A Clear Winner

The vodka machine keeps on humming.


Indeed, vodka is the single largest spirits category by far, accounting for nearly 31% of total U.S. spirits sales volume, according to the latest figures from the Handbook Advance 2010, published by the Beverage Information Group. In 2009, vodka accounted for almost 58.4 million 9-liter cases. Last year was a difficult one industry-wide, but vodka notched a volume increase of 5.7% (compared with 1.7% for spirits overall). Control states showed only a slightly lower increase for vodka at 4.9% with 14.3 million 9-liter cases. One caveat: Sales of value-priced brands rose dramatically, while sales of high-end vodkas slowed.


“I would say vodka had a pretty good year in a tough environment,” commented Paul Tuell, director of Finlandia Vodka for the North America and Latin America Regions. “In terms of dollars, it’s been a bit flat; in terms of case volume it’s been a pretty good year.” Finlandia, which enjoyed solid growth last year, is now celebrating the brand’s 40th anniversary.


The category’s sheer size is one big advantage, especially in this difficult economy. With the proliferation of brands, flavors, varieties and price points, consumers know there’s a vodka for every preference, taste and pocketbook – and more to chose from all the time.


“The vodka category, like the spirits industry on the whole, has felt the effects of the economic downturn,” reported Simon Burch, vice president of marketing, Diageo North America. “However, the diverse offerings within the category have allowed the vodka segment to adapt to continually meet the needs of consumers.” Diageo’s vodka portfolio is certainly diverse; it includes category leader Smirnoff (9.5 million total 9-liter cases in 2009, according to Beverage Information Group’s Handbook Advance 2010), representing a 2.0% overall increase over the previous year. In control states, Smirnoff’s increase was 3.8% with 2.1 million cases in 2009. Industry giant Diageo also owns top contenders Popov Vodka in the value segment (almost 2 million total cases in 2009, up 6.5% overall and 5.0% in control states) and the superpremium Ketel One (1.84 million cases, up 3.6%). Diageo also markets Ciroc, the high-end vodka made from French grapes.


Clear Advantages


The white spirit has a number of advantages that have enabled vodka to thrive, including drinkability, mixability and a product to match every drinking occasion. Those qualities are important to younger adult consumers, often the target of flavored vodkas, as well as seasoned drinkers who appreciate the various rungs of quality. And the off-premise trade is well-positioned to take advantage of these factors.


As the on-premise market has demonstrated for years and a growing number of consumers are discovering at home, vodka is eminently mixable. “With vodka, you don’t need a mixology degree to make a great-tasting cocktail,” pointed out Gino Luci, brand manager for Three Olives, Proximo Spirits vodka label.  “Flavors make it easy,” said Luci, “just add a splash of soda and consumers have a cocktail right in their hand.”


As this recession drags on, consumers are still counting pennies and not going out as much. On-premise beverage alcohol sales have declined. Although customers are staying home, they’re still drinking, of course. That’s where vodka’s mixability is a real plus, and that also spells opportunity for off-premise business.


“As consumer behavior shifts, we see off-premise as a big opportunity,” said Ian Crystal, brand director for Absolut, Level and Fris vodkas. Absolut built its reputation in bars and restaurants, and the company has invested heavily in on-premise. “Now we are designing our marketing tactics to go directly after the off-premise entertaining at home occasion,” said Crystal. To communicate that message, the Pernod Ricard brand has just launched its Absolut Drinks initiative and debuted the new Berri Açaí flavor.


Flavor in Favor


One of the hallmarks of the category is the proliferation of flavored vodkas, which have helped drive growth overall. Traditional tastes of buffalo grass, pepper and citrus have given way to a tutti-frutti kaleidoscope ranging from bacon to bubble-gum, which begs the question: How many more flavors can fit on retailers’ shelves?


With a current total of 18 flavors, Three Olives is betting that the flavor boom will continue.


“We track our flavors closely and the momentum doesn’t seem to be slowing down,” commented Luci. Even though unflavored vodka still has the greatest share of volume, he said, the flavored segment is growing much faster, which is driving a lot of the growth in the overall category.


A number of other companies would seem to agree, judging by the wealth of new flavor debuts.


Ketel One, for example, just launched its new Oranje, joining Citroen as a companion flavor to the popular, high-end Dutch import. The orange-flavored line extension begins as the original Ketel One Vodka, produced in small batches, and is then infused with the all-natural essence of a select combination of oranges. At 80 proof, Oranje has a subtle yet crisp orange flavor. Its suggested retail price is $25 for a 750 ml bottle.


