Vodka paving US future for flavoured spirits

Vodka remains the ultimate neutral spirit, but the success of infused variants has perhaps opened the way to bigger, bolder-tasting spirits and niche products in the States, writes Tom Sandham.

Vodka brands are experimenting with bigger, bolder flavours

This year, Diageo’s Reserve Brands World Class cocktail competition took its search for the UK’s best bartender to the air as four bartenders boarded a British Airways business flight to New York, crammed into a galley and mixed drinks with altitude. It was shakes on a plane – more appealing than Snakes on a Plane for anyone familiar with the Samuel L. Jackson B-Movie.

World Class is the industry’s most prestigious cocktail competition and Reserve had flown the bartenders to New York because it remains an essential imbibing terrain.

And what they discovered was that for all vodka’s dominance, American bartenders and consumers are starting to demand bigger and bolder flavours in their spirits.

Whisky, gin and rum are on the up. Before we launch into hyperbole on the booming complex spirits though, some perspective: vodka still rules the roost in the States. Year to date IRI data shows vodka premiumisation continuing, with US$20+ products up 4% compared to last year.

“The success of vodka is down to two things,” says Brian Cox, vice president at Belvedere. “A deliberate attempt by spirit marketeers to go after beer occasions. And ‘trading up’ – vodkas and Tequilas are now able to answer consumer needs related to status and discernment, previously the exclusive preserve of brown spirits.”

Diageo too has seen growth in the super and ultra-premium sector. Interim results, six months to 31 December 2012, revealed how Reserve Brands delivered double-digit growth, with continued strong performances from Ketel One and Cîroq.

Standard vodka has wobbled, but this has been offset by a strong flavour market. Indeed flavours are the story in vodka. IRI data reveals flavours are growing faster than regular vodka, generating 21% of total dollar growth in the category, with the likes of Smirnoff Iced Cake and Kissed Caramel kicking these numbers up.

Edward Pilkington, Diageo’s global category director for vodka, gin and rum, says: “Smirnoff is the largest ‘flavoured’ brand with 30 different Smirnoff flavours now accounting for over 25% of total industry flavoured vodka sales (source: IRI) – and they’re growing double-digit net sales. Approximately half of Smirnoff’s growth there is coming from our new confectionary flavoured brands.”

Such flavours are not to everyone’s taste of course. Brian Cox takes a stern tone: “We’re utterly against these flavours. They are detrimental for the obvious reason that a clear liquid at 40% that tastes like cupcake is not responsible marketing. We are about quality and maturity.”

So vodka is big, no surprise there. But ignoring volume and value share for a moment and looking at fashions, craft spirits are worthy of note.

Scotch single malts are in double-digit growth in the US, led by The Glenlivet

Michael Kinstlick, CEO at Coppersea Distilling, recently excited the craft distilling community with his ‘US Craft Distilling Market: 2011 and Beyond’ white paper. In it he identifies a rise in craft distilleries from 24 in 2000 to 52 in 2005 and then up to 234 at year end 2011. Coppersea is in New York State where the passing of the 2007 Farm Distillery Act has made it considerably easier to set up shop, and interestingly it is changes like this that have seen the number of States with a craft distillery rise from 12 to 45 since 2000. It may be small beans to some and it’s a tough market to operate in, but it seems there’s a demand for artisan spirits.

It’s very similar to what the beer industry faced in the late 1980s and the craft beer market has subsequently boomed. Should spirits follow it could be an exciting time for innovation.

David King, the US-based marketing director of Berry Brothers & Rudd has seen the burgeoning scene through the company’s association with Anchor Distillers: “Craft is the new thing and the market is struggling to digest it, particularly at the wholesale level which is so vital in the US compared to other markets. Anchor’s one-stop-shop approach of representing many craft products in one place allows wholesalers to supply customers with minimal complexity. We also act as a filter, as many of the craft guys unfortunately will not make it due to barriers such as A and P needs and long-term cash flow needs. The best play for a lot of these guys is to get a modicum of success and then sell to a bigger player.”

