GROCERY: Lightning in a bottle

Like a bottle of beer shaken too hard, flavored malt beverages, or FMBs, exploded at retail after the launch of Smirnoff Ice in 1999. Since then, more than 2 billion bottles of Smirnoff Ice have been consumed worldwide. But last year the mania for "malternatives" (short for the "alternative malt beverage market") cooled, according to sales data from the major market-tracking firms.

Is the trend going flat? Category experts don't think so. While beer still dominates, the alternative malt products have carved themselves a handsome niche, particularly in supermarkets, and have succeeded at giving U.S. retailers a vehicle to bring new consumers into a category that had been moribund for over a decade.

Line extensions, particularly those ushering in new flavors, are expected to keep the momentum going. The binging, however, appears to be over.

According to "Beer in the U.S.," a report from New York-based Beverage Marketing Corp., 2000, 2001, and 2002 all saw double-digit growth for malternatives. The peak period was 2001, with a 52.5 percent volume increase. As the report puts it, however, "Only time will tell if the amazing growth of the malternative market in 2001 over the previous year can ever be duplicated, but it does not seem to be a likely future event."

The most recent data available from ACNielsen bears this out. Taken as a whole, malternatives saw just a 0.1 percent increase in dollar volume in the combined off-premise channels (food/drug/ mass/convenience, excluding Wal-Mart data) for the 52-week period ending Dec. 18. Unit volume (i.e., total SKUs) was up 4.5 percent over that same period, an indication that there was a whole lot of dealing going on.

The news in the supermarket channel ($2 million-plus, excluding supercenters) was slightly better, with dollar volume up 2.9 percent, and a 6.7 percent uptick in total SKUs.

A flood of new products might have saturated the market. Two years ago there was a veritable frenzy among companies entering the marketplace.

No more hangover

Miller Brewing Co. alone had a plethora of brands, including Skyy Blue, Sauza Diablo, and Stolichnaya's Citrona (all malt-based beverages), as well as Jack Daniel's Original Hard Cola, a spirits-based malternative. Today only Skyy remains in Miller's portfolio.

"I think there's been a hangover from the introduction of all the malternatives," observes Benj Steinman, president of Beer Marketers Insights, a beer industry newsletter, "and now it's disappearing."

Hangover or no, the malternative category shows no sign of slipping away. All "big three" brewers have strong FMB franchises -- Bacardi Silver (Anheuser-Busch), Skyy Blue (Miller), and Zima (Coors)-- while Diageo's Smirnoff Ice, U.S. Beverage's Hooper's Hooch and Seagram's Coolers, and Mike's Hard Lemonade make for a solid, manageable shelf. Indeed, malternatives offer variety for a new generation of malt beverage consumers.

"FMBs enjoy strong popularity among the three fastest-growing population segments in the U.S.: Hispanic, African-American, and 21-to-29-year-old consumers," explains Tom Rose, v.p., trade marketing for Stamford, Conn.-based Diageo-Guinness USA. "This translates into additional sustained growth and opportunity for further innovation."

Information Resources, Inc. (IRI) panel data (provided to PG by U.S. Beverage) shows that among all beverage alcohol options, FMBs rank highest with young adults on a purchasing index (211)-- twice the level of beer and nonflavored spirits, and nearly three times that of wine.

According to Fred Gambke, s.v.p., national accounts and sales development at U.S. Beverage, "FMBs provide the malt beverage category with a needed entry against the growing interest in spirits." Gambke adds that the value of attracting malternative consumers lies in their diversity, urban and suburban. "And 28 percent are new to the beverage alcohol category," he says.

Moreover, while malternatives are largely perceived as a convenience-driven category, 43.1 percent of all retail rings in the category occurred in the supermarket channel, which accounted for 45.7 percent of volume based on 288-ounce cases. Overall, malternatives accounted for just over $51 million in sales in the grocery channel, representing a nice niche market.

According to a category timeline provided by U.S. Beverage, the malternative category was established in 1981 with the widespread introduction of coolers, which then were primarily wine-based.

In the '90s most wine coolers were transformed into malt-based beverages to increase their distribution potential (i.e., so they could be sold where beer was sold). That decade also saw the introduction of "clearmalts" such as Zima and "hard" malt-based lemonades, like Mike's Hard Lemonade, Hooper's Hooch, and Doc Otis, the last from Anheuser-Busch.

