Entrepreneurship Zone: 19 April 2024 :: Non-alcoholic G&T: South African taps into booming demand for alcohol-free drinks

Fri Apr 19 10:17:31 CAT 2024

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Entrepreneurship Zone: 19 April  2024 :: Non-alcoholic G&T: South African taps into booming demand for alcohol-free drinks

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When Johannes le Roux began researching the development of a new ready-to-drink (RTD) beverage brand in 2015, he didn’t know that he would be the co-founder of The Duchess, a non-alcoholic gin and tonic producer. Today, the Cape Town-based business looks set to benefit from strong projected growth in the global non-alcoholic market over the next five years.

In 2015, having launched, scaled and sold a successful local brandy and cola business, Brannas Draught, Le Roux was ready for his next foray into the alcoholic beverage market.

“I learnt a lot about the beverage industry while developing Brannas Draught: how to create a brand from scratch, how to create the liquid, how to manufacture a beverage line and how the distribution network operates,” Le Roux tells How we made it in Africa.

Following the sale of his business, he travelled to the Netherlands to undertake market research and discovered considerable demand for alcohol-free products.

“The more research I did and the more people I spoke to about trending alcoholic drinks, I realised the vast majority were trying to cut down on their alcohol consumption. It was clear the global alcohol-free beverage category presented a fast-growing segment,” he says.

At the time, several alcohol-free beers had already entered the market, but no alcohol-free gin and tonics or wine spritzers were available.

On his return to South Africa, Le Roux secured seed funding from five friends and family members, which provided manufacturing funding for the first product batch. He consulted with the food technologists who had assisted in creating the Brannas Draught range, as well as his botanist aunt, who provided the botanical extracts required. He and a small team experimented with the blending of distilled gin and juniper extracts, creating a botanical tonic that would ultimately become The Duchess Botanical Gin & Tonic.

The business sold over one million units in South Africa in its first year. In 2020, it added an alcohol-free wine spritzer range and has brought its total units sold since inception to over seven million across five territories: South Africa, the Netherlands, Belgium, the UK and Australia.

Today, 74% of its market is female and between the ages of 18 to 34 years.

Growing the business in South Africa

Explaining his approach to growing the business in South Africa, Le Roux says it was all a matter of persistence, coupled with a solid knowledge of the market and a unique product.

“I did a lot of LinkedIn stalking to find purchasing managers and made a lot of cold calls to the head offices of big retailers to pitch to their head of beverages. Once we had secured meetings, we would literally arrive with a bottle opener, glassware and a cooler box of our test samples,” he recalls.

The Duchess also focused on establishing a sales pipeline at local food markets, such as Neighbourgoods, and Le Roux attributes much of the business’ success to its strong brand positioning and design elements. By the end of 2017, this approach had earned it listings with major retailers Pick n Pay, Checkers, Spar and Makro.

This momentum was helped by Covid-19-induced alcohol sales restrictions in South Africa and an overall awareness around alcohol-free drinks.

In 2019, The Duchess attracted the attention of ZX Ventures, the corporate venture capital and innovation arm of brewing company AB InBev, which came on board as a backer and provided the local drinks provider with networks and deep industry knowledge.

In 2020, South Africa’s total sales of alcohol-free beverages reached 1.34 million cases. Of this, 64.8%, or 866,667 cases, was beer; 19.5%, or 260 000 cases, ready-to-drink products; and 15.7%, or 209 333 cases, wine, according to figures provided by the company.

The Duchess is now available in most local retailers.

The Duchess produces non-alcoholic gin and tonic in three flavours.

International expansion

Back in 2018, Le Roux set his sights on the international market, bringing on an experienced friend as international sales manager. “What we did in South Africa – cold-calling buyers – he did on an international scale and spoke to buyers across hundreds of territories. Within a year, we were able to secure our first listings in the Netherlands. It took a lot of persistence and endurance but I think it was the only way to do it.”

Exports currently account for around 50% of total sales. In the Netherlands, The Duchess products retail at Albert Heijn, Jumbo, Plus, Gall & Gall, Sterk Amsterdam and Coop, while in Belgium they can be found in Delhaize, Carrefour and OKay. In 2021, The Duchess launched on Amazon in Germany, the UK and Spain.

Production and distribution

Utilising what Le Roux describes as a “lean and scalable” operations structure, The Duchess sources its raw materials from long-term external providers. The flavourings and tonics are provided by a flavouring house, the botanicals are grown by Le Roux’s aunt, the glass bottles are sourced from Consol Glass and the labels are printed by Cape Town-based Label Image.

“Our operations manager then arranges the transport of all raw inputs to our co-packer, Chill Beverages International, in Stellenbosch. We put an order in with them for, let’s say, 4,000 cases and they blend, fill and carbonate to create the finished product,” Le Roux explains.

