Boston Beer's abrupt warning last month that it overestimated demand for its popular hard seltzer brand Truly provided a wakeup to the alcohol industry that triple-digit growth rates for the popular beverage category were a thing of the past.
The news seemed to confirm for some that the long predicted death of the hard seltzer category — a source of growth for beer manufacturers amid a sales decline of their core brews — had finally come. Boston Beer slashed its full-year guidance as a result, and its stock lost nearly 25% of its value in a single day, wiping billions off its market cap.
But this appears to have been a knee-jerk reaction by the markets. Analysts said Boston Beer's hiccup was likely the result of an overaggressive forecast, not a dying category. Hard seltzer remains a long-term source of growth for the alcohol industry, they argued, even if the sector is ripe for a shakeup as hundreds of brands with similar attributes fight for limited shelf space.
"I don't really believe that this is in any sort of way a death knell for the hard seltzer industry. Once people take a breath and reevaluate what the category has done and judge what it's doing now in that context, people will realize it's still a very strong category."
Beverage analyst, Morningstar
While some brands are inevitably going to follow Coors Hard Seltzer, which Molson Coors announced in July it was discontinuing in the U.S. to focus on more promising offerings, the category is poised for a prolonged period of robust growth lasting for several more years.
"I don't really believe that this is in any sort of way a death knell for the hard seltzer industry," said Nick Johnson, a beverage analyst who covers the alcohol space at Morningstar. "Once people take a breath and reevaluate what the category has done and judge what it's doing now in that context, people will realize it's still a very strong category."
Following the herd
The industry is dominated by Truly and Mark Anthony Brands' White Claw, which collectively command 75% of the category, with others like Bud Light Seltzer, Topo Chico Hard Seltzer, Vizzy and Corona Hard Seltzer also fighting for market share. In the case of Bud Light and Corona, their manufacturers have turned to their popular brand names to peddle their new offerings.
The hard seltzer category has been a boon to these and other beer makers. Last year, beer volume dipped 2.8% despite total alcohol consumption jumping to its highest rate in nearly two decades, according to IWSR. At the same time, consumption of hard seltzer rose 130% in 2020, the data analytics provider estimated.
The rush to capture a portion of that growth has resulted in a flood of similar products on shelves that creates confusion among consumers and overwhelms retailers unable to stock them all. During Boston Beer's recent earnings call, President and CEO Dave Burwick cited data from IRI showing there are an estimated 220 brands and 1,000 SKUs, a figure that is about 50% higher than last year.
"The proliferation of brands in this category has occurred, there's a herd-like mentality in this business broadly. And I think people try to bring new brands into the marketplace and there's a sameness to these brands. There's a lack of originality," he said. "And I think what's happened: A little bit, little bit of a luster to the specialistic segment for some consumers has been lost."
Morningstar's Johnson said despite unique characteristics like flavor, packaging or ingredient mix, there are only so many ways to make spiked water.
"The dimensions that these new brands are differentiating on just really aren't things in my opinion that really matter to the large majority of consumers." Johnson said. "And that's where you get a lot of the kind of sameness."
The sharp drop in the growth of hard seltzer is being attributed to a maturing market, a return of volume to the on-premise channel where the beverage is less popular, more hard seltzer choices and a challenging comparison period to last year when consumers were pantry-loading. According to data from NielsenIQ, hard seltzer sales were up more than 51% for the 52 weeks ending July 10, 2021, but in the final 12 weeks of that period sales were only up 7.8%.
“Honestly, it hit us hard and fast," Burwick said on CNBC. “We will gain share. The question is where the category goes. And you know, if anybody out there can give a better sense of that we’re all ears, but we can’t control it."
Another factor weighing on hard seltzer is that the category, which traditionally has catered to younger consumers of legal drinking age, is attracting more older millennials between the ages of 35 and 44 years, according to Beth Bloom, an associate director of US food and drink at Mintel. Even though this demographic increases the number of people drinking hard seltzers, older consumers tend to drink less, she said.
