The past year proved to be a case study in "expecting the unexpected", with proof points including: the U.S. Treasury report on anti-competitive practices; Provi's antitrust complaint against Southern Glazer's and RNDC; and the recent IRS and TTB raid of Southern Glazer's California office.
Those unique events are matched by emerging and escalating beverage alcohol trends to watch in 2023:
1) RTDs leading the pack on growth and consumer preference,
2) States deciding on how to treat unlicensed third party delivery and shipping services,
3) Soft drink giants plowing into beverage alcohol distribution mechanisms and mashup products like Hard MTN DEW, and
4) a tipping point for meaningful sustainability, with new requirements for packaging as an opening salvo.
Read on for a sneak preview into what's shaping up to look like bonafide modernization efforts in an alcohol regulatory system some 90 years following its inception.
Prediction 1: RTD's impressive growth path will yield new legislative action: Consumer preference, largely Gen-Z and Millennials, has pushed the ready-to-drink category to the fastest growing of 2022, and it's expected to increase by $11.6 billion through 2026. RTDs are typically lower-alcohol and feature unique flavors, in lock step with young Gen-Z's unique distinction of being the least alcohol-consuming generation in history. Retailers are paying attention: according to Drizly's BevAlc Insights 2022 Retail Report, 71% of retailers said growth in the RTD category has permanently changed how and where they stock their products.
As the category grows, states will take a closer look at how to classify and tax these unique products. Spirits-based RTDs are leading the pack, with 25 states, including Michigan and Vermont, having already reduced the gallonage excise tax rates on spirit-based RTDs. Look for more states to follow suit in 2023, and in doing so removing barriers to further growth and turning this category trend into a full-sail regulatory trend.
Prediction 2: States will continue to wrestle with third party delivery and shipping laws in 2023: The pandemic wrought many changes over the past few years, and in the bev alc sector none was more in the spotlight than third party providers (TPP). Today states are taking a hard, post-pandemic look at who should be allowed to deliver alcohol, as well as facilitate shipment via fulfillment houses.
Should DoorDash, Instacart et al be allowed to deliver alcohol just as they do food? Individual states get to decide, and Colorado voters just said no to Prop 126, which would have allowed delivery by DoorDash and other unlicensed TPPs. Incidences of alcohol delivery to minors abound, and this factor will continue to impact local sentiment and decisions. Other states, like New Jersey, give TPPs a green light to deliver alcohol, creating new requirements for these entities, including: obtaining a $2,000 annual third-party delivery permit; running background checks on delivery personnel; training drivers on compliance with alcohol laws; and putting safeguards in place to mitigate against deliveries to underage persons, including stringent record-keeping. The coming year will reveal new approaches by jurisdictions that recognize consumer demand for delivery, and allow unlicensed TPPs, albeit with examples to follow for solid guardrails, including better tools for monitoring these new players.
On the shipping front, fulfillment houses remain a misunderstood TPP cog in the alcohol shipping world, and we expect states to continue scrutinizing whether these businesses should be licensed. Indeed, with states pressed to ramp up beverage alcohol enforcement, a trend has emerged whereby agents will peruse FedEx and UPS reports, then react to a high percentage of DTC shipments coming from fulfillment houses. These third-party businesses that handle packaging and storage on behalf of alcohol producers, then transfer to common carriers for shipment, became a target in state-by-state tug of wars over DTC shipping. We've seen some states update their fulfillment house rules over the past several years, most recently in Louisiana. These essential TPPs will remain in the crosshairs as regulators and state legislators seek case-by-case clarity on their role in DTC.
Prediction 3: Hold on to your seats - 2023 will be a year of blending, blurring and further merging across categories: In calendar 2022, PepsiCo became an alcohol distributor with the launch of their Blue Cloud Distribution entity, securing federal alcohol wholesaler permits in 31 states, and introducing Hard MTN DEW and Lipton Hard Iced Tea (a flavored malt beverage) into the marketplace; Keurig Dr. Pepper invested in non-alcoholic craft beer giant Athletic Brewing Company; and Monster acquired U.S. brewery CANarchy - injecting diverse mashup products at scale into the bev alc industry. And, in the process, creating category-blurring "total beverage" companies seeking expanded beverage market share with soda, energy drinks, and alcohol under one roof.
And the blur isn't confined to categories, as heavily invested, longtime participants in the three-tier system closely scrutinize a player the size of PepsiCo entering the fray, sidling up with serious distribution power, and taking a seat at the table. As journalist Kate Bernot recently opined in Good Beer Hunting, "The entrance of one of the world's largest soft drink companies into the distribution business has created tension with traditional beer wholesalers, many of whom see Blue Cloud as both a practical and existential threat to the status quo."
Prediction 4: Sustainability will have a bigger footprint across categories: 48% of U.S. alcohol drinkers say they consider a company's sustainability or environmental initiatives before purchasing beverage alcohol. Such consumer sentiment, in addition to supply chain issues credibly prompting innovation out of sheer necessity, will help push this trend front and center in the new year - from sustainable packaging (including a reckoning with the weight/production of glass) to zero waste initiatives to carbon footprint reduction. The Golden State will help lead the way. Today, many aluminum, glass, and plastic containers, including containers for beer and wine coolers, are subject to a refundable bottle recycling fee in the world's fifth largest economy, California. Starting in 2024, wine and spirits containers will be, too. Producers like Tablas Creek are getting out ahead of mandates, introducing eco-friendly alternatives like their 3L wine bag-in-box. Look for proliferation of Extended Producer Responsibility initiatives around beverage alcohol popping up across states over the next year.
As for carbon reduction, a recent report by SIA Partners called out three ways the beverage alcohol industry can make an impact: 1) Adopt new bottling standards, 2) lead consumer engagement in working with biodynamic, organic, and carbon-neutral producers, and 3) publish sustainability goals. With Millennials and Gen-Z in the forefront of the sustainability push, count on new legislative measures to push this trend into the spotlight.
With global beverage alcohol ecommerce sales on track to exceed $173 billion by 2031, and the U.S. poised to become the world's largest ecommerce market for alcoholic beverages, businesses in the industry face increased opportunities as well as scrutiny.
Growing tax requirements and complexity will continue to pose hurdles to business expansion in 2023 and beyond. One way to overcome tax challenges is to keep informed of tax policy and regulatory changes in markets where you sell. The expansion of economic nexus in the beverage alcohol industry is an overarching trend impacting sellers today. Learn what economic nexus means for the beverage alcohol industry and how recent changes may impact your business in Avalara's white paper.