What are you drinking?

The rise of alt-drinks in a sober curious world

Prohibition was repealed by the 21st Amendment in 1933, yet today’s drink menu looks largely the same as it did nearly a century ago. The alcohol industry is dominated by a few large players that still work within the bounds of the post prohibition era — a three tier regulatory system where distributors sit in-between retailers and producers. Innovation has been slow to come and has often missed the mark, as brands are disconnected from the end-consumer.

Prohibition-era three tier system of alcohol distribution still in effect today.

Today’s Millennials, well accustomed to developing personal relationships with their favorite brands via Facebook and Instagram acutely feel the disconnect with big alcohol. As mindful and health-conscious consumers, Millennials are ‘sober curious’ — they want low ABV and low calorie alternatives, yet the options from legacy brands are few and far between. As socially conscious consumers, Millennials are disappointed by the traditional gender roles and stereotypes perpetuated by big alcohol.

Several Millennial entrepreneurs are taking big alcohol head-on by rewriting the rules of a century-old industry. They’re building direct relationships with customers, creating new categories of beverages, and in some cases, finding smart ways to get around the three-tier system. These entrepreneurs are also flipping the script on drinking — opening up new contexts and occasions for drinking outside the bar.

There are four key opportunity areas where new brands are well-positioned to differentiate themselves from big alcohol:

  1. Community building — Build a direct relationship with the end-consumer to understand what they want to drink
  2. Product development — Create better beverages with better ingredients
  3. Distribution — Distribute direct to the consumer
  4. Go to market — Flip the script on drinking norms by opening up new spaces and inviting occasions for drinking outside the bar

Below I’ve gone in-depth on each opportunity, citing examples of how new brands and entrepreneurs are already starting to forge ahead in the face of big alcohol.

1. Build a Relationship

The three-tier system means alcohol makers are often several steps removed from the customer — instead of selling direct, they sell to the distributor, who sells to the retailer, who then sells to the customer. This creates a game of telephone for brands, resulting in a big disconnect with the end consumer.

Because brands are separated from the end-consumer, they barely get any data on who the consumer is and what their preferences are. Furthermore, they’re primarily spending marketing dollars on one-way channels like TV where there’s limited opportunity to engage in dialogue with the consumer. In the first quarter of 2016 alone, $421M (~90% of total alcohol ad spend) was spent on TV commercials for beer. This disconnect results in a beverage assortment and marketing messages that are out-of-touch with today’s customer.

Newer beverage brands are going direct to the consumer via social media, where they’re creating an inclusive online community and lifestyle brand. Their community-building tactics are reminiscent of popular beauty brands like Glossier and SoulCycle, which pioneered the community-first growth model. My partner Jeremy Liew has written on the importance of community in brand-building in his article, “How to Build A Breakout Brand” — click here.

Tequila brand Los Sundays is at the forefront of community building with their Instagram account @aboutlastsunday. The account, positioned as a ‘creative platform,’ posts user-generated content to tell stories — about relationships, life’s hardships, and the little things. Tequila features very subtly, if at all. Rather, the content is aimed at building a relationship with the customer and evoking an emotion.

Bev, a VC-backed rosé brand, also builds community through its Instagram @drinkbev. The brand, which largely focuses on female consumers, rallies consumers around the #breaktheglass movement, encouraging women to ‘take a risk’ and ‘challenge the status quo.’ Every Wednesday the account features legacy alcohol ads that are #notok — i.e., those that feature unrealistic or over-sexualized content. This heads-on challenge has been well received by the brand’s 10K+ followers who are actively engaged via comments and re-posts.

@drinkbev Instagram account

Beyond Instagram, newer brands are sponsoring events, developing their own pop-ups, and opening up new social spaces as a way of building community. Kin Euphorics, a ‘functional’ beverage brand (i.e., one that incorporates adaptogens and nootropics instead of alcohol), recently opened Kin House LA — a venue for happy hours, dinner parties, and intellectual programming. Founder Jen Batchelor says, “Kin House is not only a full manifestation of the different feelings you experience with Kin Euphorics, but it is also a physical representation of our philosophy … We are creating the canvas for the community to come and paint it” (source).

Kin House LA. (Source: Lonny; Photographed by Yoshi Makino for Kin Euphorics)

2. Create Better Beverages

Startups are well-positioned to create better beverages because founders are driven by personal passion and insight. They’ve personally experienced the need for something better and they’re on a mission to create it. They’re unburdened by entrenched processes and red tape. They can experiment with new ingredients and create new beverages in the span of a few weeks vs. months or even years. And because they’re close to the customer, they can more quickly get feedback and iterate on taste.

