Diageo's Stake in Seedlip Proves Booze-Free Spirits Are Big Business

Over the course of just three days this week, a trio of alcoholic beverage behemoths—brewer Anheuser-Busch and liquor makers Diageo and Pernod Ricard—inked deals to buy up buzzy upstart brands.

But only two of the takeover targets actually contain alcohol.

French liquor giant Pernod Ricard on Monday bought Texas-based Firestone & Robertson Distilling Co., owner of the TX brand, and just two days later, Anheuser-Busch scooped up Cleveland’s craft brewer Platform Beer Co.

The most interesting deal of the week may belong to Diageo, purveyor of Ketel One vodka, Captain Morgan rum and Don Julio tequila. On Wednesday, Diageo disclosed it bought a “significant majority” stake in Seedlip, a non-alcoholic spirits brand that only launched in 2015.

Terms of the deal weren’t disclosed. Diageo and Seedlip declined to comment on the investment, but Diageo says founder Ben Branson will stay on at Seedlip and help propel the brand’s future in his role as a shareholder and director.

Priced at $36 per bottle in the U.S. market, Seedlip has just three variants—Spice 94, Garden 108 and Grove 42—but is already sold in over 7,500 bars, restaurants, hotels and retailers across 25 countries. Grove 42, for example, is described as “a zesty & complex, citrus-forward blend of three types of orange & uplifting spice distillates.” The recommended way to drink it: served with tonic and a twist of orange peel.

While Seedlip’s annual sales haven’t been disclosed, Diageo already placed a smaller bet on the brand in 2016 when it took a minority stake, back when Seedlip had participated in the Diageo-backed accelerator program called Distill Ventures.

As sales for beverage alcohol drop globally, demand for no and low-alcohol drinks have been on the rise. Within bars and restaurants, no and low-alcohol beer are the fifth-fastest growing beer type in the U.S., according to Nielsen, with a total value of $77 million. That’s led major brewers like Heineken and Anheuser-Busch’s Budweiser to offer their own non-alcoholic “beers.”

Many Americans, especially millennials, are looking to cut back on their alcohol intake as they aim to live a healthier life filled with more purported “wellness.” And that means cutting back on the stiff drinks. Nielsen says that 66% of millennials have proclaimed they are making an effort this year to reduce their alcohol consumption. And nearly half of consumers last year said they abstained from alcohol at some point, citing health as a major motivating factor.

This trend has picked up cachet on social media as consumers boast of their detox “Dry January” or “Sober September.” Among the Americans that participated in “Dry January” this year, 80% said they plan on doing so again in 2020.

With that in mind, consumption for the liquors sold by Diageo and others may continue to face some serious pressure. And that’s where non-alcoholic brands like Seedlip come to play. The trend is so pervasive that it was one of the hottest topics at this year’s Tales of the Cocktail, an annual cocktail event in New Orleans that’s supposed to be all about boozy liquor.

What remains to be seen is just how big this non-alcoholic market can become, especially within the spirits category, which lags the sales volume for similar offerings for beer, ciders, and wine. In the U.S., no- and low-alcohol products account for 0.5% of the total U.S. alcohol beverage market, but spirits-only command 0.1% share within the liquor category.

“Our estimates are that the no- and low-alcohol spirits market is relatively non-existent outside a few brands,” says Brandy Rand, chief operating officer for the Americas at IWSR. But, Rand adds, research shows that non-alcoholic drinks are what consumers want today.

“While it’s millennials that are supporting this trend, other demographic segments are also taking part in both short- and long-term abstinence from drinking,” says Rand. “Looking toward the future, Generation Z dictates the pace in their desire for no-alcohol options.”

Diageo isn’t the only major liquor brand to experiment within this space. Pernod Ricard is backing Ceder’s, a brand that claims to have all the flavor of gin without the alcohol, in the United Kingdom.

Perhaps the biggest challenge that this industry faces is availability at bars and restaurants. While some menus have added so-called “mocktail” sections, this practice isn’t widespread. And that’s a problem as it pertains to brand discovery. A popular line among marketers in the liquor world is that “brands are built on premise”—i.e., at trendy bars and restaurants. Without that support, it might be tough for non-alcoholic brands to truly take flight.

Diageo, however, seems up to the challenge.

“Seedlip is a game-changing brand in one of the most exciting categories in our industry,” said John Kennedy, president of Europe, Turkey, and India at Diageo in a prepared statement. “We’re thrilled to continue working with [Ben Branson] to grow what we believe will be a global drinks giant of the future.”