Drinks industry ‘cutting corners’ on low ABV products

Although low-ABV and alcohol-free ‘spirit’ launches are on the rise, businesses that are “cutting corners” on production could harm the category’s growth, according to the founder of drinks investor Distill Ventures.

Lidl launched its own cut-price zero alcohol ‘spirit’ last October (Photo: Lidl)

Patel, who co-founded DV in 2013 and now serves as the company’s non-alcoholic lead, told the drinks business the spirits industry faces “significant challenges in liquid development.”

“Lots of people are cutting corners on this,” he said.

According to Nielsen, like-for-like sales of low- and non-alcoholic alternatives in the UK rose 25 per cent to £116.6m in the year to June 15, as consumers have started to drink less alcohol and look for healthier options. There are now more than 50 non-alcoholic spirits on the market in the UK, but their mark-ups vary depending on the brand and retailer, from under £10 to close to over £35 per 70cl bottle.

Seedlip, which launched in 2015, is widely credited with driving the recent trend for low and no-alcohol spirits launches. There are three zero-poof spirits’ in the range, retailing between £22 and £27 in the UK. DV, which is funded by Diageo, took a stake in Seedlip in 2016, and the company was bought by Diageo last year.

In the UK, there is no duty paid on beverages with an ABV of 1.2% or lower, so brands like these could be very lucrative for drinks companies and retailers as they do not need to pay tax on them in the same way as a full-strength spirit.

When the deal was announced in August, Javier Gonzalez Lastra, an analyst at Berenberg, said the price of Seedlip could become “unsustainable” if similar products came to market at a fraction of the cost.

And now, cheaper products are gaining listings alongside the original alcohol-free ‘spirit’. Challenger grocer Lidl has launched its own ‘craft spirit’ last October, priced at £9.99.

However, Patel said it is unhelpful to talk about these products as if they’re part of the same category, adding that he is “not a believer in copycat solutions.”

“It’s still a nascent category,” he said, “so to treat these products as homogenous is lazy.”

Asked whether DV’s low alcohol brands are under pressure to lower the RRP of their products, Patel said he thinks the long-term sustainability of the category is “dependent on world class liquids delivered in world class experiences, and we encourage our founders not to compromise.”

Patel’s comments came days after Distill Ventures, an incubator for small drinks companies funded by Diageo, acquired a minority stake in Ritual Zero Proof. Founded in Chicago by Marcus Sakey, GG Sakey and David Crooch in 2019, it is the first non-alcoholic brand to publicly accept investment from DV.

DV works by taking a stake in a small drinks brand, and then proceeds to offer advice on marketing, routes to market and liquid production. Diageo will then buy a majority stake in the company if and when it passes a certain threshold, such as a sales target or profit margin. Seedlip was the first non-alcoholic brand to ‘graduate’ from DV’s programme, and second overall after vermouth brand Belsazar. Diageo upped its investment in the business to a “significant” majority shareholding in August 2019. Today, roughly a quarter of DV’s portfolio is made up of brands specialising in low ABV and non-alcoholic drinks.

Patel said he was “deeply impressed” Ritual’s liquid production, as well as the founders’ “deep understanding of consumer needs”.

“We’re interested in what makes our entrepreneurs’ brands different and not easy to replicate,” Patel told db.

“What deeply impressed us (about Ritual) is that they have an approach to liquid excellence that’s better than average, and a deep understanding of consumer needs.”

“Unlike copycats they’ve not made assumptions,” he said.

Asked about the future of the low and no-alcohol sector, Patel said that north America will be the next lead market, but despite Seedlip’s success, no single brand “is ever going to own the entire space.”

“How it plays out is yet to be seen,” he said, but the winners will be “taking a test learning approach” and “constantly looking at feedback”.

Although the category is still “very small”, Patel said DV feels positive due to the fact that “base level consumer trends are relatively universal.”

“Things like people’s knowledge of their own health…I see that everywhere. That’s what gives me hope.”