Non-Alcoholic? Or Yes-An-Enjoyable-Pour? The future of alcohol alternatives.

(This note was distributed to readers of our Rad.Daily newsletter. You can sign up here to become a reader. If you want to see the future, you just have to look at the bets entrepreneurs are making.)

In today’s Rad.Daily, we consider startups producing alcohol replacements and initiate our coverage of the sector.

This is a nascent startup category: the seven companies identified in our analysis have raised < $1.0m of disclosed capital in the aggregate. Seedlip, a leader in the sector, has not disclosed its funding status, and so that number is understated but still directionally indicative.

It’s also a category that will have to redefine what a viable alcohol alternative is. The precedent is not compelling. When hearing the descriptor “non-alcoholic,” most summon a mental image of something second-rate. A derivative. Something that was not really designed to be enjoyed but instead just tolerated.

In many ways, that’s what startups are good at: taking an under-appreciated customer problem, addressing it head on and with the intent of designing a focused solution, and in doing so changing everyone’s perception of what a market can be.

Big market or small market?

There are a lot of people who have opted out of alcohol or would like to drink less. In fact, a growing number of people fit the bill of seeking alternatives to alcohol consumption. For health, lifestyle, or other reasons, young people are increasingly interested in limiting or eliminating their alcohol consumption.

According to a Radicle Survey included in our full report, ~31% of people 18 and over do not drink (consistent with National Institute of Alcohol Abuse and Alcoholism statistics), and another 17% drink roughly once per month. Meanwhile, 23% of respondents listed themselves as likely to try an alcohol replacement product if offered in a store, bar or restaurant.

The result is a really large potential market: imagine some +150 million European and American adults who do not drink and a roughly equal sized group who is likely to try an alternative to alcohol.

In our analysis, we boil down the current serviceable addressable market (SAM) to ~$5.7b, based ultimately on the assumption that ~20% of the adult EU and U.S. population is willing to spend ~$36 annually on products offered by companies in this category. We in turn anchor that spending in a set of thoughts on how often people might opt for an alcohol alternative and the price that they might pay for a serving of non-alcoholic beer, wine or spirits.

But what if we re-frame that very analysis? If this conversation is always anchored in the vocabulary of “replacement”, “alternative” and “non-”, it will always be a portion of something bigger rather than something purposefully distinct. To properly consider this potential market then is first a definitional issue. Then a math issue. We dig into each below. So as not to bury the lede, however, when you approach the problem from that angle, adults may spend meaningfully more than $36 annually on the experience and satisfaction that they currently extract from beer, wine and spirits.

What actually is the definition of this sector?

When one considers what job people hire alcoholic beverages to do, you end up with an interesting bit of calculus:

  1. There’s the effect, of course. Dare we say that people generally like the buzz. So they hire alcohol as what remains a broadly accepted means to that end.
  2. There’s the taste. Beer, wine and spirits — in their own ways — each lend themselves to tasting experiences. They typically boast strong flavors, and different varieties are interesting to explore. People hire alcohol to taste something different, bold and interesting.
  3. There’s the taste in combination with cuisine. Many chefs have designed menus with wine in mind. Increasingly spirits and craft beers, in addition to wine, are the expected liquid accompaniment to food. People hire alcohol because their food has been programmed to go with it.
  4. There’s the oral and manual fixation. People hire alcohol to have something in their hands when socializing.

And then of course there’s what people definitely do not hire alcoholic beverages for:

  • The high sugar content. Most people, Michelob Ultra ads notwithstanding, are not buying alcohol to get their sugar fix.
  • The high calorie count. Relatedly, most people are not hiring alcohol to help them achieve their daily fuel intake.
  • The hangover. Name anyone who enjoys the day after!

Our view is that startups in this category divide along two primary lines. There is a group (the “Mature Pours”), led by Seedlip, that are primarily attempting to create beverages with mature, complex, dynamic flavor profiles that are appealing in both relaxation and culinary settings. There are then companies (the “Good Feels”), exemplified by Caliente, that attempt to do the job of providing a buzz with products that do not contain alcohol.

And so…

When framed in the affirmative, these are beverages that we imagine people will consume in a dinner, after-dinner or festive setting. They will do the job that people need beverages at those times to do. And inasmuch, they will compete directly for spending currently dedicated to both alcoholic AND non-alcoholic beverages.

In sizing the opportunity, our survey results suggested that the average consumer who opted in to alcohol alternatives would spend ~$36 annually on products offered by companies in this category. The table below lays out what consumers spend annually on non-alcoholic and alcoholic beverages.

If total spending is $877/person, $36/person is just 4% of the total, far below the percentage of the population who doesn’t drink or doesn’t drink regularly. Herein lies real potential. Yes, today there is realistically a $5–6b market for alcohol replacement startups. But that speaks mostly to the category’s positioning as a ‘replacement.’ The larger opportunity will be achieved through reframing the category in terms of what it is accomplishing, the jobs it is solving and the lack of negative externalities. In that frame, one can redefine the category, and in doing so, grow it significantly.

In considering new approaches to old categories, we often think of Nest and how the thermostat category grew 4x post its introduction. Here, the opportunity is much greater than 4x. It could be 100x.