Move Over Hard Seltzer; Spirit RTDs Are On The Rise
Ready-to-drink (RTD) beverages continue to make headlines as the fastest-growing alcohol beverage category. While malt-based RTDs still retain 91% share by volume in the U.S. RTD market, spirit-based RTDs grew by 53% in 2021, approximately double the growth of the wine-and malt-based categories, according to IWSR's drink market analysis. The surge isn't expected to slow as IWSR predicts spirit-based RTD volume will grow at a compound annual growth rate of 33% in the U.S. by 2025. Here's a closer look at what's driving the rapid growth of spirit RTDs.
Seltzers Set the Stage
It's hard to talk about RTD alcohol trends without discussing hard seltzers. The rise of hard seltzers brought new life to the flavored malt beverages (FMB) category - a subset of the ready-to-drink alcohol market. Hard seltzers presented health-conscious consumers with a lighter alternative with lower calories and little to no sugar and carbs. In addition to being perceived as a “healthier” FMB option, hard seltzers also benefited from the growing popularity of sparkling waters and the convenience of canned drinks. While the popularity of hard seltzers was initially fueled in part by an increased focus on health and wellness, consumers increasingly signaled an interest in products that delivered a more premium drinking experience and sophisticated flavor profiles, paving the way for the entry of spirit-based RTDs such as High Noon.
The surge in spirit RTD innovation is expanding the overall RTD category, as new products address the latest trends and preferences of a maturing market while satisfying consumers’ appetite for variety.
SOURCE: NielsenIQ -The Current Biz of RTD Fizz (52 weeks ending 10/02/21 vs year ago)
Better-For-You RTD Beverages
As consumers continue to look for “healthier” alcohol options, spirit RTDs are responding with spirit-based seltzers with natural flavors and fewer calories. Some brands are taking it even further by adding functional components to their beverages.
Alcohol brands cannot make health claims, but spirit RTDs, such as Flying Embers’ probiotic-spiked hard kombuchas and Owl’s Brew’s tea-based seltzers, benefit from the “health halo” created by ingredients like vitamins, antioxidants, and probiotics.
Premiumization and Trading Up
Better-For-You and flavor variety are critical growth drivers, with spirit RTDs ranging from lower ABV carbonated seltzers with lighter flavors and fewer calories that compete with hard seltzers to full-strength, sophisticated, nuanced cocktails.
Within the spirit category, Tequila and Mezcal, along with other brown spirits, are driving the growth of traditional spirits. These products benefited from premiumization trends and consumers’ experimentation with at-home mixology during COVID. As consumers’ tastes expand beyond classic cocktails, niche and regional recipes like Ranch Water, a tequila highball made with lime juice and Topo Chico, are making their way into the RTD market. Many consumers are trading away from hard seltzers into spirit RTDs, looking for a more premium cocktail experience while still seeking the convenience, simplicity, and portability of RTDs.
According to NielsenIQ, Tequila-based RTDs saw the highest growth at 138%, followed by rum-based drinks at 132%. Vodka-based beverages accounted for more than half of the category’s off-premise dollar sales for the 52 weeks ending October 2, 2021, increasing 110% over the previous year.
Not only have premium vodkas such as Absolut and Ketel One entered the canned RTD space, but large format premium RTD cocktails are also on the rise. Crafthouse Cocktails Moscow Mule Bottled Cocktail retails for $19.99 for a 750ml bottle, placing it above the cost of a low-end rosé while still significantly below the retail price of a bottle of straight spirits.
Spirit RTD’s are differentiating themselves with unique flavor profiles, quality ingredients, beautiful packaging, and well-designed brand messaging and stories. Spirit RTD brands like Cutwater, started by Yuseff Cherney as a hobby in the back of his brewery, provide the canned cocktail market with a personal connection and relatable brand story.
Spirit RTD Growth Will Accelerate
While Hard seltzers and FMBs currently command the lion’s share of the RTD category, spirit-based RTDs are expanding the category and growing exponentially. This rapid growth will accelerate as federal and state regulations change to level the playing field with Hard Seltzers and FMBs. According to The United States’ Distilled Spirits Council (DISCUS), 13 states are currently considering new RTD laws to lower taxes and allow for greater retail availability of spirit RTDs.
Traditionally, spirit sales have been restricted to approximately 30% of retail accounts where beer is available. This limitation means spirit-based RTDs miss out on high-traffic channels like grocery and convenience. However, that distribution disadvantage has been eroding, especially during the pandemic when states eased up restrictions and helped open up distribution channels for spirits, particularly on-premise and direct-to-consumer (DTC). The Distilled Spirits Council of the United States (DISCUS) and spirit suppliers have been fighting to end distribution restrictions, at a minimum, for lower ABV and single-serve products; if successful, spirit RTDS would be more widely accessible to consumers.
Spirit RTDs are currently also at a tax disadvantage. The federal excise tax on malt-based beverages and sugar brew-based beverages is five cents per 12-ounce serving. Wine-based RTDs are taxed twice that rate, and spirit RTDs are taxed yet higher at 13 cents. State-level excise taxes are also higher on spirits compared to beer or wine.
Not only does the current tax environment make it expensive to produce spirit RTDs, but these additional costs are passed on to consumers, contributing to a significantly higher retail price. DISCUS is pushing to lower excise taxes to be equivalent to malt-and wine-based products.
If DISCUS and spirit suppliers succeed in pushing through their agenda for excise tax equivalency and greater market access, malt-based RTDs will lose their price and distribution advantage, opening the door for further growth in spirit RTDs. Already, distributors looking to partake of spirit RTD growth and offset the slowing of hard seltzers are seeking permits to become total alcohol beverage suppliers.
The Future Looks Bright For Spirit RTDs
Spirit-based RTDs have a unique set of challenges, but the category is ushering in a wave of innovation that expands the RTD category’s evolution beyond the recent success of hard seltzer.
In Sept 2021, Diageo launched Reeftip, a brand that helps regenerate coral reefs, with a line of Ready-to-Drink spiced rum cocktails. Craft distilleries are launching spirit-based RTDs made with signature gin or vodka. More brands are working on experimenting with different alcohol bases and local, plant-based ingredients.
Another exciting area to watch is the entrance of non-alcoholic beverage brands like Pepsi and Coke into the spirit RTD space. This type of collaboration opens doors for crossover and collaboration between a range of companies that bring different strengths and advantages to the market.
If you're interested in entering the spirit ready-to-drink cocktail category or the spirit RTD market, get in touch with BevSource. Our team can help you navigate the complex landscape of regulations, taxes, formulation, and manufacturing that come with spirit-based RTDs and provide product development and production support for your brand as it enters this growing market.