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Winning Amid Consolidation and Innovation

Key Considerations for High Growth Brands (and those that want to be) PART ONE of TWO WRITTEN BY SARAH NAGEL SISISKY

All data and statistical information have been sourced from Bar Convent Brooklyn 2018 Routes to the U.S. Beverage Alcohol Market for Entrepreneurial Brands presentation.

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t seems that more than ever, one of the toughest challenges facing American spirits producers in today’s market is the increasingly consolidated distributor landscape. Carving out a successful route-to-market in this environment has proven to be quite challenging. The good news is opportunities have been created for alternative distribution solutions and pathways to reach American consumers. Part One of this two part series will explore the current U.S. spirits landscape from a high level vantage point, and Part Two will examine key considerations for success within this landscape, including thoughts on how to determine an optimal route to market.

The Regulatory Framework It is first important to touch briefly on the underlying regulatory framework of the U.S. market. While not a glamorous part of the business or the showcase of this article, a basic understanding of two core regulatory realities will help drive thinking on other issues addressed at length in the article. The first reality is that the regulatory framework in the U.S. is complex — no surprise there. There is regulation at the federal level through many executive branch agencies, including, among others, the Alcohol and Tobacco Tax and Trade Bureau (TTB), Food and Drug Administration (FDA), Federal Trade Commission (FTC), and U.S. Customs and Border Patrol (USCBP), as well as regulation and oversight at the state level, which is by nature highly decentralized. In essence, the U.S. market is roughly equivalent to 51 different countries — one level of federal regulation plus regulation in each of the 50 individual states. The second reality is the “three tier system.” Under the three tier system, which dates back to the 1930s, the TTB divides the industry into three tiers and requires that manufacturers/suppliers (first tier), wholesalers/distributors (second tier), and retailers (third tier) must remain segregated and operate only within their own tier. Despite the regulatory complexity of the market, consumption of spirits in the U.S. has increased on average by 2.4% annually with the latest data showing total U.S. consumption in 2016 at 221 million nine liter cases. With this trajectory, the market should increase by over 22 million cases in the next five years. This growth has been driven and is expected to continue with premium priced

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Over the period 1990 to 2017, market share of the top five distributors has increased from 23.8% to 64.4% brands. Non-premium products in several categories, including gin, rum, and vodka have all shown negative growth while every premium segment across distilled spirits shows volume growth. Over the five year period from 2018 to 2022, non-premium spirits anticipate increased volume of 4.3 million cases, or an increase of 2.9%, and premium spirits are expected to nearly quadruple that number with an increase of 17.7 million cases, or 23.6%. Within this context of overall sector growth, large suppliers continue to hold a highly concentrated position. Data from 2016 indicates that the top ten spirits suppliers account for 72% of total market share, driven by the largest supplier, Diageo, accounting for 24%. Similarly, there has been significant consolidation in the distributor tier. Over the period 1990 to 2017, market share of the top five distributors has increased from 23.8% to 64.4%. Despite significant consolidation among large suppliers and distributors, there has been a notable rise in domestic craft spirits producers. In fact, domestic craft spirit producers number more than 1,600 with a combined market share of less than 4% of total market value. For a more detailed view of the craft spirits landscape, the Craft Spirits Data Project produced by the American Craft Spirits Association, Park Street, and IWSR is a useful resource (Authors Note: I am the head of Client Development at Park Street). Amid the backdrop of consolidation, how are small brands competing against the large suppliers with often entrenched market positions?

An Era of Democratization One key factor for success among emerging brands is their ability to capitalize on the changing media landscape. There has been since 1980 a considerable increase in overall media consumption across channels (e.g., print, TV, Internet and games), together with the introduction and subsequent wide scale adoption of new media

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Artisan Spirit: Fall 2018  

The magazine for craft distillers and their fans.

Artisan Spirit: Fall 2018  

The magazine for craft distillers and their fans.