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Brewers Are Flooding Into Spirits. Should Investors Avoid Them?

By Rich Duprey – Aug 14, 2021 at 10:45AM

Key Points

  • Spirits, especially whiskey, have been on a growth trajectory for over a decade.
  • Beer, and even craft beer, is in decline.
  • Ready-to-drink beverages could be a hot new growth market.

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As hard seltzer fades, brewers are looking for the next drink sensation.

Molson Coors Beverage (TAP 0.56%) has become the latest brewer to enter the spirits market as hard seltzer's popularity sharply fades in the U.S.

The brewer announced that on Sept. 1, its new Coors Whiskey Company will roll out a 95-proof, ultra-premium whiskey called Five Trail that's made from a blend of single-malt whiskey and three bourbons, and will retail for $60 for a 750-milliliter bottle.

It's part of a larger portfolio realignment Molson is undertaking to scale up to mostly premium and super-premium beverages. And it's why it also just announced it was gutting the economy portion of its drinks menu. The brewer will discontinue 11 beer labels, including Miller High Life Light and Keystone Ice.

Because beer and seltzer are falling out of favor, while premiumization allows brewers to pad their bottom line (particularly in spirits), we might see more of them jump on the bandwagon alongside Molson Coors.

Man holding up a glass of whiskey

Image source: Getty Images.

Sailing on a whiskey river

Whiskey is on a decade-long run with the number of 9-liter cases sold rising to 28.4 million last year, an 84% increase since 2010, for a compound growth rate of 6.3% annually. At the super-premium level, it's growing even faster, running 18.3% higher each year.

Although value spirits are up only a little more than 3% a year since 2010, it looks better than beer, which is down 1% annually, according to the Brewers Association.

Despite craft beer plunging 9% last year, its 10-year annual growth rate remains 8.6%, showing just how high craft beer flew and the heavy lifting the category did for the industry. But beer's time is passing as drinkers look for new flavor profiles and quickly leap in and out of trends.

Losing its fizz

Hard seltzer was simply the latest craze and enjoyed triple-digit growth for several years running, which led many brewers to dive in headfirst. Molson introduced three different brands (it just dropped Coors Hard Seltzer), Anheuser-Busch InBev has about a half-dozen brands on the market and said earlier this year it was investing $1 billion to boost production, and Constellation Brands made a big splash with its Corona Hard Seltzer.

Samuel Adams maker Boston Beer (SAM 0.89%) jumped into the space earlier than most, allowing its Truly brand to quickly become the second biggest hard seltzer on the market, a spot it still holds.

But brewers, including Boston Beer, badly misjudged the beverage's staying power because growth seriously fell off the table this past quarter. The brewer now says it only expects the category to rise 20% as opposed to the 90% growth rate it previously predicted. Hard seltzer is still growing, but not nearly at its previous pace, and that raises questions about whether investors should be backing brewers right now.

The abrupt about-face could hit their financial performance (and their stocks) very hard. It's why Molson Coors is getting into whiskey and why Boston Beer is taking Truly into hard liquor, partnering with Beam Suntory to develop Truly branded spirits and to help the Jim Beam whiskey maker introduce ready-to-drink beverages.

Ready to grow

The Distilled Spirits Council of the U.S. (DISCUS) says the spirit industry's revenue grew 7.7% last year on a 5.3% gain in volume, marking the 11th consecutive year it took market share from other alcoholic beverages. Spirits now command more than 39% of the alcoholic beverage market.

Brewers jumping into spirits might seem like a cause for concern as they could do to whiskey what they did to craft beer, hard cider, and hard seltzer: Basically, dilute it to the point where drinkers wanted or needed something new to stand out in a crowd. But they could be tapping into a category that's actually ready to accelerate.

DISCUS notes spirits-based ready-to-drink (RTD) beverages helped drive 30% growth in the U.S. pre-mixed cocktail category. It forecasts the U.S. market could reach over 280 million cases and be worth over $7 billion in supplier revenue.

Brewing up new opportunities

Boston Beer's partnership with Beam is targeting the RTD market especially, and Molson Coors said last year it would be introducing Proof Point, RTD seltzers made with spirits and juice. Earlier this year, it partnered with Casa Komos Beverage Group to introduce a tequila-based RTD.

Anheuser-Busch has been quite successful with its Bud Light margarita mixes, such as Lime-a-Rita and Straw-Ber-Rita.

Because brewers generally are adept at selling ready-to-drink beverages (it's essentially what a beer is, after all), they just might excel far beyond traditional spirits makers. Canned cocktails that can be snapped open and immediately consumed lend themselves to both on-premise and off-premise occasions, a perfect mix even for times such as a pandemic when bars and restaurants are closed.

Rather than avoid brewers, their metamorphosis into distillers might mean it's just the time to get behind these beverage stocks.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Molson Coors Beverage Company Stock Quote
Molson Coors Beverage Company
TAP
$55.58 (0.56%) $0.31
Boston Beer Stock Quote
Boston Beer
SAM
$377.07 (0.89%) $3.31

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