Beverage Alcohol’s Easy-Growth Era Is Over. Cost Design Is Now Strategy

Since the pandemic-era valuation peaks of 2021 and 2022, nearly $850 billion in market capitalization has been erased from the world’s largest publicly traded companies in the beverage alcohol industry, according to Kearney’s analysis of S&P Capital IQ data. The figure combines the declines from each company’s individual peak valuation to its market capitalization on July 1, 2026, rather than comparing industry valuations on two common dates. Privately held suppliers, distributors, and other industry participants are excluded.

Our assessment is that this is more than a cyclical downturn. It is a structural reset, affecting consumer demand, pricing power, and profitability. For operators accustomed to years of expansion, the question is increasingly urgent: How should businesses respond when growth can no longer be taken for granted?

During the COVID-19 pandemic, the industry enjoyed extraordinary demand and premiumization. Between March 2020 and May 2023, U.S. spirits sales value increased more than 20%, compared with roughly 2% for wine and 5% for beer, according to the authors’ analysis of IWSR Drinks Market Analysis data. Government stimulus payments, shifts toward at-home consumption, and bar and restaurant closures encouraged consumers to spend more on higher-priced products.

As those unusual conditions faded, industry economics deteriorated.

In April 2023, we presented the first edition of our SipSource industry forecast at the annual Wine & Spirits Wholesalers of America (WSWA) conference, projecting a long-term decline in volume and value across categories. Our analysis suggested that the transition away from pandemic-era consumption would be difficult. Demographic changes, growing interest in moderation, the availability of cannabis-based alternatives, and mounting affordability pressures all pointed toward a reversal in industry performance. The conclusions were not especially well received.

Subsequent data have reinforced our concerns. Through June 2026, WSWA’s SipSource data showed combined wine and spirits volume declining 6.5% and revenue falling 5.5% on a rolling 12-month basis. Although the rate of decline had begun to moderate, both measures remained negative.

Ready-to-drink (RTD) beverages and non-alcoholic alternatives continue to show pockets of resilience, but a return to broad-based growth is not a prudent near-term planning assumption.

The industry therefore needs a different approach to profitability. Businesses must determine what to protect, what to improve, and what to exit when activities no longer justify the resources they consume.

In the current environment, cost system design is strategy.

Rethinking the Cost Structure

Incremental cost reductions will not be enough for companies whose operating models were built around sustained growth. That assumption no longer holds. The challenge now is to rethink cost allocations, improve profitability measures, and redesign how the organization creates value.

Few businesses have a sufficiently accurate view of profitability across their customers, brands, products, and channels. An apparently attractive customer may require unusually expensive service. A flagship brand may generate impressive revenue while delivering only average returns once promotional spending, distribution costs, and inventory requirements are considered.

Similarly, the relative attractiveness of sales channels can change substantially when cost-to-serve and working capital are incorporated into the analysis.

Perfect profitability measurement is neither practical nor necessary. Building and maintaining such a system would introduce its own administrative burden. What matters is achieving sufficient accuracy to support sound decisions.

This can be particularly challenging in a traditionally high-margin business such as beverage alcohol. We call it the curse of the high-margin business.

When each additional sale generates an attractive gross margin, management naturally prioritizes volume growth over cost discipline. That approach can work when demand is expanding. When revenue contracts, however, inefficient cost structures and poorly understood allocations become liabilities, particularly in businesses with significant fixed costs.

The objective is a profitability model that reveals where value is genuinely being created and guides decisions accordingly.

Building a More Effective Cost Allocation Model

The objective of cost allocation is not to calculate profitability to the last dollar for every customer, brand, and channel. It is to create a behavioral system that encourages suppliers, customers, and employees to make decisions that benefit the business.

An effective model requires three characteristics:

• Simplicity: Stakeholders must understand and trust the system if they are expected to use it.
• Accuracy: Allocations must be sufficiently reliable to inform commercial and operational decisions.
• Incentives: Performance measures and rewards must reinforce the behaviors the business wants to encourage.

These principles become especially important when companies share platforms, data, and services across business units. Centralized capabilities can create significant economies of scale, but poorly designed internal charges may discourage their use.

If a business unit cannot understand the relationship between the services it receives and the costs assigned to it, the allocation model can undermine the strategy it was intended to support.

Three approaches can help prevent that outcome.

1. Allocate Costs Based on Workflows and Strategic Priorities

Use a layered approach, beginning with costs that have clear ownership and can be assigned directly to the responsible business activities.

For operationally intensive functions, including logistics, claims, deductions, pricing administration, and sales support, use practical cost-to-serve measures that reflect how resources are consumed. Depending on the activity, these might include cases shipped, delivery stops, miles traveled, order lines, or exceptions requiring manual intervention.