For nearly all founders I’ve spoken with, it was a personal epiphany that led them to start the beverage company — in the words of Haus founder Helena Price Hambrecht: “… why isn’t there a better way to drink?” In Hambrecht’s Medium post announcing Haus she writes, “People aren’t looking to get wasted anymore — they are health conscious and they care about their image. They don’t want to be that drunk person on Instagram; they don’t want the calories or the hangover. They’re looking for what I’m looking for.”

In addition to personal passion, startup founders are propelled to create better beverages by their ability to create from the ground-up — outside the entrenched ways of big alcohol. Whereas innovation at a place like ABInbev takes years or months at best, startup founders can constantly test and iterate in a small-batch format. They can also more easily get customer feedback because they already have a 1:1 relationship with the end consumer. This makes the innovation cycle even faster and more likely to result in a beverage the customer actually wants.

Newer beverages entering the market are a mix of alcohol and alcohol-free beverages. For both categories, founders are focused on ‘better for you’ drinks (lower ABV, lower calorie, lower sugar). And a large portion of new drinks can be described as ‘functional’ — i.e., while they won’t get you tipsy, several of the most popular ingredients like ashwagandha and rhodiola, promise to boost mood and ease stress.

In the alcohol segment, founders are producing hard kombuchas (e.g., Flying Embers, Kyla), canned wine spritzers (e.g., Underwood, Hoxie), and spiked seltzers (e.g., Two Robbers, Arctic Summer). In the no/low-alcohol category, founders are producing botanical drinks (e.g., Curious Elixirs, Dirty Lemon), hemp/CBD-infused drinks (e.g., Sweet Reason, Monk, Recess), and adaptogen-based drinks(e.g., Moon Juice, Kin).

New categories and example brands (image source: Google).

These new drink brands have seen initial success, with soaring sales and acquisition offers, validating the need for better options in the market. Diageo recently announced a majority stake in botanicals brand Seedlip for an undisclosed amount.

Big alcohol is already starting to enter the market, with a focus largely on seltzer-based drinks. WhiteClaw is produced by Mark Anthony Brands, the maker of Mike’s Hard Lemonade. Truly is produced by Boston Beer Co, the maker of the iconic Sam Adams Beer.

3. Distribute Direct

In addition to marketing direct, new brands are looking to distribute direct to the consumer. However, the legacy three-tier system presents some challenges, as distributors are typically required to sit between the producer and the retailer.

Legacy distributors are heavily consolidated and aligned with big alcohol players, making it difficult for new brands to break into the distribution network and get on sales quota lists. Furthermore, alcohol regulations are written at the state level, meaning states each individually have their own licensing schemes, permitting processes, and loopholes. Lastly, to make matters even more complicated, regulations are different for beer, wine, and spirits.

While existing laws are not set-up for brands to go direct to consumer, loopholes and changing regulations are starting to provide brands with an opportunity to go direct.

Beer

For beer, inclusive of all beverages made by brewing and fermentation (e.g., hard kombucha), licensed wholesalers are required for distribution. Six states (Nebraska, New Hampshire, North Dakota, Ohio, Oregon, Vermont, Virginia), and the District of Columbia, allow breweries, including those outside the state, to sell direct to their residents. Oregon allows this, but only for states with reciprocity (i.e., those that allow direct shipments from Oregon-based breweries). Breweries that go direct to the consumer must still get state-specific permits and be aware of state-specific regulations regarding packaging, labeling, and shipping. In some cases, breweries are also subject to volume limits. Information on state-specific regulations can be found here.

Wine

It’s much easier for wine producers to go direct to consumer, as 43 states allow their residents to purchase wine direct from wineries, including those out of state. Similar to beer, state-specific permitting, licensing, and volume limits apply. The Wine Institute produces a full list of state-specific regulations, which can be found here.

Wine distribution is much more open than beer distribution for a number of reasons. Firstly, because most wine is produced in California, there are fewer local options available, meaning there’s strong consumer demand states aren’t as motivated to protect local interests. Furthermore, because the wine industry is geographically consolidated in California, the industry has a strong and unified front through action groups like the Wine Institute and Free The Grapes. Additionally, because wine is much more expensive than beer, consumers are less sensitive to the shipping cost. Wine shipped direct to consumer represents ~7% of the total US wine market today.

Wine distribution map (source: Wine Institute).

Spirits

Only 5 states allow direct-to-consumer shipping in the spirits industry today, covering ~5% of the US population. Kentucky is the latest state to allow shipping direct, with the legislature changing the shipping law just last year. Eric Gregory, president of the Kentucky Distillers Association says, “… once other states realize Kentucky has broken the ice … we’re going to see a lot of movement with other states coming on board” (source).

