Speaker 1: Canned cocktails have become all the rage as of late.

Speaker 2: I don't taste any alcohol in here and that's kind of scary.

Speaker 1: In 2022, Spirits took over beer as the market share leader in the US. Premix cocktails are the second largest spirit by volume, growing nearly 25 percent from 2022 to 2023. High Noon is by far the biggest, having done over $400 million in sales in 2024. But new players are constantly upending the market. Take Surfside, for example. This iced tea and vodka drink sold half a million dollars worth of product back in May of 2024. By August, that number crossed $2 million.

Speaker 3: Think of a tailgate occasion. Think of a barbecue or you're at the beach. It's not the best place to bring your 750-milliliter bottle of liquor and all your mixers to make a cocktail yourself. And yet having it in a can allows you to eat into those occasions that are normally beer.

Speaker 1: Spirit companies from Absolute to Bacardi are naturally capitalizing on the trend too. But so are some of the largest names in beer, like Anheuser-Busch and Molson Coors.

Speaker 4: What's interesting is that once the big players, the big brewers, the big distillers get in on the action, you know that there's a trend here that they're trying to capitalize on with consumers.

Speaker 1: This is a canned Jack Daniels and Coca-Cola. Want to give it a try?

Speaker 5: Let's do it.

Speaker 1: Oh, man. That's a punch. The ready-to-drink market of alcoholic beverages has been on the rise for decades. In the 80s, wine coolers were popular. A decade later, alcohol pops like Smirnoff Ice and Bacardi Breezers took off.

Speaker 6: Synonymous with the 90s generation and synonymous with the rave culture, all of these kind of fluorescent colors and fluorescent artificial ingredients, all of that fitted that narrative and that demographic. That lasted for a few years.

Speaker 1: The 2000s ushered in an era of craft beer, but ready-to-drink regained its footing in 2016 with the introduction of White Claw. For the next five years, their popularity soared, so much so that the brand was struggling with a supply shortage in 2019. White Claw hard seltzers peaked in 2022.

Speaker 6: Around that time, you had a plethora of new brands coming in, an oversaturation of new flavor sophistication initiatives, so many flavors that essentially started devaluing the core proposition of the brands. Consumers started getting confused and they started taking a step back. By last year, that would accelerate into essentially more or less a collapse of the hard seltzer category.

Speaker 1: At least a collapse of skyrocketing growth, it's still a huge market. From 2021 to 2023, spirit-based ready-to-drink doubled its market share in the U.S. Malt-based beverages like a White Claw or Twisted Tea are still the dominant players. Malt-based drinks are made with alcohol fermented from sugar rather than a spirit. This is a U.S.-centric phenomenon. About 90% of its consumption takes place in the U.S. A big reason for that is in the U.S., they are taxed like beer, which is lower than spirits.

Speaker 5: In college, they're cheap. It's kind of like, all right, I'll drink it. It has a bit of flavor in it. I'll enjoy myself. Now you graduate to better taste for a higher price.

Speaker 1: And of course, there are some cultural considerations as well.

Speaker 6: Europeans or other nations around the world, we do not call alcohol hard. We don't use the adjective hard to describe alcoholic drinks. And additionally, on top of that, we do not call sparkling water seltzer. So trying to explain to a European what a hard seltzer is was an exercise of futility from the beginning.

Speaker 1: Ready-to-drink spirits, on the other hand, are popular globally. They're essentially pre-mixed cocktails with real liquor, like a vodka or tequila as its base. Pre-mixed cocktails started taking off in 2022 and have grown exponentially since then. In 2024, spirit-based ready-to-drink volume is up about 650% in the U.S. compared to 2019.

Speaker 4: I think there's an interesting trend where hard seltzers actually set up the playing field for canned cocktails. It sort of primed the consumer to be out and looking for something in a can that they enjoyed consuming. And then it sort of turned into this trend where now they're looking for a canned Moscow Mule, a canned Margarita, a canned Paloma.

Speaker 1: Let's try the espresso martini. So this is 13% alcohol. Just for reference, a high noon was 4 1⁄2%. Wow. Dangerous. The three biggest players, High Noon, Cutwater, and Neutral, control more than half of the U.S. ready-to-drink spirits market. High Noon is owned by Gallo, a winery that owns brands such as Barefoot and Andre. Cutwater and Neutral are owned by beer giant Anheuser-Busch.

Speaker 3: When you think about how these brands behave, they're actually far closer to how beer brands behave in the sense of the velocity at which they go through, how they're gonna dominate the cold box, therefore how are you merchandising, retailing it, et cetera. And when you have a company that maybe plays in a little bit more of that space like ABI, you're able to port through those learnings.

Speaker 4: Big Beer has traditionally fought against getting spirit-based cocktails onto supermarket shelves because they don't want to relinquish that shelf space. But now what you're seeing is a reversal of policy. They want those products because now they have them in their own portfolios.

Speaker 1: But while ready-to-drink spirits are a booming business, there is some skepticism as to its lasting impact on the biggest beer manufacturers.

Speaker 7: I think that what they are very good at is beer. They are also very financially-driven companies. My question always is, are they prepared to make a long-term financial investment in a brand from the ground up in order to expand it in a patient fashion? And so far, I haven't seen much evidence of that.

