THE GIST
Constellation Brands will partner with The Coca-Cola Company to extend Coke’s Fresca line of calorie-free sodas into spirits-based, ready-to-drink (RTD) canned cocktails called Fresca Mixed. Financial terms of the deal were not disclosed. Constellation says the product will launch this year.
The partnership between Constellation and Coke is a potential “getting to know you” moment for both companies ahead of a potential, long-rumored merger between Constellation Brands and Monster Energy, of which Coca-Cola owns a 16.7% stake through a strategic partnership announced in 2015. The main sticking point in that merger would be Monster’s global distribution agreement with Coke, which breaks down like this:
If Monster and Constellation were to merge, Constellation would want to distribute Monster.
That would require Coke to allow Monster to terminate the current, long-term distribution agreement it has with Coke.
However, if Coke and Constellation find each other to be mutually beneficial partners on alcohol products such as Fresca Mixed, it could encourage Coke to sign off on a Monster-Constellation merger.
With all this potentially at stake, the Fresca Mixed launch takes on outsized importance as it’s a trial for what could be an industry-shifting union. A potential merger between Constellation and Monster would give the combined company a market value of about $92 billion, according to Reuters. It would create a company with massive influence in the convenience store and grocery segments, with offerings in energy drinks, beer, and wine and spirits. Constellation also owns the U.S. rights to Modelo, the number-two beer brand in IRI-tracked chain retail stores behind Bud Light. Monster is the number-two energy drink brand behind Red Bull.
“It’s a one-stop-shop of beer and energy drinks on a distribution truck of beer and energy drinks,” Mark Gallo, sales manager at Nor-Cal Beverage, a West Sacramento, California-based beverage contract packager, says of a Monster-Constellation merger. “It’s a game changer.”
With talks of a Monster-Constellation tie-up in the background, Fresca Mixed is more than just an RTD cocktail launch. It’s the first date on what analysts and Constellation’s CEO hint could be a long and meaningful relationship.
WHY IT MATTERS
Blurring lines between soft drink and alcohol brands are a given as 2022 begins. This is The Coca-Cola Company’s second alcoholic beverage partnership, and an expansion of its portfolio to include spirits-based products. It teamed up with Molson Coors Beverage Company to launch a malt-based hard seltzer version of Coke’s Topo Chico mineral water brand, which launched in March 2021.
Along with short term benefits of launching a new product with wide distribution, what’s even more important in this partnership is the way it joins Coke and Constellation, a critical duo in any discussion of a deal with Monster.
“Obviously the tie-up of Monster and Coke is the key piece to making whatever merger deal work with Constellation,” Gallo says. “Now you've got this three-headed monster testing the waters amongst each other.”
Asked on the earnings call whether the Fresca Mixed partnership opens the door to future Coke-Constellation launches, CEO Bill Newslands noncommittally acknowledged that potential.
“This opens a very interesting door,” Newlands said.
Constellation is perhaps an even more attractive alcohol partner for Coke than Molson Coors, which has a portfolio focus on beer rather than Constellation’s beer-wine-spirits trifecta. And where Fresca Mixed will stand out is through its spirits base (Constellation has not specified which base spirit will form the cocktail). Category leader High Noon, made with vodka, is the top-selling spirit-based seltzer and grew +178% last year. Cutwater Spirits, which makes RTD cocktails with a variety of liquor bases, grew +185% in 2021. Malt-based spin-offs have been popular because of a lower tax rate than spirits—Topo Chico Hard Seltzer, Bud Light Seltzer’s Hard Soda variety pack, the forthcoming HARD MTN DEW collaboration between Boston Beer Company and PepsiCo, have been malt-based.
Spirits-based RTDs have been on a tear over the last year, despite their generally higher prices and more limited retail outlets. Together, spirits-based seltzers and RTD cocktails were +60% in IRI-tracked chain retail in 2021, earning roughly $1.4 billion, a bit more than the Truly Hard Seltzer family of brands sold in those same stores. In IRI-tracked stores, RTD cocktails were up +41%, while spirits-based seltzers were up +165%. On Constellation’s Q3 earnings call, CEO Bill Newlands said Fresca is Coke’s fastest-selling diet soda brand, and that more than half of Fresca customers say they’ve used it as a cocktail mixer. That indicates a sizable portion of Fresca drinkers organically found it a complement to liquor-based drinks.
"Consumer preference is clearly for spirit-based products, with vodka the leader by some way,” Brandy Rand, chief operating officer for the Americas at IWSR, told The Hill in October.
“Brands have consequently started to use their spirit base as a point of difference and to indicate quality."
Other crossover soft-drink alcohol brands have perhaps been proof of concept for the Fresca Mixed launch. With sales in just 10 markets and only for ten months, Topo Chico Hard Seltzer ended 2021 as the number-seven hard seltzer brand family in chain retail stores tracked by IRI, earning $94.5 million in those stores last year—an indication of the runway for “hard” versions of existing soft drink brands. Topo Chico Hard Seltzer is extending distribution nationally this month, and Molson Coors has announced a ranch water extension to initially launch in nine markets.
Words by Kate Bernot