Big Beer’s low-alcohol Plan B has too much froth

Asahi group

09/07/2024 13:15

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Aimee Donnellan
       LONDON, July 9 (Reuters Breakingviews) - Big brewers are
talking a good game on zero-alcohol beer. Carlsberg  CARLb.CO ,
Heineken  HEIN.AS , Anheuser-Busch InBev  ABI.BR , Molson Coors
 TAP.N  and Japan’s Asahi  2502.T  are expanding into low and no
alcohol products, targeting an increasingly health-conscious
consumer and the Gen Z generation. But the boom looks relatively
small, and if it gets any bigger non-brewers may muscle in.
    The origins of low alcoholic beer can be traced to ancient
Egypt. Around 5,000 BC, children, pregnant women and people from
all social classes consumed a beverage that was similar to what
is now known as beer, but which contained low amounts of
alcohol. Because the brewing process tended to kill off harmful
bacteria, it was seen as preferable to potentially polluted
water.
    Thousands of years later, health concerns are again
driving zero alcohol demand. Consumers are becoming
more conscious of their wellbeing, and consuming large
quantities of alcohol no longer fits the bill. In a recent UK
survey 36% of under-25s said they were non-drinkers. Just as
tobacco groups have pivoted towards smokeless and no-nicotine
products, brewers are now scrambling to retain relevance.   
    One topical upshot of this trend is Carlsberg’s decision to
splurge $4.2 billion on soft drink and premium cocktail mixer
Britvic  BVIC.L . Brewers’ specific focus on low-alcohol beer
goes back to 2017. Starting in that year Heineken and Budweiser
owner AB InBev launched a variety of brands including Heineken
0.0, Corona Cero and a zero-alcohol version of Leffe Blonde.
Carlsberg has no-alcohol beer versions of Kronenbourg 1664 and
Tuborg, too. Supermarket chains like Walmart  WMT.N , Tesco
 TSCO.L  and Carrefour  CARR.PA  have dedicated entire shelves
to zero alcoholic beers, and bars now display a wide selection
catering for teetotalers.  
    The pool of potential customers is expanding rapidly. From
2020 to 2023, the number of non-alcoholic beer drinkers in the
U.S. increased from 0.6% of the adult population to 5.2%,
according to a YouGov report. These drinkers are particularly
lucrative. Four out of five non-alcoholic beer drinkers are
under the age of 44 and nearly two-thirds have more than $1,000
in monthly disposable income.
    For brewers, a new, expanding market comes at a good time.
In the U.S. and Europe — their biggest markets — volumes are
declining. Big Beer is also less profitable: Heineken in 2023
recorded an operating margin of just over 14.5%, a steep decline
from the 17% it made before the pandemic, as the cost of raw
materials and staff wages soared.
    One catch is that brewers have to pay to play. Heineken USA
spent $50 million on advertising in 2020 and gave away 10
million samples in its U.S. market. More recently, it has
undertaken a Formula 1 sponsorship deal worth $300 million,
which showcases its non-alcoholic beer. 
    The aggressive marketing is partly necessary because
non-alcohol beers are a tough sell. Early consumers were put off
by an unpleasant aftertaste, due to the need to heat the product
to burn off the alcohol. Unfortunately, this also removed the
natural hops flavour that lends beer its distinctive taste. In
recent years brewers have ploughed money into research and
development, which has made the products taste better. 
    The key hope for brewers is that a few years of high
advertising spend will encourage consumers to switch to zero
alcohol. If so, the real prize is that brewers could one day
boost their margins. That’s because zero alcohol is often not
subject to any alcohol taxes, which means brewers can charge a
similar amount for a can of zero alcohol as they do for
traditional beer and pocket the saving.
    Take Heineken. Last year, the Dutch group paid around 6
billion euros of excise duties on its alcoholic beer. Those
duties are charged due to environmental reasons and the energy
used in the manufacturing process, as well as to tax
alcohol. Imagine that over the long term the 42 billion euro
beer maker can charge the same price for its zero-alcohol drinks
and turn all its 242 million hectolitres of beer sales into
duty-free no-alcohol fare. Even if it still paid two-thirds of
its current excise duties, the brewer could add the 2 billion
euros saved to the 3.2 billion euros of operating profit it made
last year — a 63% increase.
    Investors may already be betting on this future. Heineken,
the market leader in zero alcohol, trades at nearly 18 times its
expected earnings in 2025. By contrast AB InBev trades on only
15 times and Molson Coors is on just 8 times.
    There are two main problems. One is that the low and no
alcohol market, at $13 billion of sales, is still tiny compared
to the $100 billion-plus of 2023 sales made by the three largest
brewers. Another is that the party may soon become ever more
crowded.  
    Although Coca-Cola  KO.N  and PepsiCo  PEP.O  lack the
necessary know-how to brew beer, there’s nothing stopping them
buying a smaller brewer and competing with established beer
makers. U.S. non-alcoholic beer company Athletic Brewing, last
year estimated to be worth $500 million, is rapidly expanding in
the domestic market and in 2023 signed a deal giving it sales
access to 5,000 UK venues. London-based Lucky Saint is the
fourth most popular non-alcoholic beer in the UK market,
according to data from NIQ.  
    The more crowded the market becomes, the harder it will be
for brewers to hit their targets. AB InBev set a goal of making
20% of its beer volume low and no alcohol by 2025, but in its
2023 annual report it said it would miss that target. Meanwhile,
analysts query whether Japan’s Asahi can meet its lofty target
of generating half of its sales from low and zero alcohol by
2040. Last year, these drinks accounted for only around 10% of
sales.  
    The low-alcohol sector could yet ride to the rescue of
brewers as and when alcohol consumption declines. But right now
it’s not obvious this will happen quickly. And if it does,
someone else may steal their pint.

    Follow @aimeedonnellan on X

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Low and non-alcoholic beer sales is only a small fraction of
traditional beer     https://reut.rs/3WeFT4D
Heineken is outperforming other global brewers    https://tmsnrt.rs/3S0rDd1
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 (Editing by George Hay and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  DONNELLAN/ 
Aimee.Donnellan@thomsonreuters.com))