Once mocked, nonalcoholic beer creates a buzz as traditional brew sales stagnate

After vowing he would never enter the nonalcoholic beer space, Sam Adams founder Jim Koch's stance on the fast-growing category appears to have softened with Boston Beer set to debut offerings next year, even if the craft pioneer's opinion of products already on the market remains resolute.

Koch said the basic problem with nonalcoholic beer was that they tasted terrible. "I don't want to make beer that tastes like crap," he decried on a recent video conference introducing the new beers. "If you want something that's nonalcoholic you've got a lot of great choices, whether they're called Diet Coke or orange juice or Monster."

Boston Beer, whose portfolio includes Truly hard seltzer, Twisted Tea hard iced tea and Dogfish Head craft beer, spent two years researching and brewing to create its nonalcoholic IPA-style Samuel Adams Just the Haze before settling on a prototype about six months ago that tasted like a traditional IPA, Koch said.

In early testing of the beer, he alluded to some of the stigma that has long been associated with nonalcoholic beverages: When people were given Just the Haze and other leading IPAs on the market to taste, they preferred his, but when they were told what they were drinking the rating dropped.

"For Boston Beer, a big part of our success has been developing beverages that may not have a market when we launched them," said Koch, who enjoys having Just the Haze for breakfast. "This is very much in that genre. Alright, let’s do something that is really cool that no one has done before and deliver an amazing, great tasting product and we’ll see if anybody goes out to drink it. You just never know. I just don’t know how big it's going to get."

Americans — most notably younger consumers such as millennials and Gen Zers — are increasingly drinking less beer than previous generations, prompting a drop in sales of signature brews at AB InBev and Molson Coors. Nielsen noted in 2019 that 66% of millennials said they’re making efforts to reduce their alcohol consumption. Overall, beer volume slipped 2.3% in 2019, its fourth straight year of declines, IWSR reported earlier this year.

"I don't want to make beer that tastes like crap. If you want something that's nonalcoholic you've got a lot of great choices, whether they're called Diet Coke or orange juice or Monster."

Jim Koch

Founder, Boston Beer

But there were bright spots in the category, too, with low- and no-alcohol posting gains of 6.6%. As large beer companies look for ways to jumpstart growth, nonalcoholic offerings have become a popular way to do that even if sales are a miniscule fraction of traditional beer and how big the niche category ultimately becomes remains far from certain.

Tapping into European success

The phrases sober curious, Dry January and Sober October have entered the lexicon as consumers curtail their calorie intake or cutback for health reasons, but are hesitant to give up the taste and experience that comes with consuming beer. A 2019 Nielsen study found one-fifth of U.S. consumers gave up alcohol in January last year. Other consumers have turned to nonalcoholic beers throughout the year because they are reluctant to endure the harsh effects that come with imbibing if they plan to exercise or need to go to work the next day.

"The [nonalcoholic] category was more associated with an older drinking demographic, but I think we all know the sort of younger millennial and even younger [demographic] is just much more conscious of the ingredients and what they are putting into their body," said Sam Calagione, a co-founder of Dogfish Head whose 35-year-old beer company merged with Boston Beer in 2019. Dogfish Head plans to roll out its latest nonalcoholic beer in early 2021 called Lemon Quest, a Gatorade-like beverage aimed at people with an active lifestyle.

Brewers remain optimistic that adoption of low- and nonalcoholic beers across Europe will eventually make their way to the United States, a big reason why many companies are introducing new products in anticipation.

Global Market Insights noted more than 25% of Europeans prefer the taste of nonalcoholic beer over the conventional version. In Spain, the world’s largest consumers of alcohol-free and low-alcohol beer, the category is responsible for an estimated 13% of annual beer sales, according to the country's brewers association. Statista reported in the United Kingdom, the number of people drinking low alcohol or alcohol-free beer in 2019 nearly doubled from 1 million in 2016, while this year in Germany 11.2 million individuals are expected to drink alcohol-free beer, a 10.5% increase from 2019.

Nathan Greene

Analyst, Beverage Marketing Corporation.

The nonalcoholic beer market remains outsized compared to the $43 billion in retail sales racked up across the total beer category, according to IRI. For the latest 52 weeks ending Nov. 1, the market research firm found nonalcoholic beer sales rose 38% to $181 million compared to the same period a year ago. Heineken, which has seen its dominance in the nonalcoholic space soar with the successful introduction of Heineken 0.0 in 2017, accounted for $51.7 million, or 29% of sales, followed by O'Doul's with roughly 25% and Busch NA at 17%.

