Malternative Mix

This has been a year of expanding line extentions and shrinking numbers for flavored malt beverages, or “malternatives.” These sweet, low-alcohol beverages found their natural audience in the 1990s among young adults raised on sugary sodas. But behind the scenes, the biggest issue of the year has been a fight over the legal definition of the category itself.

This debate over the classification of malternatives — the question of “what is a beer?”– only surfaced in recent years (see sidebar). But malternatives themselves have been in U.S. markets for over a decade. Coors launched Zima, an early malternative, in 1993. Unlike the “clear beer” that Miller tested around the same time, Zima distanced itself from its beer identity in appearance, flavor and marketing.

The next wave of malternatives was variations on hard lemonade, starting with the introduction of Hooper’s Hooch in the mid- ’90s, and followed by the hugely successful Mike’s Hard Lemonade (still the number two brand in the category). Similarly themed Two Dogs Lemon Brew, Jed’s Hard Lemonade, Doc Otis’ Hard Lemon and Rick’s Hard Lemonade all conjured the same folksy, nostalgic image.

THE SPIRITS CONNECTION

The styling of Tequiza, launched by Anheuser-Busch in 1999, and Smirnoff Ice steered the category’s identity away from the old time medicine show and into the cocktail lounge. It may also have pitched it into controversy.

The overt association with spirits caused alarm among opponents, who condemned the malternatives as “gateway” beverages, which promised the sophistication of hard liquor with the easy drinkability of soft drinks.

SKYY_sprt_6pk1Miller Brewing’s recently introduced Skyy Sport was the first malternative to highlight low-carb positioning.

But the new generation of malternatives, with their overt connections to familiar spirits brands, caused unease in corners of the beer industry, as well. Skyy Blue, Captain Morgan Gold and Bacardi Silver found space next to traditional beer in retail cold boxes and advertising media where the parent brands weren’t allowed.

Moreover, their malt-basis — their technical connection to beer and the legal justification for malternatives’ advantageous tax position and market access — appeared increasingly shaky.

THE TTB STEPS IN

In March of last year, the United States Alcohol & Tobacco Tax & Trade Bureau (TTB) published proposed new regulations on the formulation of ready-to-drink (RTDs) products or “flavored malt beverages” (FMBs). The comment period on the proposed ruling closed in October 2003, by which time the TTB had received over 16,500 responses, a record for any TTB rule-making.

There are two dominant positions on the proposed regulations. Each of the opposing camps in this fight is peculiar in its composition, bringing together the Davids and Goliaths of the brewing world on one side and FMB manufacturers of all sizes (some of whom are also conventional brewers) on the other.

The brewers’ side is represented by the powerful Beer Institute, the similarly powerful National Beer Wholesaler’s Association (NBWA); and the far smaller Brewers’ Association of America (BAA), which represents the interests of small brewers. They support the so-called 90/10 composition standard, under which 90% of the alcohol content in a malt-based beverage must be derived from malt, with only 10% coming from a distilled source.

In this argument, the brewing community emphasizes the integrity of beer, and the importance of not blurring the distinction between different categories of beverage alcohol that have been regarded as separate by tradition and in law.

Leading Brands of Flavored Malt Beverages

(Thousands of 2.25-Gallon Cases)

Brand Supplier 2002 2003p % Change
Smirnoff Ice Diageo 23,110 15,125 -34.6%
Mike’s Hard Lemonade Mike’s Hard Beverage 12,600 11,500 -8.7%
Bartles & Jaymes E & J Gallo Winery 6,700 7,000 4.5%
Smirnoff Ice Triple Black Diageo – – 6,395 ++
Seagram’s Coolers United States Beverage 6,100 5,700 -6.6%
Bacardi Silver Anheuser-Busch/Bacardi USA 7,500 5,000 -33.3%
Skyy Blue Miller/Skyy Spirits USA 6,800 5,000 -26.5%
Zima Coors Brewing 4,800 2,900 -39.6%
Bacardi Silver O3 Anheuser-Busch/Bacardi USA – – 2,500 ++
Smirnoff Twisted V Diageo – – 1,285 ++
Total Leading Brands 67,610 62,405 -7.7%
Others 10,040 7,395 -26.3%
Total FMBs 77,650 69,800 -10.1%

(p) Preliminary. Source: Adams Beverage Group

In a speech last year to the National Conference of State Liquor Administrators, Art DeCelle, General Counsel for the Beer Institute, explained, “As we know, distinctions between malt beverages, wine and spirits date back to colonial times in the U.S. and to ancient times in Europe and the Middle East. Those distinctions are reflected in hundreds of statutes and regulations.”