When it comes to distribution, the business adopts a fit-for-purpose model, adjusting its distribution approach based on the volume of the order, the nature of the client agreement, and the territory in which the product will be sold.

“We’ve got different approaches for different markets and I can honestly say we haven’t yet solved our distribution strategy. That is probably the most important, costly and complex part of the beverage business, especially since the biggest and best distribution networks are in-house distribution, such as those of AB InBev and Coca-Cola. As an independent brand, competing with that is tricky,” he says.

Locally, the Duchess works closely with regional distributors, servicing 50 clients and about 1,500 independent retail, forecourts and on-trade outlets. This is supported by a national merchandising partner.

In Australia, where The Duchess has a single client – Woolworths – the product is sold directly to the company, which utilises its own distribution resources. “This tends to be the most effective way to do it because there are no middlemen involved and consumers get the best price on the shelf.”

In its other markets, such as the Netherlands and Belgium, the business sells directly to import companies specialising in specific territories that take care of key account management, sales, distribution and local marketing.

“Most beverage companies use the importer model: finding an importer that is strong in your category of trade in that country and then signing an exclusive agreement. This means, however, that there is essentially a middleman and, as a manufacturer, you make a smaller margin on those sales,” reveals Le Roux.

The company has also expanded into producing alcohol-free wine spritzers.

Non-alcoholic global market boom

Competition in the local and global non-alcohol RTD beverage market has intensified since the inception of The Duchess in 2015.

Major competitors now include Savanna Non-Alcoholic, Abstinence, Seedlip, Heineken 0.0 and ABInBev’s Castle Free.

According to the International Wines and Spirits Record (IWSR), consumers are increasingly opting to limit their alcohol consumption by drinking alcohol only occasionally or consuming both alcoholic and non-alcoholic beverages at the same event or celebration.

The 2022 IWSR No- and Low-Alcohol Strategic Study shows that no- and low-alcohol beer or cider, wine, spirits, and ready-to-drink products grew by more than 6% in volume in 10 key global focus markets in 2021, and now command a 3.5% volume share of the industry.

The market value of no- or low-alcohol beverages in Australia, Brazil, Canada, France, Germany, Japan, South Africa, Spain, the United Kingdom and the United States grew from $7.8 billion in 2018 to just under $10 billion in 2021.

Additionally, the study forecasts that no- and low-alcohol volume will grow by an 8% compound annual growth rate (CAGR) between 2021 and 2025, compared to regular alcohol volume growth of about 0.7% CAGR over the same period.

“According to the new IWSR research, 43% of adults across the focus markets who have purchased no- and low-alcohol beverages say they are substituting those products in place of full-strength alcohol for certain occasions, rather than abstaining from alcohol overall,” reads the report.

Future plans

On the heels of ZX Ventures’ backing of The Duchess in 2019, in late 2021, Rand Merchant Bank (RMB) announced it had partnered with AB InBev’s corporate venture capital arm to take an equity stake in The Duchess.

“Our team’s focus is on building a community around our beverages. A social and emotional connection that consumers can relate to. AB InBev is the perfect sales and distribution partner and we have recently brought on RMB as strategic financial backers,” comments Le Roux.

Owing to increased competition in the market, The Duchess is now focused on reducing its local costs by some 35%, which should make non-alcoholic beverages accessible to a wider audience.

It will also leverage a newly launched B2B app by AB InBev, BEES, which allows small taverns, outlets and liquor stores to purchase stock directly.

“We want to focus on the South African market this year, while globally things are steadying. It’s difficult to activate the brand internationally when you are unable to hold launch events in certain countries. So this year, we’re focusing on getting the core things at home right,” he says.

Thereafter, the business has earmarked funds to expand into new territories such as the US where the no- or low-alcohol segment is forecast to grow by 28% CAGR by 2025.

The Duchess range is packed as 6 x 4-packs per case of 24, with each unit containing 275ml, and offers a range of three non-alcoholic gin and tonics and two alcohol-free wine spritzers.

Johannes le Roux

-HowwemadeitinAfrica

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DISCLAIMER: This report has been prepared by Bulls ‘n Bears, a division of Faith Capital (Pvt) Ltd for general information purposes only and does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The information contained in this report has been compiled from sources believed to be reliable, but no representation or warranty is made or guarantee given as to its accuracy or completeness. All opinions expressed and recommendations made are subject to change without notice. Securities or financial instruments mentioned herein may not be suitable for all investors. Securities of emerging and mid-size growth companies typically involve a higher degree of risk and more volatility than the securities of more established companies. Neither Faith Capital nor any other member of Bulls ‘n Bears nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Recipients of this report shall be solely responsible for making their own independent investigation into the business, financial condition and future prospects of any companies referred to in this report. Other  Indices quoted herein are for guideline purposes only and sourced from third parties.

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