Category leader Smirnoff recently released its 100-proof flavored vodkas, Spiced Root Beer and Dark Roasted Espresso. Debuting under the Smirnoff Blue Label, these are the first extensions of the 100-proof vodka line. SRP for the new flavors is $16.99 per 750 ml. “Spiced Root Beer and Dark Roasted Espresso are great additions to our portfolio, and signify the brand’s commitment to being ‘there’-‘there’ at the forefront of innovation, with a unique approach to the category,” stated David Tapscott, director of Smirnoff Vodka. In other news, Smirnoff Blue underwent a repack and reformulated flavor profile late last year.


Also under the Diageo umbrella, the company’s ultra-premium Ciroc Vodka brand launched its first line extensions with the release of two new flavors: Ciroc Red Berry and Ciroc Coconut. Entertainer/entrepreneur Sean Combs collaborated with Ciroc experts to create the new flavors. SRP for Red Berry and Coconut is $30 per 750 ml.


Another French vodka, Grey Goose, boasts three flavors in addition to Original: La Poire, L’Orange and Le Citron. Perhaps indicative of the entire category, the superpremium Grey Goose saw sales slow. Still, while the control states registered a 3.4% decrease for the Bacardi U.S.A. vodka brand, it nevertheless enjoyed an overall increase of 1.2% in 2009 to 3.5 million 9-liter cases. Indeed, some of the popular, high-flying superpremium vodkas like Grey Goose did okay, but they understandably didn’t match their explosive growth of recent years.


For its part, Imperial Brand’s Sobieski Vodka, at the value end of the spectrum, recently added two new flavors: Sobieski Cytron and Sobieski Vanilia.


Among the more whimsical flavors are two new ones from Pinnacle: Whipped Cream and Cotton Candy. In support, Pinnacle is planning a $5 million national advertising schedule for 2010. Parent White Rock Distilleries reports Pinnacle’s sales topped off at 1 million cases in 2009 and are on track to sell 1.5 million this year. In control states alone, the brand saw a 41.5% increase in 9-liter cases for 2009.


Meanwhile, Finlandia launched Tangerine last year, which has been performing well, according to Tuell. Finlandia’s portfolio includes the classic, plus seven additional flavors.


Heaven Hill Distilleries’ entrant Burnett’s Vodka boasts 20 flavor varieties, including the new Fruit Punch and Pink Lemonade. The new flavors will be supported by POS for floor displays and shelf facings, as well as sales education materials. 


“The real opportunity in the flavored category lies in true innovation,” declared Maura McGinn, group director of vodkas and cordials for Skyy Spirits. That’s why Skyy scrapped its old flavored line in favor of All Natural Skyy Infusions. Infusions Pineapple was released last spring, which was one of the most successful product launches to date, says McGinn. Infusions Ginger was launched this February, bringing the total to seven.


Belvedere Vodka also has a twist, macerating fruits and flowers to impart flavors without artificial additives. The newest addition is Belvedere Pink Grapefruit, artisanally produced with whole fruit.


“Flavors have been very important to our business and we’ve been very successful with them,” said Ian Crystal, brand director for Absolut. He added, “But obviously, with the economy changing, you never know when you can continue to push the envelope. Berri Açai is our first sort of hybrid flavor. It’s cutting edge. There was some trepidation going in.” So far, performance of the new flavor has exceeded expectations.


Sister spirit, and another Pernod Ricard brand, Fris, billed as the first freeze-distilled vodka, is also debuting three new flavors: Cherry, Blueberry and Grape. The launch is being supported by national print and online advertising and POS materials to generate interest and take-away at retail. SRP will be in line with Fris’ base brand at $9.99 per 750 ml.


Meanwhile, Stolichnaya, which notched sales of 1.95 million 9-liter cases in 2009, just released the eleventh flavor in its portfolio: Stolichnaya White Pomegranik, made with the natural flavor of white pomegranate. Rarer than the better-known red pomegranate, the white version is less tart, helping to impart a natural sweetness to the vodka. The new flavor can be enjoyed straight or in a variety of cocktails, the company says. It has a suggested retail of $23.00 for a 750 ml.


Sweet tea has become one of the hottest flavors on the market with two relatively new brands showing significant sales. Diageo’s Jeremiah Weed Sweet Tea Flavored Vodka burst on the market last year with sales of 150,000 9-liter cases and White Rock Distilleries’ Sweet Carolina Sweet Tea Flavored Vodka eclipsed 100,000 cases last year. For its part, Seagram’s Vodka, one of the fastest-selling vodka brands in the U.S. (with volume of more than 1 million cases), also debuted a Sweet Tea flavored vodka last year.



A Question of Value


Much of the vodka category’s growth over the past few years has come from ultra-pricey and dazzlingly packaged super-premium entrants. Now that growth has shifted to thrifty value brands. On the plus side, this huge category has the range to capture all consumer buying occasions, so customers aren’t trading out of the category altogether.


“Consumers are still actively turning to vodka in both off-premise and on-premise occasions, though there has been evidence of a change in their purchasing habits,” stated Diageo VP Burch.


