The Distilled Spirits Council of the United States (DISCUS) had historic news to cheer about during its annual meeting in New Orleans earlier this month: For the first time since the late 19th century, spirits are projected to overtake beer in the U.S. as the most-consumed alcohol by servings by the end of next year. (A serving of wine is 5oz; spirits is 1.5oz; beer is 12oz.) Beer Marketer’s Insights (BMI) reports the conference room erupted in “whoops and hollers” at that projection from Brandy Rand, chief operating officer for global beverage market analysis company IWSR. However you want to parse the exact details of servings and market share, spirits are gaining ground while beer loses it—a trend that’s been slowly unfolding over two decades.
Beer, whose most recent high-water mark (in the 1990s) was of 61% of all servings of alcohol in the U.S., as determined by government and trade organizations, has fallen below 50%.
Spirits, meanwhile, grew from 27% of servings in the ’90s to close to 40% pre-pandemic.
Beer’s tumble has been hastened in recent years as spirits’ momentum is bolstered by ready-to-drink cocktails (RTDs) like canned margaritas and vodka sodas, one of the hottest categories across all of alcohol.
Amidst the sea change in consumer preference for spirits over beer, DISCUS sees opportunities:
With drinkers’ interest in spirits on the rise and a host of canned cocktails making liquor-based products more convenient, the spirits industry is using this momentum to push for lower tax rates for lower-proof RTDs that are often on par with beer and hard seltzer in ABV, an effort known as tax equivalency.
DISCUS has also made an effort to expand the types of stores where spirits-based RTDs can be sold.
Beer industry trade groups are pushing back vehemently, arguing that spirits-based RTDs are a fundamentally different product that should be taxed at the same rate as full-strength liquor even if they carry beer-strength ABVs. Yet with the debate roiling, it’s not clear that brewery owners—the group that stands to lose sales to RTDs—actually see this issue as one worth fighting.
Many leaders in beer have tried to raise alarms about the threat spirits-based canned cocktails pose to beer sales. In April 2021, Boston Beer Company president Jim Koch warned the beer industry in a letter that it needs to “wake up” and recognize the threat RTDs pose: “For twenty years, spirits companies have eaten our lunch. … Let’s not let them eat our dinner.” Koch is flagging the threat from RTDs, but he’s also acknowledging a broader truth: Beer has been losing drinkers to spirits for decades, well before the dawn of canned cocktails. Those RTDs are a dessert to a meal that was already served.
Nationally, there are two advantages beer does enjoy that spirits do not:
Beer has lower excise tax rates: Federal rates for a 12oz can of a 6% ABV malt-based product (like beer or hard seltzer) carries a 5 cent excise tax. It's 10 cents for one with a wine base, and 13 cents for one with a spirits base.
In many states, beer can be sold in grocery and other retail stores where distilled spirits cannot.
For the past year, opposition to equivalency has been a legislative priority for brewers’ two main associations, the Beer Institute (BI) and the Brewers Association (BA). It was a focus of a legislative affairs session at the BA’s Craft Brewers Conference in May, and saw lots of discussion at the BI’s annual meeting last September. Since then, the BI has published numerous blog posts and articles on the topic.
The job of these trade organizations is to defend its members—and tax policies that might benefit them—but are individual breweries worried? A handful of states offer evidence that most are not.
In two states that last May passed lower excise taxes for spirits—Michigan and Nebraska—neither state’s brewers’ guild opposed those bills. Nebraska’s law dropped excise tax rates for RTDs below 12.5% ABV to 95 cents per gallon from a prior rate of $3.75 per gallon, and Michigan’s dropped excise taxes for RTDs below 13.5% ABV from 48 cents per liter to 30 cents per liter. Some breweries in those states, in fact, also have distillers’ licenses and produce their own canned cocktails. (In Nebraska, the two in-state producers of RTD cocktails—Sideshow Spirits and Brickway Brewery & Distillery—also own beer companies.) Other brewery owners just seem to have more pressing priorities than excise tax battles.