That said, there’s clearly scope for more; pre-Prohibition records indicate the US supported nearly 3,000 distilleries. Much of ‘craft’ is driven by craft whiskey, but there are also good vibrations from those in the Scotch whisky category. Chivas is amongst the most positive. “People are after products with authenticity,” says the company’s commercial director, Mark Thorne.

“With our portfolio we’ve been able to play to the connoisseurs who are looking for new experiences. Our 18-year-olds are performing well, which shows consumers in America are making careful choices about the quality of whisky they want to purchase.” Meanwhile Diageo’s interim results reveal solid growth for Johnnie Walker, up 4% in volume and 9% in net sales, with corresponding figures of 6% and 7% for Buchannan’s.

Thorne also points to the 11.7% growth in single malts – a category led by The Glenlivet in the States. “Malts are doing well, but it’s driven by variety rather than large brand growth, so the category is fragmenting,” says David King. “Our relatively small brands – Glenrothes, Glendronach and Benriach – are massively outperforming the market, and again it’s driven by variety of cask type, vintages and finishes.”

American whiskeys like Jim Beam’s Red Stag are following in the footsteps of flavoured vodka

But of course Americans love a homegrown success story and US whiskey is flying right now with a 25% rise in value (2007-2012) according to Euromonitor. The key players attribute this to innovation – by which we mean flavour. Beam’s Red Stag is the poster boy, up 22% (value) in the last 12 months to May (Nielsen), maintaining its rapid growth since its launch in 2009.

Not entirely popular with the purists, flavoured whiskies in America are on trend, and the ‘innovators’ are arguing that it brings a new audience to the category. It looks like they are here to stay for a while, as others follow suit.

Will Scotch join the party, and follow the lead of Dewar’s Honey? King again is quick to manage expectations: “There is innovation in whisky, but so far the flavor sector is really driven by price, or Dewar’s desperation due to the decline in standard blends which started around 1979. I don’t see widespread activity due to brand integrity concerns, but it may attract new entrants or relaunched older brands.”

The Irish have dipped a toe into flavours, with Bushmills Irish Honey the obvious example. Brendan Buckley, innovation and category development director at Irish Distillers, did not discount it. “It’s inevitable there will be more entrants. We’re looking at it closely, but whatever we do has to respect the integrity of something that has taken 100 years to get here. But we are performing well in the US. Irish whiskey grew at CAGR of 20% between 2007 and 2012. That’s driven by Jameson, which has increased its share from 63% to 77% in that time frame (IWSR).”

Elsewhere the subject of Tequila is on the lips of the industry due to the Jose Cuervo shake up. What’s next for Diageo isn’t clear, but obvious on-trade activity around the Don Julio products would indicate an impetus here. More important might be how the other operators in the market react.

“The situation with Jose Cuervo is a big opportunity for all of us,” says Olivier Fages, International vice-president of Olmeca. The brand is only doing tens of thousands of cases over in the US right now, but it’s expanding across the country and with bartender backing thanks to one of it’s creators being the late and loved Henry Besant, it is definitely one to watch.

Steffin Oghene, global brand consultant for Olmeca Altos, adds: “We have a mescal trend, but the category is still very small and there is still so much work to be done with Tequila. I’m training on the West Coast and it still amazes me that California, a market that has thousands of brands, still lacks knowledge on

Tequila.” Working with bartenders will help, just as it has with gin, a spirit that’s incredibly fashionable, although not necessarily reflecting this in growth and value. Mark Thorne at Chivas is enjoying the success of Beefeater globally, but admits gin is flat in the US.

The successful US launch of Leblon cachaça and other modern takes on Latin spirits have hinted at some Latin love in America, but they have yet to really grab the consumer, despite large spends. Meanwhile rum is performing well, providing it is either aged or flavoured. Bacardi, the number two brand in Euromonitor’s ‘Top Five US spirits’, may be ahead of Captain Morgan at number three, but overall dark rum outsells white rum, and has done since 2007. This further endorses the view that US drinkers are interested in flavour and character.

So, to sum up, volume and value still favours vodka, but even the neutral king has had to depend on its myriad flavours. If there is one overall trend to take note of in America right now, it is that after years of homogenised tastes, big flavours are on the agenda.