Broad averages can obscure meaningful differences. A customer receiving frequent small deliveries, for example, may be considerably more expensive to serve than one purchasing the same volume through fewer, larger orders.

These distinctions should inform pricing, service levels, customer prioritization, and commercial incentives.

Management compensation should also reinforce the model. Rewarding sales growth without accounting for the cost of generating that growth can perpetuate the very behaviors the company needs to change.

2. Separate Shared Services From Enterprise Investments

Shared services such as information technology, finance, legal, and analytics present a different allocation challenge.

Start with showback, making the cost and consumption of these services visible to business units before introducing internal charges. This transparency helps managers understand what they use and the value those services provide.

Chargebacks should then be introduced selectively, primarily where local managers can meaningfully influence demand or usage. When managers have control over a resource, they can make informed choices and accept accountability for the resulting costs.

The opposite is also true. Allocating charges for services that business units cannot control creates frustration without improving efficiency. It may even discourage adoption of centralized capabilities that were intended to create scale.

Costs that are not locally controllable should generally remain on the corporate profit-and-loss statement rather than being assigned through arbitrary chargebacks.

Strategic investments require another distinction. Artificial intelligence (AI), data infrastructure, automation, and cybersecurity are increasingly essential enterprise capabilities. Treating them solely as overhead to be distributed across business units risks suppressing adoption.

These investments should instead be governed and evaluated according to the business value they generate.

3. Incorporate Capital Into Profitability

Costs not directly traceable to individual activities are often allocated using profitability proxies. That is directionally sound, but the larger concern is capital cost allocation.

A profitability view that excludes working capital and balance-sheet impacts can materially distort management decisions.

Inventory levels, payment terms, and cash conversion cycles all influence the economic value of customers, brands, suppliers, and individual stock-keeping units (SKUs). A product with an attractive gross margin may deliver considerably less value once the cost of holding substantial inventory is considered.

Likewise, a customer generating strong sales may become less attractive when extended payment terms and expensive distribution requirements are incorporated into the equation.

Capital-aware profitability analysis provides a more complete picture of where the business earns its returns. It also helps management distinguish activities that generate cash efficiently from those that consume disproportionate resources.

Cost Structures and the Shift to Machine-Centered Workflows

Cost allocation tells us where profitability resides. AI provides an opportunity to increase it by changing how the underlying work is performed.

Recent advances in AI and automation make it possible to redesign structured, repetitive workflows and move beyond incremental cost management.

Back-office functions such as claims processing, deductions, invoice matching, master data management, onboarding, and parts of finance and human resources are particularly promising candidates. These high-frequency processes often involve recurring decisions and clearly defined steps.

AI presents far more than an efficiency program. It is a new operating model for driving business value.

Realizing that potential requires redesigning workflows to work with the technology. Simply layering new software onto existing processes will deliver only a fraction of the possible gains.

As these systems improve, more work can shift from human-centered processes to machine-centered execution, with employees focused on decisions and activities that still require their judgment.

That transition can improve accuracy, accelerate execution, and reduce structural costs. More importantly, it offers a chance to rethink the operating model rather than merely speed up its existing processes.

AI investments should therefore be evaluated against the business value they create, not simply treated as another expense to allocate across the organization.

The Path Forward

The growth era in beverage alcohol has ended. Cost system design is now strategy. Those systems must align stakeholder behavior with business priorities, incorporate capital considerations, and make effective use of AI.

Meeting that challenge requires deliberate changes to the operating model, supported by financial measures and incentives that reflect current market realities.

We believe leadership teams should prioritize five actions:

1. Identify distorted incentives. Determine where existing cost allocations encourage decisions that undermine profitability.
2. Separate controllable costs from enterprise investments. Allocate operating expenses where managers can influence them, while protecting capabilities that create value across the organization.
3. Build capital-aware profitability measures. Evaluate returns by customer, brand, supplier, SKU, and market, incorporating working capital requirements and service costs.
4. Redesign repeatable workflows. Use AI and automation where they can fundamentally improve how work is performed, rather than merely accelerating existing processes.
5. Sequence changes carefully. Prioritize initiatives according to potential value, feasibility, and the disruption required to implement them.

This is not simply about cutting costs. It is about aligning the operating model and its associated costs with market realities so profitability can recover and endure.

Beverage alcohol companies that redesign their cost structures, capital allocations, and workflows will be better positioned to withstand prolonged pressure and capture opportunities as they emerge.

The question is no longer whether the industry’s legacy operating model is broken. It is whether leadership can rewire the business before market conditions force its hand.