January 22/New York/Press Release -- Mounting demand for crafted alcoholic beverages and premium products is giving niche producers a reason to eat, drink and be merry. Currently, a thirsty market is enticing investors to enter into the alcoholic beverage businesses, which has led to a quickly expanding proportion of start-ups in the sector. While a growing population of legal drinkers and rising alcohol consumption will contribute to this expansion, the rise of premiumization will likely be the key to these new, independent enterprises’ success. Premiumization, a trend by which consumers gravitate toward premium and ultra-premium products, including alcohol, is expected to become more widespread as overall spending increases. As such, the growing taste for high-end beverages will help drive up demand for higher-priced craft and imported spirits. As a result, the alcoholic beverage manufacturing sector is overflowing with opportunities for crafty entrepreneurs looking to enter the beer, liquor and wine industries.

Brewers Lead the Pack
Though dominated by a few major players, the breweries industry is currently foaming over with an influx of niche players that are giving industry leaders a run for their money. Traditionally, a high degree of competition and rising production costs have led to merger and acquisition activity among this industry’s largest players. In fact, just two companies, Anheuser-Bush InBev and MillerCoors, hold a massive 75.4% of the market share. In recent years, however, changing consumer preferences have given rise to craft breweries, which are smaller and target regional markets. These enterprises have been expanding and gaining widespread popularity among curious consumers who spend an increasing proportion of their cash on premium beverages. Moreover, increasingly health-conscious sippers are substituting higher-volume purchases of value beer for lower quantities of finer brews. As a result, craft brewers are cutting into a widening slice of Budweiser and Miller Light’s pie.

In addition to a culture that emphasizes locally brewed craft beers, increasing market acceptance and low barriers to entry make this industry attractive for new businesses. Craft beer can be brewed using minimal equipment, and industrial equipment can be bought ready to use. In the five years to 2012, the number of craft breweries is anticipated to grow at a 7.7% annualized rate to 2,017 firms. This rampant expansion has also justified a rise in industry employment. As a result, the number of employees in the Craft Beer Production industry <http://www.ibisworld.com/industry/craft-beer-production.html>  is estimated to grow at a 6.9% average rate per year to 12,643.

Although wage costs are expected to rise, revenue is expected to expand at an even fast rate as high demand for craft beer justifies price increases, allowing the industry to become more profitable. The average profit margin is expected to account for 9.5% of revenue in 2012. Notably, however, profitability varies between companies because the cost per unit manufactured decreases as craft breweries scale up production volume. The largest craft brewer, The Boston Beer Company, has an estimated operating profit of 30.1% of 2012 revenue.

New Flavors for Distillers
Despite significant consolidation among major companies within the greater distilleries industry, including Diageo PLC and Beam Inc., the number of industry establishments has expanded at an annualized rate of 10.3% during the five years to 2012 to reach 191 locations. This robust growth has been underpinned by a flurry of craft distilleries -- small, independent establishments -- entering the market as consumer demand for locally produced and crafted beverages has increased. These establishments have popped up all over the country, offering consumers unique new flavors and options of vodka, whiskey, cognac and liqueurs, among others.

In particular, this trend has benefited the vodka distilleries industry. From 2007 to 2012, IBISWorld estimates that the number of industry establishments has grown at an average annual rate of 2.2% to 128. Established vodka companies are also keying in on changing consumer preferences by offering flavor-infused and low-calorie spirits. Major player Skyy Spirits, for example, introduced its Skyy Infusions line of flavored vodka in 2008 as part of this trend.

IBISWorld expects that distillers of all sizes will introduce products tailored to specific niches in an attempt to grab market share. In particular, craft distilleries are forecast to experience success in the wake of the burgeoning craft movement in the similar wine and beer markets. New product introductions will be accompanied by extensive promotion and advertising to ensure that customers take notice. Despite burgeoning demand, increased spending on marketing and product development will prevent profit from climbing significantly faster than revenue. As a result, profit is only expected to increase from 8.1% of revenue in 2012 to 9.0% in 2017.

Vintners Investing
The wineries industry is getting better with age. Even when the economic recession diminished demand for higher-priced wine, sales expanded at a slow and steady pace due to rising wine consumption. As such, outside investors are being drawn to the industry as world wine production declines and demand rises, propelling prices upward. Premiumization, for example, has led consumers to seek out premium vintages and styles of wine-making, while increasingly health-conscious consumers have substituted toward red wine for its acclaimed health benefits. One trend that has not caught on with wine drinkers yet, however, is the eco-friendly movement (e.g. biodynamic, organic and sustainable wine-making practices). Because consumers will continue to seek quality regardless of origin, they will likely be unwilling to pay higher prices for “green” wine. Nonetheless, given the groundswell of niche markets and demand, new producers are entering the industry to secure a slice of the growing revenue, keeping the industry in a growth phase for at least another decade. As a result of increasing spending on marketing to drive wine consumption, operating profit as a percentage of revenue is forecast to decline to 6.8% by 2017.

Still, small producers of unique, crafted wines must contend with the challenge of finding steady distribution contracts, especially as downstream wholesalers consolidate. This trend, combined with sharply falling retail and on-premise (i.e. restaurant and bar) sales during the economic recession, has led smaller wineries to find refuge in direct-to-consumer wine sales via the internet and tasting rooms. However, IBISWorld expects that state regulators will invest in technology to enforce existing internet-sales regulations, rather than make consumer access easier. As a result, consolidation is anticipated to continue; though the number of wineries is expected to rise, growth will be slower than during the past five years, increasing 2.2% annually on average to 7,880 companies in 2017.

Despite consolidation, the average number of employees per establishment is projected to remain at about four through 2017. In November 2012, Foley Family Wines bought a controlling stake in Guenoc Valley, which produces wines under the Langry and Guenoc brands. This joint venture signals the willingness of investors to support local operations from outside instead of merging with and directly controlling each winery’s operations, which will ultimately appease consumers looking for uniquely crafted wines.

Reveling in Success
Amid this climate of enthusiasm for crafted beverages, small businesses are making successful inroads in an industry where bold brands and multinational behemoths historically control much of the shelf and advertising space. According to IBISWorld estimates, fewer than 1.0% of alcoholic beverage manufacturers employ more than 500 people in their business, while about 50.0% of these producers employ fewer than five people. Consumers’ growing attention to quality and willingness to pay for premium products are allowing these producers to introduce new varieties of beer, wine and liquor with great success. In response to increasingly exotic consumer preferences, producers will continue to cater to niche markets by picking up on emerging trends like gluten-free or organic alcoholic beverages. And, as consumers continue to explore new beverages, new entrants will be able to find their own niche in the market.