is greater market fragmentation, evolving competitive dynamics, new requirements to win, and stronger headwinds for established labels.

The pandemic-induced sales boost aided large, established brands through the first half of 2022. At the height of the crisis, consumers sought familiar brand names that they could trust, while large producers were able to keep shelves stocked by navigating disruption to secure scarce supplies and maintain operations. However, that momentum proved to be temporary. Consumer habits and market dynamics have normalized in 2023, and now the industry is shifting at seemingly more accelerated rates than before.

As such, scaled players will have to balance the need to place bets in higher-growth segments with a need to profitably and sustainably defend, nurture, and expand their existing core brand portfolio. But where is this all heading?

At AlixPartners, we are closely monitoring five key trends that we believe will reshape the American alcoholic beverage industry now and in the future, and will most likely expand globally. Industry players that best understand these trends and their implications will more effectively refine their business strategies, product portfolios, and operating models—ultimately improving their odds to succeed in this ever-evolving market.

1. Demand fragmentation is blurring competitive lines

Evolving consumer preferences, stagnant core brands, inter-segment trends, and the emergence of new brands and categories are all pushing beverage companies to diversify their portfolios—resulting in the blurring of competitive lines. E&J Gallo, the largest winemaker in the world, is now a major player in spirits and RTD canned beverages. Molson Coors is scaling and expanding its "Beyond Beer" portfolio, emphasizing flavored RTD beverages, spirits, and non-alcoholic options. Twisted Tea is now the main growth engine for Boston Beer, the maker of Sam Adams. Coca-Cola and Pepsi have entered the RTD category as well, with hard sodas, mixed drinks, and seltzers; Pepsi even launched its own alcohol wholesale distribution business, Blue Cloud.

As corporate capabilities get stretched in different directions, companies cannot do it all alone. New alliances enable collaborative product development and greater go-to-market reach. From a competitive strategy standpoint, the blurring of lines is driving previously isolated players into a collision course. Operating more effectively in a "coopetition" environment—where the players you cooperate with are often the same you compete with—can be very tricky but is increasingly necessary.

Key steps for companies to take:

• Reconsider with whom you compete, and how the requirements to win have changed as a result.
• Rethink your go-to-market model—build ecosystem partnerships to complement in-house capabilities (including "coopetition").

2. Portfolio realignment will soon intensify

Established beverage companies have bought their way into new categories, scooping up high-growth brands to create more diversified portfolios. But the pendulum may have swung too far—many of these companies now possess overly complex product portfolios riddled with subscale market positions.

We believe we are at the start of an industry-wide portfolio realignment period, with M&A activity leading to a high volume of brands and assets switching hands in the coming years. Companies will need to pick their spots and simplify their product spread, focusing bets on select brands and categories with the most promising growth potential, where they have the highest likelihood to win, and where greater portfolio synergies exist. Some early indications of this broader trend: Beam Suntory is weighing the sale of a group of spirits brands, Pernod Ricard is seeking a buyer for its wine assets, and Molson Coors has discontinued 11 economy brands and its cold brew coffee partnership with La Colombe.

Key steps for companies to take:

• Clarify your portfolio strategy, doubling down on where you are best positioned to win (categories, markets, and segments) and on where you can attain portfolio synergies.
• Assess brands or segments with subpar profitability, low growth potential, or no strategic role for divestiture or reorganization to improve efficiency.

3. Enhanced commercial capabilities are on the rise

In our experience, the alcoholic beverage sector continues to lag in terms of commercial capabilities compared to the rest of the consumer products universe. We see two culprits: one, the three-tier system creates regulatory constraints, and two, wholesale distributors took on many of the commercial capabilities instead. But neither of these should deter alcoholic beverage manufacturers from upping their game.

Recent high-profile executive hires of industry outsiders with extensive consumer product and marketing backgrounds indicate an intentional push to inject new thinking into the sector and upgrade sales and marketing capabilities. For example, Sally Grimes, the former CEO of Clif Bar and former Group President of Prepared Foods for Tyson Foods, was appointed in October as the new CEO of Diageo North America.

Key steps for companies to take:

• Understand where current commercial capability gaps exist—e.g., market insights, advanced analytics, demand forecasting, integrated business planning, gross-to-net management, price and revenue management (PRM), category management, distributor management, and more.
• Look outside of the alcoholic beverage industry for best practices and inspiration.
• Evaluate what capabilities you should build in-house and which you should continue outsourcing to third parties or wholesale distributors.
• Consider whether new skills or talent upgrades are required.
• Assess new digital, machine learning, and AI-based tools to enhance capabilities.

4. The "fourth tier" is here to stay

Many states eased restrictions on alcohol sales during the pandemic, particularly by enabling greater digital commerce activity—which expedited the emergence of on-demand, third-party, direct-to-consumer (DTC) liquor delivery services such as Drizly, Gopuff, and Minibar. These services essentially function as the "fourth tier" and are here to stay, as they keep growing in popularity.

Digital commerce will continue to be a driving force for the alcoholic beverage industry, yet it remains an underexplored channel for many companies. Forecasts suggest the digital share of alcoholic beverage sales will reach 6% by 2026, with premium-plus products benefitting most. Enhancing digital commerce capabilities and devising strategies tailored for digital channels—whether through DTC capabilities or partnerships with "e-tailers," online platforms, or delivery services—remains a largely untapped growth opportunity in the alcoholic beverage sector.

Key steps for companies to take:

• Develop digital channel insights focusing on consumer segments, consumption occasions, and paths to purchase.
• Define a clear and intentional digital commerce and DTC strategy and build required capabilities (e.g., assortment, pricing, merchandising, promotional strategies, commercial planning, and more).

5. Distributor relationships must become more strategic as they grow in importance

Wholesale beverage distributors continue to gain in market influence. Since the turn of the millennium, the number of independent distributors in the U.S. has halved, with the top ten wine and spirits distributors now accounting for nearly 75% of the national market. Southern Glazer's, for example, operates in 44 states and Washington D.C. (as well as Canada and the Caribbean), represents over 7,000 brands, and earns $25 billion in annual revenues (25% more than Diageo's global turnover).

Distributors don't just control market access—they are increasingly the gatekeepers of data and insights, due to their proximity to retail and foodservice customers and their visibility across multiple beverage categories and brands. As such, it's crucial for alcoholic beverage manufacturers to rethink how they can most effectively partner with distributors. How can each best complement the other's capabilities, to better align interests and incentives? How can they better integrate operations along the end-to-end value chain, to drive greater market effectiveness?

Key steps for companies to take:

• Assess current distributor relationships—what's working and where are the pain points and missed opportunities?
• Rethink how to best leverage and/or complement distributor relationships.
• Pursue the next level of an integrated distributor management approach, akin to how consumer product companies typically partner with key accounts (e.g., joint business planning, co-investments, category management, data sharing, and more).

Shifting consumer preferences, lowered barriers to entry, and new market dynamics have swirled into a cocktail of change for the alcoholic beverage sector. But these changes also bring a distinct set of opportunities for players that have the courage to challenge long-held industry beliefs and habits by strategically realigning their portfolios, exploring new go-to-market possibilities, and upgrading their capabilities.

We strongly believe that the five undercurrents detailed above will fundamentally transform the industry. As the tectonic plates move, those who adapt faster will pull ahead while those attached to previous orthodoxies may be left behind.

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