Brewers make the malternative argument
By just-drinks.com editorial team | 2 July 2002
The RTD boom in the US, led by Smirnoff Ice, has proved a major fillip to spirits companies but has also provided brewers with substantial new business as they have collaborated with spirits brands to produce these malt-based beverages. However, Anne Brockhoff found that while both have much to gain, the brewers still have more to lose.
Diageo launched Smirnoff Ice in the US in 2001 and almost immediately won 2% of the "beer" market. For as strange as it may seem, Smirnoff Ice was launched in the US as a "malternative", a flavoured brewed malt beverage, rather than as a pre-mixed spirit. The "malternative" route offers many advantages for spirits companies looking to launch similar RTDs in the US but it also means that the brewers are included in on the act.
In most cases, the malt-based RTDs, while bearing spirits brand names, are in fact being produced and distributed by brewers. So while at first glance the arrival of all these malt-based beverages, sold and drunk from bottles in exactly the same manner as beer, may have seemed a massive competitive threat to the brewers, that is not quite the case.
That said, it doesn't appear to be a straightforward win-win either. For the spirits producers, flavoured malt beverages have so far yielded pretty straightforward benefits to spirits companies. They offer a new revenue stream, access to sales outlets usually off-limits to distilled spirits and a knock-on marketing boost to the core spirits brand which is behind the malternative, in spirit if not literally in spirit.
The situation is more complicated for brewers, but participating in the malternative market does have more of an "up" side than a "down". True, malternatives do compete directly against and take market share from beer, particularly light beers. But they also offer tremendous growth potential - the category grew by 87% in 2001, compared to 12% growth for imported beer, 9% for premium light beer and just 6% for premium beer.
Malternatives are expected to continue growing at an 80% clip in 2002.
"Even if that pace slows, premium-priced flavored malt beverages are more profitable than beer. "
Deutsche Bank estimates the category as a whole could generate profit margin of $600m this year. Anheuser-Busch alone could see revenue per barrel increase by 40 basis points after introducing Bacardi Silver with partner Bacardi earlier this year, according to Deutsche Bank. And, at the very least, Bacardi Silver sales help protect Anheuser-Busch's lead in the overall malt beverage market from competition by new products. Bacardi Silver "represents a competitive risk" for the company, Deutsche Bank analyst Marc Greenberg said. "Even if (the category) goes away or significantly weakens, they still win."
However, the outcome is less certain for Coors and Miller Brewing. Coors blamed a 1.2% drop in 2001 sales volume partly on malternatives, which it said distracted distributors from Coors Light. That distraction will only increase this year. Diageo rolled Captain Morgan Gold out in May while Miller paired with Campari's Skyy Spirits to produce Skyy Blue, with Allied Domecq for Stolichnaya Citrona and Sauza Diablo and with Brown-Forman for Jack Daniel's Original Hard Cola.
According to Greenberg, the "me-toos" are not getting the shelf space or the attention achieved by the earlier launches. "They're getting trial, because people want to see what it tastes like," Greenberg said, "but can they sustain that?" Coors is betting on it. The company is re-vamping its veteran malternative, Zima, after sales volumes dipped by more than 10% in 2001, and is also launching a new, male-oriented brand called Vibe.
If products like Vibe and Jack Daniels' Original Hard Cola succeed in winning over the key 21- to 27-year-old male drinker, malternatives could capture as much as 7% of the total beer market, Morgan Stanley said in an April note.
Still, 3% is more likely, and "existing entries do not represent a major threat to mainstream beer brands," Morgan Stanley said. That's partly because malternatives aren't likely to entice brewers like Coors into abandoning their core products. Earlier this year, Coors upped its marketing efforts and struck a five-year deal thought to be worth $300m to become the official beer sponsor of the National Football League. "Our approach to growing the business remains focusing on our core brands, especially Coors Light," said Dave Dunnewald, director of investor relations at Coors.
Miller, which South African Breweries (SAB) agreed in May to buy for US$5.6 billion, is also keeping its focus firmly on beer. The brewer boosted investment in Miller Lite and Miller Genuine Draft early in 2002, and it paid off with a 1.6% rise in first quarter domestic shipment volumes. "
"We have not taken our eye off our base brands or reduced investment in those brands at all"
Total marketing spend across the category could reach as much as $350m this year, according to some estimates. That will only increase as new players take the field, analysts said. Jack Daniel's Original Hard Cola, which Miller and Brown-Forman plan to roll out in July, will be the latest but likely not the last addition to the category.
Diageo is testing as many as 25 ready-to-drink beverages around the world, and a Crown Royal or Tanqueray malternative or a new offering based around one of Allied Domecq's spirits labels could be next, analysts said. "You're going to see a product innovation cycle that may peter out next year, but will not expire," Greenberg said. "There's a lot a lot of money, potentially, to be gained."
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Brewers make the malternative argument