The future of vodka in seven regions
Although the past few decades have been kind to vodka volumes, the category’s future is varied, as this report on the future of the spirit across seven regions shows.
From Asia to Latin America, the future of vodka is varied across the world, as this latest report showsThe past couple of decades have been very kind to vodka in the vast majority of developed and emerging markets, despite the inevitable slow volume declines in the low-value powerhouse destinations of Russia and Eastern Europe.
But in early 2014, there is a scent of change in the air. The flavours boom in the US – recently driven by increasingly bizarre creations – is seemingly nearing its end, while the ongoing eurozone crisis and general economic fragility have made Western Europe a more commoditised and price-sensitive market.
The greatest optimism is reserved for the long-term promise of Asia and the dynamic growth of Latin America and Australia, alongside continuing (if patchy) signs of trading up in Russia.
Consumer trends are moving too: Russian Standard’s Oleg Yegorov reports an increasing tendency towards neat vodka consumption, alongside the ongoing cocktail boom.
Meanwhile, Bacardi-owned Grey Goose says the “major trend” it has identified is that of consumers becoming more educated and curious about spirits and cocktails in general. Cocktail recipes, the company adds, have become the most popular pages on the Grey Goose website.
To assess vodka’s future successes properly, we need to take a closer look at its prospects region by region.
Click through the following pages to see our report on the future of vodka across seven different regions.
North America
After years of dynamic growth in volume and value terms, the US vodka market is showing increasing signs of flattening out – but alongside some lingering opportunities for expansion.
“Flavour fatigue” is the buzzphrase of 2014. Not that sales are falling, but growth has stalled to mid-single digits despite a swathe of new launches. But there’s still room for Diageo’s global white spirits portfolio director Peter Fairbrother to applaud Cîroc sales, up 16% on the back of the introduction of Cîroc Amaretto, as well as good performances from Smirnoff Sorbet and Confectionary flavours, despite a slight decline in overall brand volumes.
Similarly, Maura McGinn, VP of global strategic marketing of spirits at Campari, says Skyy Infusions continues to enjoy double-digit growth, boosted by last year’s launch of Moscato Grape, the brand’s most successful flavour debut to date.
Brown-Forman’s Finlandia is competing against two potentially negative trends – flavour fatigue and imported premium brands lagging the market – but is switching to a stripped-down focus on simple mixed drinks, such as Finlandia Grapefruit Crush: Finlandia Grapefruit, grapefruit juice and a splash of soda. After “tremendous success” in several states it will now be expanded, says Carmen D’Ascendis, global MD, vodka. “Consumers are aware that vodka is mixable,” she adds. “We don’t need to bury them with hundreds of drink recipes.”
If the flavoured segment is becoming more complex, standard unflavoured vodka is increasingly cut-throat. McGinn describes it as “more and more of a commodity play as many of the top players battle it out for shelf space and sales by pulling the price lever. You can’t build a brand on price alone. It simply isn’t a winning formula”.
It’s also a factor higher up the value chain, says Legend of Kremlin export director Ekaterina Egorova. “The slowness is mostly due to the fact that in such an established market of vodka drinkers, the cake is the same size,” she says. “There isn’t any significant growth in the number of consumers and the only shift we can see is between the categories.”
Latin America
Volumes remain relatively small, but Latin America has been one of the most dynamic and fastest-growing regions for vodka in recent years, and it’s a pattern that is set to continue, according to Euromonitor International.
It predicts that volumes will rise 24.1% in 2012-17, with value surging an impressive 35.2% over the same timescale. That would represent accelerated volume growth compared to the previous five-year period, but with a slight deceleration in value growth. And the big prize, most companies agree, is Brazil. “Brazil is the battleground in South America, with locally produced international brands slugging it out with imported premiums,” says Brown-Forman’s Carmen D’Ascendis.
Diageo’s Peter Fairbrother concurs, saying that Brazil “continues to be a promising market” for Cîroc, with the brand growing in strong double digits according to the company’s results for the second half of 2013.