Speaker 1: An outlier in the brewer space is Sam Adams' producer, Boston Beer. It's a smaller player compared to giants like Anheuser-Busch and Molson Coors. However, 90% of its U.S. sales are coming from Beyond Beer, which includes popular brands like Angry Orchard, Twisted Tea, and Truly. At the height of the hard seltzer craze, Boston Beer's stock soared, then tumbled as malt beverage growth slowed back in 2021. The company dumped millions of unsold cases of Truly that year.

Speaker 8: We were very aggressive about adding capacity, adding inventory, buying raw materials like cans and flavors, and frankly, we overbought. And when the growth stopped, we had more of all those things than we were gonna be able to use.

Speaker 1: And in line with the broader market trend, Truly has now moved into the vodka soda business as well. With big beer companies seeing beer sales on the decline, expanding portfolios is top of mind.

Speaker 6: But 90% of the conversations I have with all of these guys, and I do have conversations with all of these guys throughout the years, they tend to be about what they call Beyond Beer. Beyond Beer includes RTDs, non-alcoholic, all of that's beer-adjacent segments. The interest is 100% there.

Speaker 1: But it may take more to convince investors. This stock chart shows the growth, or lack thereof, that Anheuser-Busch and Molson Coors have experienced since 2019 compared to the S&P 500.

Speaker 7: The stocks really haven't done much of anything. So you have a five-year, six-year, seven-year trend of Beyond Beer growth, which has been pretty exponential, but these companies' stock prices have done very little during that time frame. So they're not participating in it.

Speaker 1: That's because despite the massive success of brands like Cutwater, the ready-to-drink category is still a relatively small part of the big beer business. It represents less than 5% of the total sales for Anheuser-Busch, who owns two of the top three premix cocktail brands. It's about 7% of sales for Molson Coors.

Speaker 3: But nothing has really stuck enough to override the decline of light beer. So investment in capabilities is one thing, but actually having strong brands that you're building over time in slow fashion that's sustainable over years to come is something completely different.

Speaker 7: In the case of Molson Coors, the biggest foray here was Simply Spiked, which was using the Simply Orange Juice brand in partnership with Coke. It had a great first year, typical poster child of what happens when you do this. You get a lot of trial, and then in year two, it doesn't get the repeat that you expect. So sales are declining.

Speaker 1: Coca-Cola's recent investment in the alcoholic beverage space started in Japan back in 2018 with its Lemon Dow beverage. Since then, it's leveraged its soft drink brands with a variety of alcoholic players. In addition to Simply Spiked, Molson Coors produces its Topo Chico hard seltzers and ready-to-drink cocktails. Jack Daniel's owner, Brown Foreman, partnered with Coca-Cola and debuted a canned version of a bar classic in U.S. markets last year.

Speaker 2: I mean, I feel like this tastes more like I made it myself in my backyard. Like, I don't know if this is fancier. I think that's what they're going for.

Speaker 6: Everyone knows what a Jack and Coke is. Everyone knows what a vodka soda is. It's a very different proposition than trying to explain to someone what a mango white claw is. Gives consumers something they have already and potentially always have been doing. And I think that has the potential to give them a little bit longer longevity.

Speaker 3: U.S. alcohol as an industry, despite the share price performance that we've seen today, is an attractive industry. It's a high-margin industry. So if there was ever a market that you were to try this, U.S. would sort of be it in a meaningful way where we've seen most of the splash.

Speaker 2: It kind of tastes like a fruit punch to me, like one of those ones you eat with a bendy straw.

Speaker 1: Really? Oh, OK. While premixed cocktails is the fastest-growing segment within the U.S. spirit industry, it's still the smallest segment by revenue. There have been some difficulties in reaching its true market potential.

Speaker 4: There's definitely some headwinds for canned cocktails, getting them onto shelves at grocery stores, at convenience stores. I mean, there's a reason why you can't just pick up a handle of vodka at your local CVS, right? Unless you're in the state of California, because it's a state-by-state measure. A lot of it has to do with consumer protections. There are different tax implications state-by-state. So the industry is currently in D.C. trying to navigate all of that from a policy standpoint.

Speaker 1: Plus, the ready-to-drink spirit space is crowded. You have traditional bar drinks like a vodka soda, but there's also canned martinis and Cosmopolitans. There's just a lot more variety in the ready-to-drink spirit space compared to hard seltzers. And lots of room for differentiated competitors to keep entering the market, which also means that brand loyalty is hard to come by.

Speaker 3: Investment is how you think about your canning lines. Do I have the canning lines at my brewery or at my facility to take the cans, to put them in a multi-pack? That is not hard. What's really hard is creating brands that resonate with consumers.

Speaker 7: The high churn rate comes from the fact that a lot of the entrants can be kind of faddish. So you get a lot of trial up front from the consumer, but the repeat isn't always there. And then the consumer goes to shop again, and there's three more choices on the shelf.

Speaker 1: While some traditionally non-alcoholic players are entering the liquor space, the opposite is happening, too. Alcohol brands are increasingly offering non-alcoholic options as younger generations are drinking less. One survey found that, overall, more than 40% of Americans are trying to drink less alcohol.

Speaker 6: In my mind, I've described in the past as the great convergence. That will lead us to the situation where we're talking about total beverage companies. And they will have as wide a portfolio as possible to tackle different drinking occasions, different need states the consumers have during the day. And they will try to use this breadth of a portfolio in order to be able to balance this extremely volatile world that we're facing right now.

Speaker 1: Mm. I like that. That's good.