After the extremely successful launch of Smirnoff Ice by Diageo-Guinness USA, the push thus far this decade has been toward co-branded initiatives between beer and spirits companies, such as Miller/Sky and Anheuser-Busch/Bacardi, to create malt-based products that sound like spirits -- an attractive proposition to young adult consumers just coming into the beverage alcohol market (women in particular).

Bettering beer

Although a niche category, the performance of malternatives was better than the overall beer market over the past year, by several measures.

According to ACNielsen data, beer sales were up 2.0 percent in the combined food/mass/drug/convenience channels (excluding Wal-Mart data) over the 52 weeks ending Dec. 25, while unit volume (total SKUs) dipped 1.3 percent. Meanwhile, in $2 million-plus supermarkets (excluding supercenters), beer saw a $2.3 million increase in dollar volume and a 1.2 percent downturn in unit volume. (It must be noted, however, that the beer category represented $6.4 billion in retail rings in the grocery channel alone -- and $8.6 billion in the combined channels.)

IRI statistics show that FMB sales were up 3.1 percent last year in the combined food and drug channels, accounting for $349 million in sales. Furthermore, malternatives now represent 6.4 percent of all malt beverage sales in those channels.

The spice of life

The current hot trend in malternatives is undoubtedly flavors. According to IRI, flavored brands account for eight of the top 10 best-selling FMB brands in supermarkets. Even the two so-called "nonflavored" brands -- flagship Smirnoff Ice, the No. 1 brand in the category, and No. 2 Mike's Hard Lemonade -- are both flavored.

"Choice continues to be key across alcohol beverage categories, just as it is across all other consumer product categories," says Diageo-Guinness USA's Rose. "Adult consumers tell us that they want new flavors and new options, and we deliver."

Recent flavor extensions from the Smirnoff Ice brand are Smirnoff Ice Triple Black (lightly carbonated lemon/lime), and the Smirnoff Twisted V line, including four flavors: Green Apple, Raspberry, Cranberry, and Mandarin Orange.

Last year Miller extended its Skyy Blue franchise into the low-carb and flavor arena with Skyy Sport -- an ultrapremium, low-calorie (160 calories per 12-ounce serving), low-carb (15 grams), citrus-flavored malt beverage with a splash of cranberry. Not to be outdone, both Anheuser-Busch and Coors came out with orange-flavored extensions in 2004: Bacardi Silver O for A-B and Zima XXX Hard Orange. Mike's Hard Lemonade and Hooper's Hooch had earlier introduced orange versions of their flagship brands, while Mike's also has a Hard Cranberry Lemonade, and Hooper's offers a "Red Brew" (berry mix).

"The flavored malt beverage segment is driven by news," notes Laura Emory, brand manager, Skyy Sport at Miller. "About 40 percent of the segment this past year was driven by line extensions. The flavored malt beverage consumer is looking for new products, flavors, and ideas in the segment."

The importance of being different

Perhaps the biggest allure malternatives have for supermarket operators is that while the products fit into the overall malt beverage category, they are not beers. They are unique beverages that not only generate profits, but also offer choices that can bring shoppers into stores.

"FMBs are one of the most valuable segments in grocery stores," observes Rose of Diageo-Guinness USA. FMBs, he explains, are often unplanned purchases, primarily by people on their way to social gatherings.

"Retailers have a great opportunity to capture extra shopper dollars by making sure they display FMBs at the same time they display beer," he continues. "Research shows that stores with beer but no FMB displays sold beer to 10.4 percent of their shoppers, but those stores that also displayed FMBs reached 13.6 percent of shoppers." That represents a 30 percent increase in penetration.

Unlike traditional beer, which is a destination purchase (i.e., a traffic driver), malternatives drive transactions and higher cash register rings. Shopping baskets with FMBs average $60.94, vs. beer without FMBs at $51.48. (The average basket without beer or malternatives is $46.54.)

According to qualitative research provided by Diageo (Shopper Genetics -- based on 5 million grocery frequent-shopper card users), two-thirds of all FMB sales are incremental.

Rose hypothesizes that, generally speaking, these are people headed to parties who are buying beer, but find themselves purchasing FMBs in addition to their planned beer purchase. Found money, in other words.

"Finally," notes Rose, "where both FMBs and beer were displayed, shoppers spent 26 percent more dollars on malt beverages than in stores where only beer was displayed."
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