“Vodka has become an increasingly fashionable tipple for aspirational Brazilians in bars and clubs, which are swapping out cachaça for imported vodka in their Caipirinhas,” Fairbrother adds, highlighting IWSR figures predicting a 2.6-million-case rise in Brazil’s vodka sales between 2013 and 2018.
Elsewhere, Campari’s Maura McGinn describes the region as a whole as “very hot”, agreeing with Fairbrother that consumers are increasingly moving to vodka from local spirits. Vodka’s “aspirational, international image” is, she says, an attractive prospect for the emerging middle classes in Brazil, Argentina and Chile – all high-growth markets for Skyy.
And D’Ascendis adds: “We are excited about Mexico, where we can tap into our own distribution company and partner with other Brown-Forman brands such as Jack Daniel’s and el Jimador.”
In particular, the company is looking for Finlandia to benefit from Brown-Forman’s leadership in Mexico’s pre-mix segment, prioritising new formats and flavours to drive growth.
Western Europe
The ongoing economic woes of the eurozone look set to have a lingering impact on vodka markets across the region, according to Euromonitor International. While the 2007-12 period was marked by value outpacing volume – growth of 24.6% versus 15.5% – that pattern is reversed for 2012-17, with predictions of volume rising 12.1%, but value up only 5.8%.
“Throughout most of Western Europe, entrenched brands are discounting to maintain volume share,” says Brown-Forman’s Carmen D’Ascendis. “This is a battle we are not interested in.”
Legend of Kremlin’s Ekaterina Egorova agrees. “People are being more careful with spending money,” she says, reporting France and the UK in “complete stagnation” and growth at the lower end in Germany thanks to the “huge” Russian ethnic market.
However, there may be some glimmers of hope on the horizon. Campari’s Maura McGinn says Skyy has gained traction in Italy and Germany, adding: “With signs of recovery, there will be increased investments in Europe, including duty free.”
Meanwhile, the UK remains Russian Standard’s biggest overseas market, says spokesman Oleg Yegorov, enjoying high double-digit growth for several years. The company even expects the UK to overtake Russia as its biggest market bar none in the next year or two, boosted by the added presence of Green Mark and Zubrowka following Russian Standard’s acquisition of rival CEDC.
The super-premium arena also remains potentially lucrative, with high rollers traditionally immune to the impact of ongoing economic problems. Egorova cites “window markets” such as London, Paris and the Côte d’Azur, while Diageo’s Peter Fairbrother reports that increased investment behind brands such as Cîroc has been an important growth driver. Innovation, too, is key, he says – including the launches of Cîroc Red Berry, Smirnoff Gold and, in GB/Ireland, new signature serve Smirnoff Apple Bite.
Eastern Europe
The vast vodka hinterland of Russia and Eastern Europe continues to dwarf the rest of the world in volume terms, and continues to display the same trends: volume falling fast, but value improving – especially in Russia. Much the same is expected for the next few years, says Euromonitor International, predicting a double-digit volume decline, but continued value growth at a slower pace.
“The big news is a stagnant market in Poland and continued premiumisation in Russia,” says D’Ascendis. “Finlandia is a leading brand in each of these markets, but we are fighting different battles in each market.”
Poland is increasingly characterised by a market extended into low-strength, flavoured “vodka” brand extensions, especially among younger adults, accompanied by trading down thanks to a recent increase in excise duty.
But intervention in the Russian market via tax hikes and minimum pricing has had the opposite effect, leading to significant falls
in value vodka as consumers trade up to mid-priced premium brands – or switch to illicit alternatives.
These contrasting trends reflect a region that, for all its common vodka tradition, is both changing fast and increasingly diverse. Diageo’s latest half-year results showed a slight decline in vodka sales across Eastern Europe, but this masks a strong performance for Smirnoff in Poland, offset by weakness for Smirnov in Russia.
For Legend of Kremlin’s Egorova, the dominant trend across the region is quality, with difficult countries such as Poland, and smaller markets such as Bulgaria and Romania, all showing good growth off a small base. “Finding the right partner is vital,” she observes. “Markets do show some common, global trends, but even a good market can be spoiled with an unprofessional approach, while the small ones can reap substantial results.”