That’s underlined by the 2009 statistics released by the Distilled Spirits Council of the U.S.  (DISCUS). The value category grew a hefty 10.7% in volume during the year; premium was a bit slower at 5.0%. Revenues for those sub-categories grew 6.7% and 4.0%, respectively, according to DISCUS. Obviously hit by the down-trading phenomenon, the high-end premium and superpremium segments were down in volume 2.3% and 5.8%, respectively, as well as revenues (off 1.2% and 1.9%, respectively).


Just how much market share those high-end premium and superpremium sub-categories will eventually regain is open to debate. Right now, there’s no question that value rules.



Shopping Smarter


In addition to the on-premise slump, there are other signs that consumers are saving their pennies. Clearly, consumers have been trading down to value-priced brands.


Even retailers in affluent neighborhoods have noted their customers are shopping smarter – using more coupons than in the past and experimenting with everyday brands.


Indeed, Constellation Spirits’ Svedka brand had a stellar year: Overall volume jumped 33.1% in 2009 to almost 2.8 million cases. Svedka is promoting itself as the “#1 Vodka of 2033,” with slick futuristic ads and sexy dancing robots. That’s on the heels of a sleek repackaging meant to enhance shelf presence.


Other value-priced brands that experienced above-average increases in 2009 included McCormick Vodka (up 7.0% overall to more than 2 million cases) and Sazerac’s Barton Vodka (a 5.9% overall increase to 1.8 million 9-liter cases), and especially Burnett’s, from Heaven Hill Distilleries, which saw sales rise 24.9% in 2009, to 1.28 million cases. Burnett’s jumped 4.6% in control states alone.


 “Now consumers are trying to find quality at the right price point. They don’t need the fancy packaging. What’s in the bottle is important,” said Alexis Roberts, a spokesperson for W.J. Deutsch. The company has just begun distributing Luksusova, a potato-based vodka from Poland. Although Luksusova means “luxury” in Polish, the new spirit competes in the value segment with an SRP of about $13 per 750 ml. The focus for the new brand, says Roberts, is off-premise right now, with educational POS materials and retail sampling programs.


“With consumers trading down, having a standard offering is a big opportunity,” said Absolut’s Crystal, talking about Fris Vodka. He said Fris has been growing double-digits for the last couple of years, and the company continues to invest and grow the brand, driving distribution and getting pricing right.


“The value proposition will continue to be important for a while,” said Tuell at Finlandia. “Consumers are looking at 6-, 12-, 18-months of slow growth. So I think we’re going to see a premium put on value. And that’s not necessarily low price.”



Is the Dazzle Gone?


All the action in the value segment begs the question: Is premiumization still viable? All signs point to a return to strength – eventually.


“The big increase in the value segment prepares the way for trading up when the good times return,” said David Ozgo, DISCUS’ chief economist at the association’s annual Industry Review in February.


“There are lots of upsides to premium and superpremium products as long as they deliver differentiation that consumers really want,” said Tuell at Finlandia. “There will always be a place for the right brand proposition at the right price, even if it’s relatively expensive, in the market.”


One example is Beam Global’s ultra-premium Effen Vodka. The name means “smooth and balanced” in Dutch, and the spirit is made from premium wheat grown in northern Holland. Fancy packaging includes a molded grip that keeps the contents cold. In fact, the brand has just launched a new ad campaign in several major markets to spark interest in the brand’s superpremium status.


 “Absolutely, I think luxury brands will bounce back again,” said Three Olives’ Luci. “But, the problem is, when you lose a consumer it’s sometimes hard to gain them back. If people are getting the quality they want at a better value, it doesn’t matter if the economy has recovered.”


“Superpremium brands have been struggling and getting super-aggressive from a price standpoint,” said Crystal at Absolut. “Tactical price adjustments are one thing, but ones that change the dynamics of the category are not the best move for those brands in the long term.”


Perhaps the concept of what premium vodka really is has to change, to place more of an emphasis on what’s in the bottle.


“Premiumization still holds opportunity, but the definition has evolved with the times,” said Skyy’s McGinn.  She terms that “affordable luxury.” Those brands that offer a balance between quality, price and style. 



Marketing Matters


In keeping with vodka’s hip and trendy image, a number of brands’ advertising and marketing campaigns revolve around fashion, arts and film, and involve celebrity affiliations.  Grey Goose, for example, hosts a number of world-class parties during international film festivals in Cannes, Los Angeles and Toronto and elsewhere.


And, late last year, Imperial Brands, a wholly-owned subsidiary of Belvedere S.A., announced a multi-year partnership agreement with actor and producer Bruce Willis to promote Sobieski Vodka in North America. Creative for the campaign will focus on a “Truth in Vodka” message, where Sobieski urges consumers to focus on what’s in the bottle, not gimmicky marketing or fancy packaging.


