The following business summary was written in Summer 2020 for a joint venture between a beloved legacy brand and a consulting firm for the introduction of a new hard seltzer/canned cocktail brand. Preparing this document required extensive industry research and creative thinking to develop the concepts and ideas presented.
XYZ is the working name for a line of alcoholic beverages that includes ready-to-drink (RTD) canned cocktails and hard seltzers. Branded spirits, wine and non-alcoholic versions of the core products may also be explored in the future. XYZ represents a timely and relevant way to re-engage a large audience of XY fans who have been largely dormant since they aged out of the brand’s products in their teenage years. Today, those fans are in their late 20s through early 40s, spread out across the country and, like other people in the demographic, likely to be alcohol consumers. The intent of the business is to capitalize on the residual positive brand associations by offering a unique and undeniably differentiated product that leverages the explosive growth of the RTD category.
The XYZ business will be managed by a joint venture between ABC and DEF. The company will be called NEWCO and will be established in Tennessee, Arizona or another state if tax, operational or business advantages exist that may benefit the business and ABC. Ownership of the entity will be divided between ABC and DEF per an agreement between the parties. Any funds raised directly into NEWCO will dilute the ownership of the parties.
Canned cocktails (CC) and hard seltzer (HS) are considered “Ready-to-Drink” mixed beverages (RTD) created by blending either malt- or spirit-based alcohol with fruit juices, natural flavorings and other ingredients typically found in hand-mixed cocktails. In 2019, spirit-based canned cocktails contributed $62m to the total RTD sales and the wine-based variety added another $83m. While pre-COVID growth rates were approximately +40% YoY, the fact that CCs offer a convenient way to enjoy mixed drinks at home has accelerated sales during the current pandemic. The diagram below displays responses of a consumer opinion poll on canned cocktails conducted by Nielsen in 2019:
Hard Seltzer currently accounts for 2.6% of all US alcoholic beverage sales, a dramatic increase over the 0.85% share in 2019, and 43% of all ready-to-drink alcoholic beverages according to ISWR. While HS sales are tracked as part of the flavored malt beverage (FMB) category, which also includes beer, most HS buyers consider HS to be its own category. Nielsen notes that the perception of a unique HS category combined with HS’s positioning around health, wellness and convenience is important since it threatens traditional FMB and beer market share. HS continues to grow rapidly at the expense of other FMB and wine options, especially among the core millennial demographic. The explosive growth of the category has created a land-grab mentality among legacy beer brands and new market entrants. In early 2018, there were 10 HS brands on the market; today, 65 brands are aggressively marketing the product with White Claw and Truly at the top of the pyramid.
Total HS sales for the 52-week period ending on June 13, 2020 were $2.7B. This is a 4X increase over the same 12-month period ending in June 2019.
Excerpted from 6/25/2020 HARD SELTZER DEFIES CATEGORIZATION AND LIMITS AS THE MOST RESILIENT ALCOHOL SEGMENT IN U.S.
In April 2020, one million US households purchased HS for the first time and overall, the number of households buying HS more than doubled compared to the average seen in previous months. The increase in HS sales is driving an overall expansion of the FMB category from 4.4% in 2019 to 10% over the most recent 4-week period. Buyers are equally distributed between women and men and according to beer industry monitor Brewbound, are typically “white, college-educated Millennials (ages 21 to 44) living in affluent neighborhoods with disposable income [who] spend almost twice what drinkers of other categories do.”
Nielsen expects continued growth over the 3rd quarter of 2020 with a projected 15% share by summer’s end. A recent IWSR Drinks Market Analysis report projects that 281M cases of HS will sold in 2023 and analysts at Jefferies project the category to eclipse $6.5b by 2024. As market momentum surges, the new flavor and blend options being introduced by manufacturers has added an additional $120m in incremental sales, a 127% increase over the previous year. As the market expands, Nielsen notes “Success can be fostered through a number of tactics, including a compelling value proposition—e.g., price point, flavors and branding—and an activation plan to articulate and drive awareness to these specific differentiators.”
The market for HS is expected to maintain its trajectory as the world moves toward a post-COVID reality. Continued growth in off-premise sales will be supplemented by on-premise demand as bars and restaurants re-open. Since, according to Nielsen, HS is rooted firmly as a canned beverage option enjoyed outside of the home, it will be insulated from the threat of market disruption as on-premise sales rebound -- “Looking ahead to a new normal, hard seltzer will remain relatively insulated from broader shifts in consumer behavior and regulation.”
As the market expands, new brands are entering and product extensions from large beer and spirit brands continue to appear. Seventy-five percent of the market is controlled by HS brands carrying their own brand names rather than those directly positioned as extensions of existing beer brands. The CC market is considerably more fragmented and share information is not readily available. Top competitors include:
As the market continues to expand, there are certain risk factors to consider:
An increasingly crowded competitive spectrum with large and small brands fighting for market share. Large brands have distribution and marketing power yet smaller brands that are not associated or branded by industry leaders continue to dominate the market.
Uncertainty associated with the COVID-19 pandemic continues to impact all facets of daily life. Alcoholic beverage consumption has increased during city and state lockdowns and leading industry experts do not expect this trend to reverse itself.
