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Big Beer’s Plan for Growth? Dropping the Alcohol

August 4, 2017, 4:24 PM UTC

A growing push among consumers to live healthier lives has completely remade the food industry over the last half decade. We shop differently, we cook differently, and we eat differently today than we did five years ago.

But does it also mean we’ll drink differently?

That premise is explored in a recent note by Bernstein analyst Trevor Stirling that looks at whether consumers’ shift toward health and wellness could shake up the alcohol sector through a rise in low- and no-alcohol beers.

Right now the “low and no” category, as the industry calls it, has a taste and image problem, and as a result makes up only about 2% of overall beer consumption. “Historically, in ‘serious’ drinking circles, alcohol-free beer was frowned upon,” Stirling writes. “Alcohol-free beer tasted bad, it didn’t make you look cool, and there was no buzz.”

Despite the low base, Stirling expects that the move toward health will make low and no one of the fastest-growing categories in beer. The compound annual growth rate for beer overall was less than 1% between 2010 and 2016, but low and no beers provided a glimmer of hope at 5.2%, according to insights firm GlobalData.

The rate of growth has made the category a “major priority” for big brewers, Stirling tells Fortune. ABInBev has said it wants 20% of its global beer volumes to come from no and low by 2025—it’s currently in the mid-single digits—and now has zero-alcohol varieties of its global brands. Earlier this year Heineken launched a no-alcohol variety of its flagship brand in Europe.

“The growth is driven by consumer trends rather than the classic push from big brewers,” says Jonnie Cahill, Heineken’s senior director of low and no alcohol, citing an increasing interest on wellness and balance. “These are solutions and products that consumers are asking for.”

The industry has little choice but to act. Stirling cites statistics from the 2015 National Survey on Drug Use and Health, which found that more than 40% of 18-25 year-olds reported they have not had an alcoholic beverage in the past month. And brewers risk finding themselves on the “receiving end of anti-drinking campaigns focused on fighting obesity,” much like the soda industry has, Stirling says.

The challenge for companies like Heineken is turning the perception of a zero-alcohol beer as a “distress purchase” on its head. “It was often coming from a position of sacrifice or a negative”— consumers felt forced to choose the category because they were the designated driver or watching their weight, Cahill says. Heineken is trying to change that by marketing its low and no beers in the same way they market their higher-ABV counterparts. “We don’t have an asterisk,” Cahill says. “If we make this about alcohol we’ve lost.”

Part of the issue used to be that low-alcohol products weren’t the highest quality, Cahill explains, but that’s changed as technology has improved. Brewers make low-alcohol beer by either filtering or evaporating the alcohol out, or by fermenting a low alcohol beer. Removing the alcohol content no longer means removing the flavor.

The U.S. market may prove to be the biggest geographic challenge. Low and no beers already have a foothold in China, where they are more affordable. And in Germany, beers mixed with beverages like lemonade (called a radler) are commonplace. “It’s never been a feature of the U.S. beer landscape,” Stirling says. “I think there’s just more consumer resistance to the idea of low-alcohol beer.”

The fundamental question is why would you pick low or no beer rather than a soda if you’re looking to avoid alcohol, or just drink water if you don’t want the calories. Stirling did his own unscientific sample and found that less than half of the testers said they would rather drink the highest-rated zero-alcohol beer than a soft drink.

“Alcohol content seems to still be the attractive offering for the beer, and not the flavor or other characteristics,” he writes. The better approach, he thinks, is positioning as a “good tasting” alternative to soda rather than a substitute for beer: “For when you are not drinking, AND for when you are drinking but not for the sole purpose of getting absolutely drunk.”