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Alva Mather, partner and head of the Alcohol and Cannabis Practice Groups and Christine Dower, an attorney, both from law firm McDermott, Will & Emery in Washington, D.C, talk to FoodBev about the surge in popularity of non-alcoholic products and the regulatory challenges that producers face in the changing beverage landscape.

Alva Mather (left) and Christine Dower (right)

In recent years, the beverage industry has witnessed a significant shift. Non-alcoholic drinks, once a niche segment, have seen remarkable growth in both consumer demand and market offerings. From non-alcoholic beer, wine and spirits to sophisticated mocktails and functional beverages, the category has expanded rapidly.

Over the past several years, low- and no-alcohol product launches have increased at a faster rate than the overall alcoholic beverage market. In response, some alcohol companies have increased their focus on product innovation and creating non-alcoholic brand extensions, while others have entered the space through acquisitions or joint ventures. As the market continues to grow, so do the regulatory considerations surrounding the production, marketing and sale of these products.

The Surge in popularity

The demand for these products is fuelled by several factors:

• Innovative product development: Non-alcoholic beverages are no longer simple, bland alternatives. Many non-alcoholic brands now rival their alcoholic counterparts in taste and sophistication, further attracting consumers who seek high-quality, complex flavours in their drink choices.

• Health and wellness trends: While the popularity of some health trends can be short-lived, growth projections suggest that the sober movement is likely to continue and health-conscious consumers are increasingly looking for ways to reduce alcohol consumption without sacrificing social experiences. Many consumers are looking for these products to be indistinguishable from their alcoholic counterparts. Non-alcoholic beverages provide familiar flavours and experiences without the perceived negative side effects of alcohol.

• Increased availability and consumer choice: The rising popularity of non-alcoholic drinks has led to greater availability in bars, restaurants and retail outlets. Beverages such as botanical-infused drinks, hemp-derived products and energy drinks are increasingly taking preference alongside alcohol. Indeed, many mainstream brands have expanded their portfolios to include non-alcoholic options, making it easier for consumers to access these products.

Regulatory considerations

As the market for non-alcoholic beverages continues to grow, industry members in the space must follow a unique set of regulatory hurdles.

1. Classification of Non-Alcoholic Beverages

One of the primary regulatory issues surrounding non-alcoholic beverages is their classification. For many consumers, the term "non-alcoholic" may imply the complete absence of alcohol. But from a legal perspective, non-alcoholic products can be generally categorised in three ways. First, there are never-alcohol products which have 0.0% alcohol by volume (ABV). These products are created using methods that do not include the production of alcohol at any point during the manufacturing process (e.g., teas, sodas, and water). The second category is alcohol-free products, which also have 0.0% ABV but are typically made by producing an alcoholic beverage and then removing the alcohol. Third, there are non-alcoholic products, which contain less than 0.5% ABV and can be either made at a higher alcoholic content with the alcohol then reduced or produced in such a way that the process results in a naturally low ABV.

These distinctions, while nuanced, are crucial to understanding the limitations and protections afforded to each product under federal and state law, in terms of how they are labelled, registered, advertised, taxed and distributed.

2. Labelling and Marketing

The marketing and labelling of non-alcoholic beverages are particularly challenging, especially when they closely resemble alcoholic counterparts and/or use similar branding and logos. This has raised concerns about consumer confusion, particularly among minors or those who may unknowingly consume a beverage with trace alcohol content. As a result, many leading trade associations, as well as state regulatory authorities, have issued guidance and best practices for suppliers, distributors and retailers to ensure that consumers are not confused or misled as to the product they are choosing.

Marketing non-alcoholic beverages also involves a careful balance. Brands must avoid making claims that could lead to the perception that their product is a health supplement or remedy unless it meets the criteria for such products. This includes avoiding misleading statements about the health benefits of the drinks or suggesting that they are suitable substitutes for medical treatments or alcohol dependency programs. Notably, if it is a product such as a non-alcoholic malt beverage, restrictions regarding the use of health-related statements apply in the same way they would if the product were an alcoholic malt beverage.

To mitigate these risks, companies should extend their responsible marketing policies to their no- and low-alcohol products, ensuring all products, regardless of alcohol content, are not advertised to minors and clearly indicate alcohol volumes. In addition, companies should be aware of instances where their products may still be restricted, similarly to their alcoholic counterparts, given their method of production.

3. Taxation

Alcoholic beverages are subject to excise taxes or duties, which can be substantial. Luckily, non-alcoholic beverages are not subject to federal or state excise taxes so long as they are 0.5% ABV or less. However, it is important to remember that other beverage taxes may come into play, particularly at the municipal level. For example, Seattle has the Sweetened Beverage Tax and Philadelphia has the Philadelphia Beverage Tax. Additionally, certain jurisdictions may impose special taxes on non-alcoholic beverages to level the playing field with alcoholic options, increasing the cost of production and complicating the pricing strategy for manufacturers.

4. Contract and/or Franchise Implications

Many states have developed franchise laws, which protect in-state alcohol distributors, primarily beer, from having their distribution rights to alcoholic products terminated by the brand’s supplier. How these laws do or do not apply to non-alcoholic brands is not always straightforward. For example, in states where a non-alcoholic product is still legally considered an alcoholic beverage, there are clear franchise implications that may force distribution to go through a supplier’s existing alcohol distributor network. Even in states where the product is not categorised or regulated as an alcoholic beverage, it is important to review the state franchise laws and any distribution agreements (and amendments thereto) that grant territory exclusively to a distributor to ensure there is no violation of a distributor’s rights if the product were not to travel through their network.

5. Trade Practice Risks

Finally, trade practice prohibitions that restrict how alcoholic products, among other categories, are marketed and sold can be imputed onto non-alcoholic products if carried by an alcohol producer because the language of the regulation attaches the prohibition to the license holder and not the product itself. For example, many activities that are expressly prohibited in the alcohol space are commonplace in the non-alcoholic beverage business (e.g., paying a retailer slotting fees). For this reason, alcohol regulators in many states have spoken openly about their concerns regarding companies’ ability to unlawfully leverage what is lawful in the non-alcoholic sector to the benefit of their alcoholic portfolio.

For this reason, if a company is to have both alcoholic and non-alcoholic products in its portfolio, we recommend maintaining as much separation between the non-alcoholic and alcoholic business as commercially possible, including not combining price promotions or discounts across non-alcoholic and alcoholic products or providing separate sampling events and consumer giveaways.

Expanding into non-alcoholic/never-alcohol/alcohol-free beverages presents significant opportunities for companies to diversify their portfolios and to sell their products directly to consumers (depending on state law), as well as non-traditional retail outlets without the onerous licensing that would normally be required to sell alcohol. By taking a thoughtful and strategic approach, companies can successfully bridge the gap between the alcohol and non-alcohol space to meet consumers’ desires on all drinking occasions.