“It’s in general not something we’re too concerned about or paying too much attention to,” says Scott Strain, co-founder and chief financial officer for Kros Strain Brewing in La Vista, Nebraska. Strain is also a member of the executive committee for the Nebraska Craft Brewers Guild. “[The guild] has two or three members that are canning cocktails right now so I don't think any of us see a whole lot of threat from it. We as a guild stayed neutral.”
The BA says the fact that the severity of this issue slips below most breweries’ radars is evidence that tax equivalency is an even sneakier threat than small breweries realize. But it seems brewery owners are aware of tax equivalency—it’s just not among their top priorities.
“Brewers lack of knowledge [about how big a threat tax equivalency is] is something that underlines how insidious changes like this can be,” says Marc Sorini, general counsel at the BA.
Sorini presented extensively at Craft Brewers Conference in May about the BA’s resistance to tax equivalence and the damage it would do to the beer category, yet in neither Michigan nor Nebraska did guilds take a stance against such bills. Responding to that, the trade group suggests brewers aren’t fully aware of the threat spirits pose. But for years, in surveys performed in partnership with The Harris Poll, the BA has provided members with insights showing that weekly craft beer drinkers regularly consume beverages from other categories. In its 2021 edition of "Getting Inside the Mind of the Craft Beer Consumer," the BA notes that at least once a week 67% of respondents consumed wine and 62% drank spirits.
Perhaps the reason for state guilds’ neutrality is that member breweries may not see hard lines between alcohol categories the way a national trade group does. Breweries have for years been happy to expand into other types of alcohol: distilled spirits, hard seltzer, cider, and wine. And the guilds have other legislative priorities: Nebraska’s guild focused last year on a bill that granted self-distribution privileges to its smallest breweries; next year, it plans to take up franchise law reform.
On the issue of tax equivalency, it appears there is a disconnect between what local breweries see as important to their businesses, and what beer’s national trade groups have prioritized. The national guilds manager position, a role whose job it was to act as a liaison between state guilds and the BA, was eliminated by the BA two years ago, against the wishes of state guild leaders.
“Most of our small members are too busy running their small businesses to closely follow legislation,” Sorini says. “And changes like the slow shift of share from beer to liquor occur gradually—it’s not a sudden change but a gradual, seemingly inexorable one. So I’m not surprised that many small brewers are unaware of these changes.”
Amongst all this back and forth, RTDs march on. In the most recent 52-week sales period tracked by market research firm IRI, spirit-based seltzers and canned cocktails grew +45.5% in dollar sales in grocery, convenience, and other chain stores. Meanwhile, beer was -2.6% and all of alcohol was flat.
And at the same time, excise tax reductions continue to pass in some states. In early June, Vermont reduced the tax rate for spirits-based RTDs to $1.10 per gallon from its prior rate of $7.68 per gallon. (The tax rate for beer up to 6% ABV is 26.5 cents per gallon; above 6%, it’s taxed at 55 cents per gallon.) The Vermont law also allows RTD cocktails less than 12% ABV to be sold in grocery and convenience stores along with state-run liquor stores, where they’ve long been available.
The Vermont Brewers Association did oppose that legislation, with chair Allen Van Anda and then-BI president Jim McGreevy both testifying before Vermont’s Economic Development, Housing and General Affairs Senate committee before the law passed. This again proves guilds and local breweries do have tax equivalency on their radar—but whether they choose to take a stance in opposing it varies from state to state.
Yet even for breweries who distribute their beers to the same shelves where they’ll compete alongside RTD cocktails, the lower tax rates for RTDs don’t seem especially dire. Sean Lawson, CEO and founding brewer of Lawson’s Finest Liquids in Waitsfield, Vermont, says he hasn’t formed an opinion of the legislation because he hasn’t “learned fully about the details of the RTD bill.”
Scott Newman-Bale, CEO of Short’s Brewing in Kalamazoo, Michigan, and the chair of the government affairs committee for the Michigan Brewers Guild, says that when Michigan’s RTD bill came up in spring 2021, breweries weren’t up to speed on the topic. Additionally, some of the guild’s brewery members also produce spirits-based products and could have potentially benefited from the legislation. Michigan’s New Holland Brewing, for example, also operates a distillery that produces 7% and 9% ABV canned cocktails which grew +9.4% in chain retail dollar sales in IRI’s most recent 52-week sales period.
