Four trends signal new growth for the beverage industry.
By Bill Pyle, Executive Vice President, Food & Beverage at Texas Capital Bank
The year 2020 was unquestionably full of challenges and turmoil — and for the beverage industry, there was no exception. As supply chains were interrupted and B2B sales diminished, consumers became more vocal about their expectations and needs. While there is still uncertainty around the economy, beverage manufacturers are uniquely positioned to take advantage of consumers’ evolving preferences, expanding buying power and increasing willingness to engage. The trends we’ve seen over the past 12 months are indicative of what we can expect over the next several years. Here are four specific trends worth noting.
1. New product adoptions
The RTD (ready to drink) market has grown exponentially since the early 2000s. Experts project sales will continue to increase about 20% annually, reaching $146 billion in sales by 20301. An increasing focus on calorie consumption and desire for more natural, less sugary beverages has made hard seltzers one of the most popular (and contested) categories. Taking cues from health-minded consumers, brewers are also experimenting with CBD-infused products and low-to-no-alcohol beers. Premium mixers are also on the rise, and premiumization overall is growing as consumers are willing to pay a greater price reflective of high-quality beverages. Perhaps that’s why so many high-end spirits with botanical and herbal flavorings are taking center stage.
New products have been a hallmark of the beverage industry for decades but are accelerating. Astute beverage manufacturers need to reassess their current portfolio and consider expanding into new products — especially as taprooms and tastings have moved inside consumers’ homes for the unforeseeable future thanks to COVID-19. It is imperative to reach consumers with products that appeal to both palates and pocketbooks. Success (and survival) will likely require capital to evolve product lines and the potential revenue from their sales. You might find that now is the most advantageous time to expand. Beyond manufacturers of emerging products, distributors and retailers will similarly be affected and could benefit from product expansion.
2. Innovative packaging
The beverage industry has also seen a recent increase in “smart” packaging. Smart packaging provides a multitude of uses, including logistics and marketing; for example, Johnnie Walker Blue Label uses printed sensors tagged with near field communication (NFC). This lets consumers interact with the product through their smartphones, accessing cocktail recipes, promotional offers and exclusive content.
Perhaps one of the most interesting and growing opportunities in smart packaging is using blockchain technology. For context, blockchain refers to recordkeeping technology in the form of a database network. Unlike traditional databases, new information is stored in “blocks” that are chained together to provide a chronological series of transactions or details that cannot be changed or reordered. Anheuser-Busch already uses blockchain in several initiatives, including a vending machine ID verification system. The company recently began a pilot program that lets consumers track their malt beverage on blockchain, allowing them to see the entire barley-to-bottle journey. Other beverage makers, such as Heineken, are using blockchain to establish sustainability and transparency in the supply chain.
While many beverage makers may not see smart packaging as a necessary investment now, those that do invest are more likely to be differentiated to the consumer. In scenarios where companies are using blockchain to be more transparent about the quality of their ingredients and their suppliers, they also stand to benefit from a boost in consumer loyalty.
3. Demand for sustainability
Consumer demand has driven major companies and even smaller startups to invest in packaging that is designed to minimize environmental impact by using fully recyclable and sustainably sourced materials. Many beverage brands are switching to plant-based renewables as an eco-friendly way of packaging their products; Coca-Cola is using recycled PET (polyethylene terephthalate) to bottle many of its biggest brands and has replaced plastic wrap with paperboard tech on its multipacks in European markets. Seedlip, a pioneer in the growing nonalcoholic spirit category, has begun exploring mushroom-based packaging.
But it’s not just packaging or the supply chain; it’s how and where manufacturers brew and build new production plants. Sierra Nevada was the first brewery in the U.S. to certify LEED® Platinum by using solar energy, capturing carbon dioxide released during fermentation, and collecting rainwater for use. Through the use of wind turbines, solar panels and biogas, Heineken is using green energy to brew beer that is sold in the Dutch market.
Whether analyzing production, packaging or ingredients, every beverage maker — large and small — will likely be tasked with demonstrating sustainable practices to buyers. It’s important to note that this doesn’t always mean taking on additional debt for upgrading manufacturing facilities or leasing new types of equipment. However, financial capital will follow strategic winners in the beverage industry.
4. Mergers and acquisitions
Despite the pandemic, beverage companies found new ways to streamline their operations as needed. Some even expanded their portfolios when opportunities arose. PepsiCo bought Rockstar energy drink for $3.85 billion, and Diageo bought Aviation Gin for roughly $610 million. Strategic maneuvers abound in more modest-sized beverage companies as well. In Texas, Two Rivers Beer Co. took majority control of Bare Arms Brewing in an effort to help fuel growth in the craft beer category. In fact, consolidation is fast becoming a theme in craft beer. Kirin snapped up New Belgium Brewing and Boston Beer Co., maker of Samuel Adams, merged with Dogfish Head Brewery, to name but a few examples.
This trend isn’t just a sign of the times. It’s also a monument to efficiency. After all, if M&A leads to scale and getting to market faster with a quality product that already has a following, an equally speedy ROI will ensue. Regardless of which side of the M&A table a business is on, it’s important to perform extensive due diligence — one that goes beyond financial records to ensure alignment on values and culture. Bigger is not always better, but scale matters.
While the beverage industry’s recent boom may have brought plenty of opportunities, it doesn’t necessarily mean that your company is positioned or ready to invest in them. However, given that these trends are accelerating and competitors are investing, can a beverage enterprise afford not to invest? Strategies to consider include evaluating and making an acquisition, divesting non-strategic assets, bringing in a financial partner or just uncovering more working capital. In each of these, a first step is to meet with a financial advisor who really understands the beverage industry and your unique business goals. The Food and Beverage team at Texas Capital Bank is comprised of qualified experts who are eager to help.
Texas Capital Bank has $38 billion in assets, and its Food & Beverage group has decades of combined experience delivering tailored financial solutions to food and beverage clients across the nation, including private and family held. An Associate Member of NBWA since 1990, the Food & Beverage group is skilled in guiding clients through ownership changes and consolidation and has the ability to lead syndicated transactions of all sizes and arrange non-bank capital.
1What 2021 Holds for RTD Alcoholic Beverages, Beverage Daily, published December 2020