A review of U.S. statutes supports the point. “[W]e find that the terms ‘spirituous liquors’ or ‘distilled spirits,’ and ‘malt liquors,’ are not used as synonymous,” said DeCelle. “On the contrary, they are treated as different substances; and in the system of revenue restrictions, in providing for their manufacture and sale, they are regarded as distinct.”

According to Don Meyer, Director of New Products for Anheuser-Busch, which produces the Bacardi line of malternatives, “We support TTB’s proposed rules that set specific limits on the amount of distilled hard liquor that can be used as a flavoring agent in these products. This change is helpful in further clarifying the rules in this product category. Our flavored malt beverages affected by this proposed change will be able to comply.”

The opposing side, represented by the Flavored Malt Beverages Coalition, an organization of FMB manufacturers, has already conceded ground to the extent of agreeing to some composition standard, rather than none. However, the coalition advocates a so-called 50/50 standard, which in practice means that a majority (51%) of the alcohol in a malt-based beverage would have to come from malt.

Gregory Altschuh, administrator of the coalition, points out that consumers have had 12 to 15 years to become accustomed to this flavor and product category. “As for these products confusing the consumers, the ATF concluded that no consumers were being misled. They discovered that consumers don’t care what the alcohol source is — they’re indifferent to the alcohol source. They know they’re drinking a cooler-like beverage, that it’s low alcohol and refreshing, and they just want something with a certain taste.

“We think the majority composition is the fairest,” continued Altschuh. “The category has evolved with the government’s knowledge. If you move to the dire level [of the 90/10 standard], you’ve set the bar so high you’ll damage the category. You’ll certainly increase the cost of production until only a limited number of industry players can play.”

Harry Bigelow, senior vice president of National Sales for Diageo/Guinness, producer of malternative brand leader Smirnoff Ice, echoes the concern about cost. “We know there will be incremental costs. It’s not great from a consumer perspective. The net is, it will cost consumers and producers more.”

Complying with new standards will be easier for some companies than others. “Can A-B do it?” Bigelow asks. “Probably while standing on its head. But what about the smaller guys, like Mike’s, who only have one product, and don’t have those kinds of resources? It could really hurt smaller players.”

No firm date for a decision has been announced, though it could come at any time. Meanwhile, it’s a fair assumption that every major malternative producer has both a 90/10 and a majority composition recipe ready. No matter which option is selected, all present brands will probably have to be reformulated.

THE HEALTH OF THE CATEGORY

As producers wait for the regulatory shoe to drop, they have had to cope with the more immediate issue of falling numbers in 2003. Preliminary figures from Adams Beverage Group indicate a 10% sales slump in the category overall for 2003; the January 2004 IRI report showed malternatives down by 14%.

JackColaJack Daniel’s Hard Cola has grown modestly but steadily since its
introduction last year.

Among the largest-selling names, Smirnoff Ice, the number one brand, fell by over 34%, with Bacardi Silver and Skyy Blue dropping 33% and 27% respectively. Tequiza and Hooper’s Hooch fared worse, with their numbers cut in half from 2002 to 2003. Mike’s Hard Lemonade and Seagrams Coolers both held their losses to single digits. The only gains were for the number three brand, Bartles and James, the Gallo wine-cooler malternative that predates all the other brands, and which might be considered in a class all its own; and relative newcomer Jack Daniels Hard Cola, up 11% but still selling less than 1 million cases in total.

Across the beer industry, 2003 was not a good year, with domestic barrellage down in every category except light beer. Still, the losses by malternative brands look serious even against that backdrop.

It’s possible to speculate that the light beer and low-carb juggernaut has captured drinkers from the same demographic group malternatives target. Perhaps acknowledging that new diet trends are influencing consumer choices profoundly, Miller introduced Skyy Sport Low Carb, the first low-carbohydrate malternative.

Some of the losses, regardless of their source, have been partially offset by new product launches, extension brands that may have either propped up or cannibalized their older siblings, depending on the interpretation.

Twisted SpritzDiageo’s Smirnoff Twisted V line, which comes in four flavors, recently joined the company’s malternative mix.

Diageo introduced Smirnoff Ice Triple Black, and Smirnoff Twisted V (Five) in four fruit flavors. Their combined sales of $7.5 million nearly match the loss in lead brand Smirnoff Ice in 2003, and Diageo’s Harry Bigelow reports that the category is now strong and growing. “Malternatives and FMBs are up since the beginning of the year. We moved from the test phase to national roll-out with Twisted early this year. Anywhere we were in test last summer we got great figures, so we saw this upturn coming.