“In Michigan, it was relatively new on the horizon and we were not prepared or well-versed in the scope of what the [legislation’s] implications could be and its complexity,” he says. “There were discussions about it at the time, but we didn’t oppose it.”
In Nebraska, Strain says his brewery’s sales have been robust, and he’s devoting more time to finding brewery workers and managing the rising costs of his inputs than he is to worrying about canned cocktails.
“We’re fortunate enough to be in a situation where we’re always growing, so I don't think we see a lot of threat from canned cocktails,” Strain says. “I think they’re a new cool option. I’ve grabbed some myself.”
Whether or not a brewery believes RTD cocktails represent sales competition may be a matter of scale. A taproom-only brewery in a small town in Nebraska, for example, may not even sell its beer on shelves next to spirits-based products. But for a beverage company the size of Boston Beer, whose two best-selling products are flavored malt beverages—Twisted Tea and Truly Hard Seltzer—RTD cocktails may be real competition. (Boston Beer is hedging its bets here, too, with Truly-branded vodka and a partnership with Beam-Suntory to produce Sauza-branded RTDs.)
Michael Uhrich, founder and chief economist of Seventh Point Analytic, says it's logical that the vast majority of U.S. breweries aren’t big enough to see themselves in direct competition with other types of alcohol. Generally, spirits aren’t available in all the retail stores that beer is, and if a brewery is taproom-only, the threat from spirits likely feels quite abstract.
“Many small brewers don’t see wine or spirits as threats to their success at all, much less to the point they would get anxious about having equal tax rates,” Uhrich says. “It’s actually a lot like how many small brewers have seen each other for many years: ‘There’s plenty of demand out there. We’re all riding the same wave.’”
Though Kros Strain brewery does distribute beyond its taproom, its ownership feels its core customers won’t suddenly abandon locally made beer for RTDs.
“I can see if you're a very large craft brewer, a top-50-size brewery, maybe that is a bigger concern for you,” says Strain. “I think the bulk of [RTDs’] market share though is going to come from spirits drinkers wanting something easier and more portable, or from hard seltzer consumers. I don't see a ton of craft beer drinkers switching out.”
Data seems to bear this out. A Sightlines+ analysis of multi-outlet and convenience store sales from states where RTDs can be sold on the same shelves as hard seltzer shows growth for spirit-based brands. As RTDs gain more shelf space, the idea that they may compete directly with hard seltzers has merit. BMI, citing data from Bump Williams Consulting, suggests canned cocktails are cannibalizing hard seltzer sales: Flavored malt beverages, hard seltzers, and spirits-based RTDs collectively are up just +1% year-to-date, despite RTDs’ white-hot sales. Why? “Hard seltzer decline wipes out the vast majority of RTD/FMB gain,” BMI reports.
That’s all macro-level information. But Newman-Bale isn’t so sure that even the smallest distributing craft breweries are immune from RTDs’ encroachment. In fact, he believes that spirits’ increasingly large share of the alcohol market will eventually hurt breweries of all sizes.
“If the pie is shrinking and the number of breweries is growing, then it doesn’t take too many people to figure out that that’s not going to be sustainable,” he says. “Yes, people should be petrified.”
He says that growing consumer interest in non-beer products and what he calls “emerging beverages” like RTDs, hard teas, ranch waters, etc. has prompted retailers to allocate more space to those items and less to beer. Tax equivalency is a part of spirits’ gains against beer, but so is the battle for shelf space and consumer preference.
Sorini and the BA are working hard to keep equivalency squarely on breweries’ radars through blog posts and conference presentations. Sorini particularly stresses that just because spirits’ encroachment is happening piecemeal, state-by-state, and year by year, it’s no less dangerous to individual breweries.
“It takes some education, but we believe companies that depend on beer for their financial health should recognize that allowing the continued erosion of market share in favor of liquor represents a slow-moving but very real existential threat,” Sorini says.
Words by Kate Bernot