Chipping away at the market leaders
Wall Street analysts and beer company executives from Molson Coors and Constellation Brands, the maker of Corona, have predicted since Boston Beer's earnings surprise that the hard seltzer category will ultimately be dominated by a few large brands, much like Coors Light, Bud Light and Miller Lite make up the lion's share of sales in light beer, or Pepsi and Coke in soda.
Sales growth for hard seltzer is likely to increase between 20% and 40% annually during the next three to five years, according to those who follow the industry. Johnson said a more moderate growth rate would deter many smaller players from investing the time and money to enter the category with future success far from certain and firmly established players already entrenched.
"It shows just how unnimble at times the beer market is and also setting expectations of forever growth, or green fields forever. No matter how many categories come in, there's always a cycle to it."
Analyst, Beverage Marketing Corporation
Molson Coors CEO Gavin Hattersley told analysts last month that even if the category grows at a smaller clip of between 10% and 40% from its recent triple-digit increase, nothing else in the beer category is exhibiting that rate of growth.
It's a big reason why Molson Coors has invested aggressively in its hard seltzer offerings like Vizzy and Topo Chico, and its bets show signs of paying off. The company doubled its share of the U.S. hard seltzer segment during its second quarter and is aiming to control 10% of the U.S. market by the end of 2021.
"We're going to invest bigger behind our fast-growing global hard seltzer portfolio," Hattersley said. "Our guidance also anticipates continued strength in our above-premium portfolio, particularly hard seltzer."
Despite being late to the hard seltzer category, legacy beer makers like Molson Coors, AB InBev and Constellation Brands are grabbing market share away from the early winners.
White Claw's market share in the U.S. dipped to 49.5% in 2020 from 56.5% a year earlier, according Euromonitor International. Data shows Truly’s market share has also been decreasing in the U.S. for hard seltzers and other hard alternatives during the past few years from 2018, when it accounted for about a third of sales.
"It's going to be further chipping away at the leaders," Bloom with Mintel said. "We are in a place right now where consumers do like to try new things and they like that kind of variety, but they prefer to try new things that are based in something familiar."
Beer makers are investing heavily in seltzer output, confident that the recent growth will continue. Molson Coors announced last December it was increasing production capacity for seltzers and popular innovations by more than 400% to keep up with consumer demand.
Constellation CEO Bill Newlands told analysts in June the company planned to double its seltzer capabilities during the fiscal year, with a long-term goal of becoming a top-three player. AB InBev aims for its seltzer portfolio, which also includes Bon & Viv, to outpace the overall seltzer segment’s growth by two times this year. So far, it's on track to beat that goal.
Hard seltzer has drawn comparisons to the slowdown that crept into the craft beer space before the pandemic after a decade of robust expansion. Craft output experienced a decade of hot growth as big beer companies and countless upstarts flooded the space, with sales increasing at a compound annual growth rate of 20.2% between 2010 and 2015, before easing to 1.8% between between 2015 and 2020, according to data provided by the Beverage Marketing Corporation.
In much the same way craft has continued to innovate and introduce new flavors despite the slowdown, hard seltzer manufacturers will need to do the same in order to remain relevant and meet consumers' insatiable appetite for variety, said Nathan Greene, an analyst at Beverage Marketing Corporation.
The hard seltzer category also is becoming populated with offerings that include spirits, putting further pressure on Truly, White Claw and products sold by the major beer makers to keep pace. The challenge for hard seltzer brands will be to find ways to differentiate from other products on the shelf, much like Molson Coors has done with Vizzy, which is made with a superfruit that contains 30 times more vitamin C per cup than an orange, or Flying Embers, which has antioxidants and live probiotics.
"In comparison to craft, it shows just how unnimble at times the beer market is and also setting expectations of forever growth, or green fields forever," said Greene. "No matter how many categories come in, there's always a cycle to it."