Goldman Sachs: Distributors Predict Hard Seltzer Shakeout in 2022

An overwhelming majority of distributors say a shakeout is coming to the hard seltzer segment and retailer shelves in 2022, according to the most recent Beverage Bytes survey from Goldman Sachs’ equity research team.

“Distributors remain convinced that a shakeout is coming in the hard seltzer category as the novelty of the category dissipates and competition significantly increases,” Goldman Sachs analyst Bonnie Herzog wrote. “Overall, distributors expect only 8-10 brands to ultimately survive and thrive with the rest struggling to compete.”

In Herzog’s most recent Beverage Byes survey, which asked 50 wholesalers representing about 145,000 retailers about market conditions and industry predictions, 87% of respondents said a seltzer shakeout is coming, down from 90% in the June survey. Just 4% of respondents said no, and 9% said they were not sure.

Forty percent of respondents said they expect the shakeout to occur “next year,” while 45% said it will happen in the spring of 2022. Nearly a quarter (23%) said they think the hard seltzer herd will be thinned “this year” or “by year end.” Two percent said they were not sure about the timing of the shakeout; and none of the respondents predicted it would happen by the end of this summer.

However, the coming shakeout does not spell the end of the hard seltzer segment, which has topped $4.4 billion in off-premise retail sales for the 52-week period ending August 8 within multi-outlet food and convenience stores tracked by market research firm IRI, an increase of 44.3% compared to the previous 52-week period.

“While distributors broadly see a shakeout on the horizon, many nonetheless noted that hard seltzers are still here to stay — as they typically generate high margins for retailers and expect that additional SKUs will continue to be introduced,” Herzog wrote.

Nonetheless, hard seltzer sales have begun to decelerate — decreasing by nearly half to +25.5% year-to-date, +11.1% over the last 12 weeks and just +5.4% over the last four weeks (all through August 8), according to IRI. Hard seltzers’ ability to eke out off-premise dollar sales growth compared to 2020, when the on-premise channel was still hobbled by pandemic-driven closures and the lack of vaccines, points to a segment’s strength.

“A few [distributors] pointed out that a shakeout could be delayed until the category stops showing growth,” Herzog wrote. “Others believe that radio and TV ads for seltzers remain critical to the overall health of the category.”

In 2021, new hard seltzer offerings rushed to shelves from beer and beverage companies large and small. Anheuser-Busch InBev launched Michelob Ultra Organic Seltzer and Cacti, as well as line extensions for Bud Light Seltzer, including lemonade and iced tea varieties. Molson Coors teamed up with Coca-Cola to launch Topo Chico Hard Seltzer and introduced Vizzy Lemonade. Category leader Mark Anthony Brands introduced White Claw Iced Tea. The second-largest seltzer brand, Boston Beer Company’s Truly Hard Seltzer, launched iced tea and punch varieties. Heineken and AriZona Iced Tea maker Hornell Brewing partnered on SunRise Hard Seltzer. Oklahoma City-based COOP Ale Works joined forces with Sonic Drive-In to create a Sonic-branded hard seltzer line, which is slated to roll out beyond its home market in mid-October to Texas, Nebraska, Arkansas, Missouri and Kansas.

This proliferation of brands will not hold, wholesalers told Goldman Sachs.

“A few noted that many brands that have been introduced this year will likely get discontinued but that other new brands (especially from the large brewers) will likely emerge to take their place,” Herzog wrote. “A few characterized the shakeout as simply a cleanup; others see it as a battleground not unlike the craft beer segment — a reality that should be part of any conversation regarding a shakeout in hard seltzer. These distributors note that craft beer volumes remain significantly over indexed relative to the shelf space warranted by the dollar volume or case sales the craft beer category brings in.”

Some wholesalers said they predict a “step up in promotional activity and possibly even deep discounting by major hard seltzer players.”

Both Goldman Sachs’ and Cowen’s recent reports about the hard seltzer segment name-checked spirits-based, ready-to-drink cocktails as a threat to the beer category’s bubbly growth driver.

“Prepared cocktails are showing accelerating momentum in the face of seltzer weakness, of course off a much smaller base,” Cowen analyst Vivien Azer wrote.

Distributors were “highly optimistic” about E. & J. Gallo’s High Noon Sun Sips, which has a vodka base, according to Herzog.

“Some noted High Noon could emerge as a category winner in 2022 with one distributor suggesting High Noon could potentially advance to the No. 2 share position behind White Claw by the end of 2022,” she wrote.

Malt or cane sugar-based hard seltzers accounted for 95.3% of the segment for the four weeks that ended August 14, according to NielsenIQ data cited in a report by financial firm Jefferies. Spirits-based offerings account for 4.7%, but have gained +41 basis points from their malt- and sugar-based counterparts. High Noon accounts for 4% of the overall hard seltzer segment, according to Jefferies.