“Triple Black is aimed at males 21-29, positioned with a little edge. Twisted is still male-focused, but with also more of a female sell than Triple Black.

“Our research shows that up to 15% of our new consumers come from consumers who aren’t drinking beer or FMBs. It truly is an add-on. Consumers are asking, ‘What product am I going to have on this particular occasion?’ We can grow if we get them to think of these on a greater number of occasions.”

Mike’s Hard Lemonade, still the number two brand, has launched new lime and cranberry flavors.

Black cherry six packBacardi Silver Low Carb Black Cherry, boasting only 2.6 grams of carbohydrates, is the newest entry in the Bacardi Silver malternative line.

Anheuser-Busch saw its lead brand, Bacardi Silver, drop from an estimated 7.5 to 5 million cases last year. However, new Bacardi Silver Raz has picked up 1 million cases, and Bacardi Silver O3, named for the three orange varieties used as flavoring, has added 2.5 million, more than making up for Silver’s losses. Bacardi Silver Limón, introduced in 2003, and the just-debuted Bacardi Silver Low Carb Black Cherry, complete the portfolio. This latest entry boasts only 2.6 grams of carbohydrates and 96 calories, while featuring the flavors of black cherries and hints of vanilla.

According to A-B’s Don Meyer, “The primary audience for the FMB category is a diverse group of contemporary adults, ages 21-27, who currently drink FMBs. When we introduce new Bacardi Silver flavors, we do expect some cannibalization since FMB drinkers like to try new flavors. We want our Bacardi Silver drinkers to try our new flavors.

“Our Bacardi Silver brands have performed well since the brands’ respective introductions. In fact, the Bacardi Silver Family holds a 24% share of the industry’s spirit- based FMBs.” (Source: IRI Infoscan combined C-Store and Grocery, YTD March, 2004.)

SC_paradpunch_4pk_rightsidSeagram’s Coolers recently launched Mango Passion Paradise Punch, among other new flavors.

A proliferation of flavors seems to be the trend. Seagram’s Coolers (considered by the company to be a ready-to-drink beverage because of its lower alcohol, rather than a malternative) celebrated its 20th anniversary by unveiling new bottle design and packaging, and two new flavors to join the nine existing Coolers. Many of the flavors are fruit combinations.

Seagram’s Smooth, United States Beverage’s malternative brand, which launched in 2003, has also added flavors in the past month and, as with the Coolers, the new choices are fruit combinations rather than single fruits.

Brand manager Justin Fisch sees product differentiation as the biggest challenge. “Other brands are limited to single fruit flavors: cranberry, green apple, orange. The packaging is grey, the liquid is clear. We looked for unique flavors and packing to differentiate ourselves from the competition.

“We realized that the category in total has become saturated in the past year. But this is a category driven by flavor. It’s not unusual that a brand will launch a new flavor every year to keep it fresh. This demographic comes to expect a new flavor every spring.”


Julie Johnson Bradford is the editor of All About Beer magazine.


A Taxing Issue

The malternatives drinks category was born of an opportunity presented by beverage alcohol tax laws. It’s not alone in that origin. Guinness, the iconic Irish stout, was formulated in the eighteenth century with unmalted roasted barley, which was not taxed, instead of black malt, which was subject to taxes. Its unusual, gristy flavor turned out to be popular with beer drinkers.

In present-day Japan, the light beer style known as happoshu relies on smaller amounts of malt than traditional beer, in order to avoid malt’s taxes.

Malternatives are simply the latest example of drinks makers responding in creative, if
unanticipated, ways to government regulation.

Under U.S. laws, beer is taxed at a lower rate than wine and spirits, and enjoys access to advertising media and retail outlets denied to the other categories as well. So, the legal classification of a beverage as a beer — a malt-based beverage — is worth fighting for.

In fact, the malt base from which the malternative derives its legal benefits only makes up between 0.5% and 2.0% of the final product. The remaining 98.0% to 99.5% comprises water and flavorings. But the flavorings are also the source of the majority of the alcohol in the final product. Flavor-infused alcohols are not taxed as beverage alcohol, so long as they are unfit for drinking on their own.

If a malternative contains, at most, 2% of the malt base, it is obtaining at least 98% of its
alcohol from “flavorings.” Clearly, if it were not for the special tax position enjoyed by beer, the malt would be eliminated altogether. In European countries with different tax arrangements, the malternative niche is occupied by so-called “alcopops,” which are diluted, flavored spirit-based drinks — with no pretentions to beer.

The U.S. beer industry’s fear is that any suggestion that the legal category of beer is meaningless could jeopardize its tax position.

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