No-Alcohol

An added benefit of no-alcohol beverage startups is they avoid the three-tier distribution system altogether. However, those that incorporate adaptogens and nootropics are subject to FDA regulations for supplements. These regulations are relatively relaxed, meaning the brands need to be careful about making specific health-related claims, but are otherwise free to distribute across all 50 states.

Based on the 2018 Farm Bill, CBD is legal to distribute across all 50 states, assuming it has <0.3% THC and is derived from hemp. However, infusing water and teas with CBD makes things more complicated, as the FDA has not yet approved the use of CBD as a supplement in beverages. In June the FDA released a statement saying, “We are aware there may be some products on the market that add CBD to food or label CBD as a dietary supplement. Under federal law, it is currently illegal to market CBD this way” (source). Nonetheless, there are still several CBD-based beverage brands on the market turning a blind eye to the regulations.

In sum, these regulations mean it’s much easier for wine and wine-based beverages to go direct-to-consumer. However, recent changes in state regulations suggest increasing momentum in opening the regulatory landscape to enable DTC shipments nationwide.

4. Flip the Script

New startups in the beverage industry are largely being started by women who are disenchanted with big alcohol and recognize the overlooked opportunity to serve female drinkers with better no-low alcohol options. This opportunity has become even more salient, with the #MeToo movement shedding light on the prevalence of alcohol in workplace harassment cases. A NYT article titled “The New Sobriety” notes, “At a politically fraught time, clarity of the mind is a potent weapon and the #MeToo movement has also helped give abstinence from alcohol an extra kick.”

Women are pioneering the development of new low-no alcohol beverages and flipping the script on drinking — creating both new beverages and new environments for drinking outside of the bar. Female entrepreneurs creating new beverage brands include those we’ve previously mentioned, Helena Price Hambrecht (Haus) and Jen Batchelor (Kin Euphorics), as well as Alix Peabody (Bev), Hilary McCain (Sweet Reason), Ashley Simon (Curious Elixirs), Sarah Hoffman and Kendra Kawala (Maker), and Ashleigh Shaheen (Higher Mind).

The Assembly, a women’s club in SF, provides Food & Bev options for members, including both alcohol and alcohol-free options (source: Instagram).

Batchelor’s Kin House was described by Vogue as a “chic clubhouse in West Hollywood for Kin to host drinks parties for the sober curious.” Other women creating new spaces for socializing include Lorelei Bandrovschi (Listen Bar), Ruby Warrington (Club SODA), and Karin Elgai (Mini Rex). Additionally, female-focused social clubs like The Wing and The Assembly have robust beverage programs, which include both alcohol and non-alcohol options.

In aggregate, these spaces are providing an alternative to the bar — spaces where women can gather together to socialize and network in a way that doesn’t revolve around alcohol and getting drunk.

Billion-dollar Opportunity

The opportunity in the beverage industry is huge — in the US alone, alcohol is a ~$200B+ industry, with beer comprising $115B of alcohol sales. As consumers seek healthier and more inspired alternatives, the low/no-ABV segment, <1% of the market today, is projected to increase at a 38% CAGR through 2022.

This fast growth translates to a ~$5B opportunity for the no-low space by 2022. However, the opportunity is likely much bigger, considering the potential for similar levels of growth in the CBD and botanicals/adaptogens segments (not currently included in no-low market-size projections). A report by Visual Capitalist projects a $1B opportunity for CBD beverages alone.

Entrepreneurs looking to enter the market have an opportunity to re-write the rules. This means focusing on the end consumer — marketing and delivering direct to her. It also means creating better beverages and new spaces/contexts for drinking. Today’s customer wants something that’s enjoyable, conscionable, and just a bit healthier.

If you’re an entrepreneur building and creating in this space, I’d love to connect with you. Feel free to reach out to ashley@lsvp.com.

If you enjoyed this post, please give some claps below. This will help others see this article in their feed!

A special cheers to Janou Gordon, Merci Grace, and other Lightspeed team members who spent time learning about this market and contributing to the post.

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Lightspeed is a multi-stage VC firm focused on accelerating disruptive innovations and trends in the consumer, enterprise, and health sectors. In the past two decades, Lightspeed has backed 400+ companies and currently manages $10.5B across the global Lightspeed platform.

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Ashley Brasier

Ashley Brasier

VC investor at Lightspeed. Former product person at Thumbtack and consultant at Bain & Company. Stanford GSB and Duke grad.

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