The Absolut “Drinks” campaign features creative collaboration from a number of artists, including fashion photographer Ellen Von Unwerth and actresses Kate Beckinsale and Zooey Deschanel. With the tagline, “Every drink is an exceptional experience,” the upscale ads are a tribute to some of the great classic cocktails.


Skyy is planning a promotional push around the upcoming film “Sex and the City 2.” Skyy has been named the official vodka of the film and will be executing a suite of marketing programs, including on- and off-premise promotions, sweepstakes, a custom cocktail program and advanced screenings. The film’s costume designer Patricia Field will be designing a limited-edition, themed Skyy Vodka bottle. 


Some brands have used celebrities to communicate a drink responsibly message during the holiday season. For example, The Ketel One Canteen traveled across the country offering complimentary gourmet food, bottled water and chauffeured rides home in New York City, Chicago and Los Angeles. Each city featured recipes created by celebrity chefs Michael Psilakis, Rick Bayless and Ilan Hall. And as the “Official Vodka of New Year’s Eve,” for the second consecutive year, Ciroc Vodka partnered with spokesperson Sean Combs to provide safe rides home to thousands of patrons in New York and Las Vegas.



New Niches


Into the already crowded category enter a number of products seeking to convey unique points of differentiation. A decade ago, many of these marketing hooks were totally off the radar. Now come a litany of new-wave vodka specialties: Organic, sustainably-grown, eco-friendly, gluten-free, energy-enhanced, diamond-filtered and aphrodisiac.


Opinions are mixed as to whether some categories are ultimately viable. The organic and sustainably-grown angle has certainly taken hold in other beverage categories, most notably coffee, tea, wine and beer.


Among the organic contenders currently in the race are Sazerac’s Rain Organics (in catchy droplet-shaped bottles), Square One Organic (which last year released a “Botanical” version that seems to tread on gin’s territory) and Ocean, made from sugarcane (which seems to tread on rum’s territory), grown organically on Maui.


“Green” vodka entered the category in 2007. Marketed by McCormick, 360 Vodka is billed as “eco-friendly” vodka. Just released are two eco-friendly flavors: 360 Cola and 360 Double Chocolate.


Most non-grain-based vodkas are gluten-free and a number of companies are touting that marketing angle. Vodka can – and is – made from virtually anything fermentable. For example, Ciroc made news at its launch a few years ago because it was made from grapes with a French pedigree. Now comes 4 Orange Premium, a new vodka distilled from four varieties of oranges. It’s produced in Florida by Imperial Brands, a subsidiary of Belvedere. Reportedly, it takes 20 oranges to produce 750 ml of vodka; SRP is $24.99 per bottle. The brand’s tagline is “The First Vodka You Can Squeeze.”


Red Bull and vodka is a common on-premise call. Now, the energy component is built into the spirit itself. Produced in Holland, V2Vodka is a wheat-based spirit infused with caffeine and taurine; and now it’s also available in mint flavor. Similarly, P.i.n.k. Vodka is infused with caffeine and guarana. And American-made, potato-based Zygo is fueled by taurine, guarana, yerba mate (a South American tea) and body-building supplement d-ribose.


“A brand that single-handedly establishes a new luxury category for vodka,” according to the company’s press release, is Diamond Standard Vodka. Illinois-based Diamond Beverages’ gimmick is a diamond filtration process. Released last year, this gem of a vodka retails for a hefty $79 per 750 ml bottle.


Another unusual American product is Yo Vodka, developed by Iconic Brands, which contains the Mexican herb damiana, reputed to be a natural aphrodisiac. The amped-up vodka was unveiled in Miami over the Super Bowl weekend and hit retail shelves nationally in April.



Drinking Small Is Big


Shaking up the spirits world in a small way is the proliferation of micro-distillers. In the last decade, the number of small distillers in the U.S. has grown from a few dozen to more than 200 all over the country. In some locations, that artisan movement means a lot of local labels.


Industry association DISCUS recognized this movement by establishing a new Craft Distiller Affiliate Membership program this year, headed by an eleven-member Advisory Council of distillers chaired by Fritz Maytag of San Francisco’s Anchor Distilling. The new craft distiller membership will be offered to producers under 40,000 9-liter cases annually.



Outlook for 2010


The general consensus is that the category overall will continue to experience healthy growth this year and beyond.


“Vodka’s versatility ensures the category will continue to have an unwavering presence at home and out-of-home entertaining experiences,” said Diageo’s Burch.


Skyy Spirits believes its vodka brand will continue to grow in 2010, “But [the market] will be increasingly competitive as brands compete for greater value share and consumers become more discerning about purchasing products with an eye on value and quality, not just style,” noted group director McGinn.


“We’re starting to see some signs of life in the on-trade; people are eating out again,” observed Finlandia’s Tuell. “With increasing consumer confidence, I think we’re going to see better numbers than last year.”

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