Long an afterthought on crowded store shelves and barroom taps, the category is showing signs of life with nonalcoholic beers forecast to generate just over 0.5% of beer sales in 2020, up from 0.3% two years earlier, data provided by the Beverage Marketing Corporation showed. The pace of growth is expected to gain momentum with market share for nonalcoholic beers tripling to between 1.5% and 2% by 2024.

"The reason for all this interest is a lot of these suppliers and also distributors and retailers and everybody is looking for opportunities, especially in new categories for growth because the outlook for traditional beer is not very good," said Nathan Greene, an analyst at the Beverage Marketing Corporation. "If anything, hard seltzer has further accelerated that outlook negatively because you are not adopting consumers for beer.”

Greene added while nonalcoholic beers will undoubtedly continue to have a place in beverage consumption, their ability to expand from a niche offering to a more mainstream product hinges on convincing enough people to consume beer for refreshment — much like they do soda, water or tea — rather than just as a vehicle to deliver alcohol. "That in the end, may be a limiting factor for scale," he said.

Time is of the essence

For beer companies, however, there is little downside in rolling out a nonalcoholic offering, analysts said. With beer sales struggling, manufacturers are looking for an opportunity to grow, and this could be one way to move the needle, albeit not at a large scale like hard seltzers have managed to do in the alcohol category. Producers of nonalcoholic beer also have the advantage of not only giving consumers choice but building loyalty to a brand creating products to support their lifestyle.

Beer companies such as Boston Beer are routinely touting how their product took years to develop to get that authentic taste. When Guinness introduced Guinness 0.0, a nonalcoholic version of its famous stout in October, the company said the process took four years so it could retain the distinct character and taste. For Budweiser Zero, Anheuser-Busch's first zero-proof beer, it took a team of brewers around the globe more than two years to create.

Anheuser-Busch not only has Budweiser Zero, which gains instant market recognition with its close ties to the Budweiser brand, but a nonalcoholic portfolio of different flavor profiles that include O'Doul's, Busch NA and several craft beers such as Golden Road Mango Cart NA and a Karbach Free & Easy NA IPA. AB InBev, which owns Anheuser-Busch, plans to have 20% of its global beer volumes coming from no- and low-alcohol beers by 2025.

Adam Warrington, vice president of corporate social responsibility at Anheuser-Busch, said nonalcoholic beers are a "major focus" the company has prioritized putting more resources behind. While O'Doul's continues to sell well, the iconic nonalcoholic beer introduced in 1990 is viewed as a product someone's uncle drinks or people consume while golfing, for example, which limits the company's opportunity to expand the brand to additional demographics.

In the case of Budweiser Zero and the brand's marketing partnership with former Miami Heat NBA player Dwyane Wade, Anheuser-Busch is able to connect with a different and larger portion of the population. Other beers serve a similar purpose by addressing a certain flavor, demographic or drinking occasion.

"In the past, the company might have just gone all-in on one innovation, like a Budweiser Zero, or just try to focus on existing brands like Busch NA or O'Doul's," Warrington said. "But different kinds of consumers want different nonalcoholic options now. When you see a segment growing double-digits as the beer leader, of course we're going to ... pay attention."

The real opportunity for nonalcoholic beers, and the path that could increase their chance of success, may be found by targeting flavorful craft brews or a certain style of beer like an IPA, Greene said. These beers thrive in large part because of their taste or ability to push the boundary rather than just being a mainstream product consumers drink for its alcohol content.

The risk for major alcohol companies is that by taking the easiest path for success in trying to reach more consumers through a single item, they don't do enough to make their offering stand out from other nonalcoholic choices people have beyond the beer category, Greene said. At the same time, big beer companies control the three-tier system where they sell product to distributors, who then sell it to retailers. These companies with scale have the best chance to get a widely distributed product onto the market and influence consumer opinions.

"If they fail, then the entire noise and perception of the industry will be that this product's not going to work and then there won’t be an opportunity given to these other products as well,” he said. "There is a chance that the best products won't have the best opportunity to succeed."

