Spirit brands reduce spend in struggling Southern Europe

With economic recovery a dim glimmer on Southern Europe’s horizon, some brands are pruning back investment in favour of more bouyant markets.

Southern Europe is only just beginning to emerge from economic gloom

Just over ten years ago J&B threw a lavish party at its annual sales conference in Spain to celebrate smashing through the three million case barrier for the first time. Everyone who was anyone in the brand’s success story was invited, and while sales had been slowing down for a while since the heady days of the late nineties, it was still quite an achievement. J&B had led the country’s Scotch whisky boom from the start, and was still a million cases clear of its nearest rival Ballantine’s Finest.

What a difference a decade makes. Having embraced Scotch and cola, the Spanish turned to rum and the original Cuba Libre before the country’s property-fuelled boom and bust put the boot in. Spain is only beginning to emerge from a double-dip recession and unemployment remains stuck at a crippling 26%. As The Economist recently reported, when the Prado museum in Madrid advertised for 11 gallery attendants, no less than 18,700 people applied.

“Yes, for us it’s been no picnic, and while we’ve been quite focused on protecting our market share, Scotch has been very tough,” says Robin Johnston, regional director for Western Europe at Chivas Brothers. But he refuses to describe it as managing a market for decline, saying, “If you do that, what do you expect?” Ballantine’s is apparently holding its share in line with the declining whisky market, which puts it in a better position than its main branded rivals, according to Johnston.

On-trade decline

This is because brands are tending to fall faster than the overall category thanks to the relative growth of the off-trade and the strength of own-label Scotch. “Before the recession, 70% of whisky in Spain was sold in the on-trade. Now it’s less than 60%,” says Johnston. With less money to spend, people are tending to drink at home, while younger Spaniards still engage in those spontaneous street parties known as botellónes, where the authorities allow them. In such an environment, international brands have little chance against cheaper alternatives which leaves brand-owners with a dilemma – do they hang tight in the hope of better times to come, or cut their losses?

In its preliminary results to June 2013, Diageo announced it had cut its marketing spend by 6% in Western Europe, seen its net sales fall by 4% and its profits by 7%. It is hard not to make a connection and conclude that by investing less, decline became something of a self-fulfilling prophecy. Commenting on the results, John Kennedy, president of Diageo Western Europe, said: “Our Southern European markets faced another very tough year and net sales declined 11%.”

The future of Scotch has appeared uncertain in the region, as consumers turn to gin

Favouring more bouyant markets

The drinks giant has clearly rejigged its promotional spend in Europe. “We increased marketing investment on Cîroc, Ketel One vodka, Zacapa, and Johnnie Walker and consequently reserve brands continued to be an area of significant growth, up double-digits,” Kennedy said at the time. By which token, brands like J&B must have had their budgets pruned back. Across Spain, Portugal, Italy and Greece, J&B haemorrhaged sales – down 30% according to Diageo. As the company admits, the brand also lost share in France while the promotional activity of their closest competitors increased.

With its sales skewed towards Europe, J&B is bound to suffer compared to Johnnie Walker Red Label whose biggest market is Brazil. Rather than attempt to defend its volumes through aggressive price promotions, it seems Diageo has decided to divert whisky destined for J&B at the time of production to other brands in more buoyant markets.

The silver lining

As former CEO, Paul Walsh, explained in February while announcing Diageo’s interim results for the second half of 2012: “If there is a silver lining to the fact we’re not selling as much young stock in Spain and France, it means we can sell it as older stock into Latin America at much higher margins.”

Whether or not Scotch can ever bounce back in Spain, Johnston says “gin is the hot story right now, with Beefeater the market leader in volume and value in premium gin.” He continues: “It’s been incredible and just shows that it’s not all about economics.” He quotes the latest Nielsen MAT figures for premium gin, up 4.5%, and 7% for super-premium gin, though “super-premium has been slowing down in the last few months”. Meanwhile Tanqueray also claims to have grown its share in Spain.

Over the border in Pernod Ricard’s homeland, “France has been remarkably resilient,” says Johnston. “It is still the biggest Scotch market in the world by some distance, and while the French economy is not in terrific shape, whisky was showing small double-digit growth until the tax increase (of January 2012) tempered last year’s figures.” The latest Nielsen stats put volumes down 3%, but Chivas claims that Clan Campbell is up 5% and Ballantine’s 2%. And, despite the squeeze on disposable incomes and the relative maturity of the French whisky market, Johnston sees lots more potential for single malts with The Glenlivet up 36% last year, from a small base. “All we’re waiting for,” he adds, “is for gin to take off.”

Stolichnaya vodka reported a “remarkable” performance in much-maligned Greece

Choose your partenrs wisely

Moving to vodka, Stolichnaya reports good growth in France and Italy where the brand “is up 25% three years in a row”, according to Marco Ferrari, chief marketing officer for Stoli’s parent company, SPI. He concedes both countries have been undeveloped markets for Stoli, and credits the current success with having the right level of investment and the right distribution partners who “really know the on-trade inside out”. The brand has yet to venture into the off-trade in France or Italy.

Stoli’s most remarkable achievement has been in Greece, a country whose economy has shrunk by 23% since 2008, and whose unemployment figures are even worse than Spain. For all the chronic instability, the brand has been growing by 8% according to Ferrari, and is the country’s second-largest vodka with sales of 80,000 cases last year. “It’s really growing despite the tremendous crisis we’re all aware of,” he says. “We never stopped investing in Greece and even launched the 20% abv, cranberry-flavoured Stoli Red there last year.”

Long-term vision

The fact that rivals have scaled back their investments to focus on less troubled and more lucrative markets has undoubtedly helped the brand. “There is no doubt we’ve been very loyal to consumers and the trade, and that’s paying us back,” explains Ferrari, who surmises that the country’s vodka market has been shrinking by 7-14% in recent years.

Greeks used to consume more Scotch per capita than anyone else, but whisky shipments were down 21% in volume and 30% in value last year according to the Scotch Whisky Association. For distillers with shareholders to appease, the urge to pull out and focus on more exciting markets must be almost irresistible. As Cyril Camus, head of Cognacs Camus, told The Spirits Business last month: “The short-term interest of a lot of companies would be to shift volumes from entry-level products in the more mature markets to China.”

Whereas he believes having a good geographic spread is far healthier in the long run, even in struggling, cash-strapped Southern Europe, Robin Johnston declares, referring mainly to Scotch: “It’s always unwise to take your eye off the core volume markets.”