Supply chain disruptions combined with exploding demand have already manifest in the form of aluminum can shortages. Suppliers are responding by adding manufacturing capacity since raw materials remain abundant.
Marketing an alcoholic beverage under a brand historically targeting children is a risk that may generate industry and media pushback. XYZ is a brand extension that follows the lifecycle of the target audience as they have matured from childhood into adulthood.
GOAL: Capture 1% market share
The overall size of the HS market in 2020 is $2.8b. It is dominated by White Claw, which currently has a 58.6% share worth $1.6b. Corona entered the market in 2020 and has captured 1.1% ($31m) since then. Although the CC market is a fraction of the HS market, there is an opportunity to drive category growth rather than simply capturing share from competitors. Securing national distribution in the grocery channel is a key to achieving this goal.
Target profit per unit: 30% (Wholesale price less COGS)
Wholesaler/Distributor margin: 25%
Retailer margin: 25%
Per-unit COGS = $0.81 with reductions as scale is achieved
Average case retail price = $38.00
Total market size = $2.8b
1% market share = $28M or 933k cases at retail = $5.5M net before indirect expenses
There are several options for funding the business including:
ABC invests directly into the business;
A friends and family convertible note or SAFE Note round that would allow CV to take on capital without establishing a valuation. Notes would convert upon a series A capital raise or liquidity event;
A seed equity round with shares priced per CV’s valuation calculation
The parties may agree to award shares to certain consultants, advisory board members or other interested parties to reduce operating expenses or access expertise that will accelerate scaling.
Initial projections call for:
An initial investment of $XX for brand and product development
A budget of $XX for each test market to cover expenses associated with production, marketing and operations
An operating budget of $XX for the first 9 months of operations
With conservative planning on both revenue and expenses, the initial raise will target $XXX in investment and allow for a minimum of three test markets and a modest cash buffer.
The primary target for XYZ is women aged 21 to 45 who have experience with the ABC brand in its more traditional youthful context. Product rollout will be staged first through test market entry then, based on results, expanded to a national footprint. Global markets will be added based on demand and the associated regulations for entry into the selected markets. The first test market will be Nashville, TN, an open distribution state, followed by other cities with a high density of consumers in the target demographic. Tests may be conducted in state-controlled or open states
Efforts will be focused on off-premise distribution in liquor, grocery, convenience, drug and big-box stores. On-premise distribution will eventually be an important component of the strategy however, COVID-19 has destabilized that segment of the industry. Efforts to secure on-premise distribution at scale will be delayed until such time that recovery is underway however, CV may identify and support specific outlets during the test market period. CV will engage a Tennessee-based local wholesaler/distributor to support the test marketing plan. Due to the nature of state laws, the partner CV selects will be thoroughly vetted since changing distributors is a difficult process. CV will vet and engage national distributors as the program expands. All contracts for distribution will be held by CV, not by outside suppliers. CV will secure all state- and federally required licenses and registrations.
Product and pricing
XYZ ready-to-drink (RTD) alcoholic beverages will be packaged in 12 oz. aluminum cans that are sold in multi-unit quantities of 4, 8 or twelve. While 24-count cases and 24-ounce cans are also options, the market has not embraced these configurations because of pricing. A variety of flavors will be available drawn from existing and proprietary recipes. The flavor profile will be throughly tested to ensure that we are producing product that consumers enjoy. The go-to-market strategy involves a vodka-based platform that delivers a 5% alcohol by volume product. Vodka-based drinks are gluten-free, which is an important marketable attribute, and when combined with flavored seltzer, provide a sugar-free, low-carb, low-calorie beverage option. This positioning will be especially important in the context of our target market’s propensity toward low-calorie, low-carb, gluten-free products. Depending on state regulations and distribution opportunities, however, malt-based variations produced specifically for big-box and non-liquor store retailers may also be offered. Product will be produced by non-exclusive suppliers that may be positioned in various locations around the United States and the world. Price points and margins will be commensurate with competitive brands in the industry. Currently, retail prices span a wide range based on number of units per package and brand. Examples include:
CV will prepare a comprehensive marketing plan that formalizes the strategic direction for the brand. This plan will address the opportunities around creating the brand, generating awareness, leveraging XY and influencer social media, providing dealer support and customer engagement. The primary goal of the program is to reengage with the expansive base of fans and former brand enthusiasts who have aged-out of traditional ABC product. As such, it will be of critical importance to blend XY imagery and messaging into XYZ’s marketing. Decisions will be considered in the context of the broader ABC brand with particular attention paid to managing any negative perceptions or backlash related to the application of the ABC brand to an adult beverage.