Convincing the skeptics

At Athletic Brewing, founder Bill Shufelt struggled at first to convince people in the industry to take a chance on his brewer of stouts, IPAs and other nonalcoholic beers. Even though a large swath of the U.S. population doesn't drink or rarely imbibes, he said alcohol marketers have done an effective job convincing people that consumers are drinking more than they do, leading to a reluctance, until recently, by craft and other brewers to enter the market.

Shufelt began looking for a partner with brewing experience, but was rejected by all but one of the first 200 people he reached out to. At a conference in 2017 with 10,000 brewers in Washington, D.C., Shufelt failed to generate even a single meaningful conversation with people skeptical about the segment's prospects and was "laughed out of the conversations pretty quickly." Rather than abandon the idea, Shufelt said the rejection served to enforce his belief there was a market that just hadn't been tapped into.

"This gave me a lot more confidence in the idea because inside the brewing industry there was zero interest. People were convinced there was not a market for nonalcoholic beer," Shufelt said. "But outside the industry, anecdotally, every person I talked to, customer, family friend, or retailers even ... showed people were interested in drinking great-tasting nonalcoholic beer. It’s just no one was making or marketing anything like it.”

An estimated 30% of adults don't drink, according to the American Addiction Centers. Shufelt, who quit drinking alcoholic beverages seven years ago when he started training for his first ultramarathon, said nonalcoholic beer has long been put in a "penalty box," but those "walls and stigmas have really started to crumble" as people care more about their health.

To carve out its niche, Athletic targeted a fitness-focused audience and has attended more than 500 races where runners could sample its beer. It also developed its own proprietary brewing process; most beer companies use traditional methods to make nonalcoholic beer before removing the alcohol at the end, a move that doesn't create the same flavor profile and limits the style of beers that can be produced.

"Alcoholic beer has a great place in today's world. Our goal is definitely not to cannibalize alcoholic beer in those sessions. We're definitely trying to reimagine the category, like an athletic beer category.

Bill Shufelt

Founder, Athletic Brewing

Despite the early challenges, Athletic Brewing watched sales grow more than 1,000% in 2019. They are up another 500% in 2020. Some limited edition brews, depending on their size, sell out in as little as 30 seconds online. It outgrew its brewery in Connecticut, which was expected to handle production for five years, in just 10 months. And in March, the company raised $17.5 million in its latest funding round, a portion of which was used to purchase an 80,000-square-foot San Diego brewery once occupied by Ballast Point Brewing.

"Alcoholic beer has a great place in today's world. Our goal is definitely not to cannibalize alcoholic beer in those sessions," Shufelt said. "We're definitely trying to reimagine the category, like an athletic beer category. We're adding beer to a lot of different days of the week, but we're also attracting a lot of soda drinkers or functional beverage drinkers into the category."

Greene praised the work Athletic has done in expanding the nonalcoholic beer category. "Athletic has kind of been the proof of concept that you can make it work because they have really done it on their own and essentially defined the new concept," he said.

Passing the test of time

Scott Scanlon, an executive at IRI, said the impetus for the resurgence in nonalcoholic beers began with the success of low calorie, alcohol beverages such as Saint Archer Gold and Michelob Ultra geared toward the health-minded, fitness-focused consumer. It followed soon after with the explosion of carbonated hard seltzer that had 100 calories or less.

The broader rollout of 65-calorie Heineken 0.0 and Budweiser Zero with 50 calories this summer were supported by expansive marketing campaigns that further accelerated adoption with more mainstream consumers.

"What [beer companies] are doing is answering consumer demand, quite honestly," Scanlon said. "It's less about the nonalcoholic nature and more about the healthier lifestyles that they are reacting to."

Even as more nonalcoholic offerings enter the space seemingly every month, beverage analysts said the category is poised for further growth. Warrington at Anheuser-Busch said the beer giant expects to introduce more products to the category. And the coronavirus pandemic has likely slowed the introduction of at least a few nonalcoholic beverages this year.

Scanlon predicted the crowded category will eventually whittle down, however, with as many as six nonalcoholic beers that "pass the test of time."

"When you talk to [consumers] about seltzers, people aren't only drinking those products because of the calorie level alone, they enjoy it," he said. "I think it will kind of come down to the nonalcoholic as well. They will look at this and say 'Yes, it's nonalcoholic. Yes, it has dramatically reduced calories, but I enjoy drinking it even though there are alternatives outside of this segment.'"