The cans, packages, POS program and all marketing support materials will feature original artwork that is sourced from the XY archives or purpose-created for the product. Bright, fun colors and legacy characters will make the product instantly recognizable. The intent is to inspire the reaction “OMG, that’s XY!” from customers browsing liquor and grocery store or big-box retailer shelves. This differentiation will be especially appealing to supply chain partners who make stocking decisions based on the incremental business a particular product will drive (rather than simply redistribution of market share). Depending on the inventory turn trend, cans, packages and other materials may have a seasonal component designed to keep messaging fresh and create a sense of scarcity. For example, a Valentine’s Day collection will only be available for a finite period of time. In other words, once it’s gone, it’s gone. The unifying design elements and logo will ensure brand consistently and recognizability, and the limited nature of the collections will inspire consumer action. Think of the cadence in terms of the fashion industry — new collections are launched at regular intervals, which keeps customers and fans engaged as they anticipate the next designs from a favorite brand.
Example Marketing Concept: The Unicorn Can — a creative point of differentiation
The core XYZ will be sold in 4, 8 and 12-can packages. Each flavor will carry an appropriate name, but the can designs themselves will vary and rotate. While single flavor packs will be available, multipacks that feature an assortment of flavors are the most popular configurations in the industry. According to Nielsen, “Within hard seltzers, for example, the top flavor is actually the “assorted” option, indicating that a large portion of consumers are eager for flavor choice.” Multipacks will be packaged in a cardboard sleeve carrying XY artwork, describing which flavors are inside and promoting the Unicorn Can.
The Unicorn Can carries the XY artwork with a prominent unicorn and contains a unique flavor. Every multipack has a unicorn but there will be a limited number of true unicorns that are extra special. When a customer finds one of the actual unicorn cans, the world of XY opens up to them much like the golden ticket in Willy Wonka and the Chocolate Factory. The Golden Ticket, confidentially, is another nostalgic theme that will instantly resonate with the customer base. They can “redeem” the can for a special XY experience, perhaps a tour of the XY archives, happy hour with ABC and her friends or an ABC party.
Each unicorn can will feature a QR code that, when scanned, alerts the customer as to whether they are in possession of a real unicorn. In order to scan a unicorn can, the customer must either download the XYZ app or register at brandeddomain.com by providing their name, email address, mailing address and a verification that they are above the age of 21. We’ll also allow customers to enter profile information and share their XY stories from their youth. The strategy is inspired by Webkinz, another nostalgic product that relies on scarcity and engagement to drive multiple purchases. We will leverage the information for market research and customer engagement that will be executed via email, web promotions, social media and other means. With each scan, customers will also earn unicorn points which can be redeemed for merchandise, content and other things.
With each scan, we can also display information about the specific flavor contained in that customer’s unicorn can and solicit feedback and ratings on the flavor profile. Since it is always part of a multi-pack, it may be possible to avoid printing the flavor and ingredients on the unicorn can even though industry labeling requirements are strict. If that is the case, the app provides a feedback loop will allow us to test new flavors in real time so we can update our catalog with products that customers rate favorably.
We expect that the unicorn can will be the first can chosen from any given multipack. Its presence will:
Inspire customers to buy multipacks
Drive repeat purchases
Rapidly expand our market intelligence and reduce our media spend through direct customer contact
Introduce a new means of customer engagement that has never been implemented in the adult beverage industry
Allow us to test new flavors without dedicated packaging or 4-pack marketing
Packaging also provides an opportunity for bundling and collectability. For example, each 8-pack could include as XX sticker or perhaps when deconstructed, it could reveal poster-sized XX artwork. The space could also be used to promote other XX lifestyle products that are geared for the millennial woman.
Test Market Program
Prior to a national launch, ABC will be tested in a number of markets in the United States. Each test market will be supplied with a minimum of 1,000 cases of product and a full marketing program consisting of a POS package, paid and unpaid media, social and influencer marketing, and pricing incentives. The test marketing focus will be on liquor stores which will be accessed through outsourced sales representatives employed by our distribution partner and personal outreach from the CV team, particularly by XXX who will leverage the XXX last name to underscore the connection to ABC. Test markets will be selected based on demographic profile and ease of entry with a focus on cities that are not subject to state-controlled liquor distribution. Qualified markets identified as especially attractive for millennials include Nashville, Seattle, Austin, San Diego, Washington DC, Denver, Orlando, Phoenix, Houston and Dallas.
XXX will assume the role of CEO of CV. All other resources will be engaged on a contract basis until such time that test market results necessitate the addition of sales, business development and operations resources. ZZZ will commit a minimum of 10 hours per week to the business and will be the primary contact for ABC. CV will outsource back office, marketing and other business services as needed to supplement in-house capabilities.
On the product side, Company X will be engaged as a non-exclusive supplier. Under the direction of CV, Company X will develop the XYZ flavor profiles, which may be based on existing recipients or proprietary, source and blend the ingredients, package the product and prepare it for delivery to wholesale/distribution partners. Assuming that Nashville, TN will be the first test market, CV will engage a Tennessee-based wholesaler/distributor to facilitate product distribution (both on-premise and off-premise) and retailer outreach.
A network of outside consultants and advisors with deep ties in alcoholic beverage and retail distribution will be assembled. CV will leverage this resource pool to establish relationships with retailers including liquor stores, supermarket and drug store chains, convenience stores, big box retailers and other outlets that fit the distribution strategy. Each potential resource will be vetted based on the ability to deliver or support scale on a national or global basis.