Her concern in Russia is that, for all its “vast” size, it is characterised by volume falls thanks to growing demand for imported spirits such as rum and whisky.
Asia
The potential for vodka in Asia is as vast as the continent itself. During 2007-12, according to Euromonitor International, volumes grew by 76% and value by 47%; the company expects a deceleration in the following five years, but 37.7% volume growth and 27.6% value growth still look pretty healthy.
Legend of Kremlin’s Ekaterina Egorova describes Asia as “the most difficult and the most promising for vodka, especially when we speak of China and India. Everyone wants to be there when ‘the train arrives’”.
The train may not quite be in the station, but it’s at least visible in the distance: China ranks fourth as a market in growth terms for Skyy, and Diageo’s Peter Fairbrother reckons sales there have grown by 250% over the past decade.
In India, he adds, Smirnoff is growing in double digits, boosted by a developing trend for flavoured vodka and exclusive launches such as Smirnoff Espresso.
But per capita consumption remains minuscule, Egorova points out. “China is the country of baijiu drinkers, India prefers whisky, but the potential for growth is immense, with people starting to earn and willing to spend,” she says.
If China and India are long-term bets for the future, Vietnam is already an enticing prospect thanks to historical ties with the Soviet Union/Russia. And Brown-Forman’s Carmen D’Ascendis says Finlandia is targeting South Korea, which she describes as “in transition”, adding: “For many years, the market was dominated by whisky and business occasions, whereas now ‘nights out with friends’ and ‘casual gatherings’ are gaining in importance.”
At William Grant, Reyka global brand director Gemma Adams agrees that Vietnam and South Korea are exciting, and highlights the brand’s recent launch in Singapore and Mongolia. “Our provenance story is really interesting to our consumers,” she says.
Australia
Vodka’s smallest global region has also been one of its most lucrative and fast-growing in recent years, with Euromonitor International figures charting volume and value growth of 41.4% and 50.6% respectively between 2007 and 2012.
Unit figures remain small – Australia absorbed just under 11.3m litres of vodka in 2012, at a cost of less than US$770m – but Euromonitor expects growth to continue at a slower pace to 2017, rising 19.3% by volume and 21.2% by value.
The secret of its success is that Australia is a relatively broad-based, high-value market. Legend of Kremlin’s Ekaterina Egorova reckons there is “huge potential” for sales growth at the higher end, thanks to a fairly stable economy and a consumer appetite for quality and prestige, as well as a willingness to try new brands – and even to consume vodka neat, rather than in mixed drinks and cocktails.
It’s a similar story for Diageo, according to Fairbrother, who notes that Ketel One sales have doubled recently. Diageo’s 5% net sales growth in spirits in Australia has also been driven by the introduction of Smirnoff Double Black, he adds, and this has itself driven a crucial demographic change.
“While five to 10 years ago few Australian males would drink vodka, the introduction of the Smirnoff Ice Double Black RTD has changed this, and the product potency and masculine image have changed the way males think of vodka,” Fairbrother says.
Further growth, he reports, has come from Smirnoff ready-to-drink and ready-to-serve products throughout the region, which in turn has expanded the Smirnoff trademark and broadened the appeal of the category as a whole.
“These products are helping draw new consumers to the segment by stealing them from traditional beer and wine occasions,” Fairbrother concludes.
Global travel retail
Any spirit brand boasting a position in global travel retail will speak of the natural competitiveness the market presents, but none more so than vodka.
The top three brands – Absolut, Smirnoff and Finlandia – between them accounted for 57% of the entire vodka market in 2012, according to IWSR, but their grip on such a solid market share is slowly slipping from the 60% they commanded a year earlier.
The number of vodka brands promoted in global travel retail has expanded over the past few years, and the total category accounts for 3.6m nine-litre cases as of 2012 figures, up 6.2% on the previous year.
The key to success in an increasingly diverse and competitive marketplace, argues Kathelijne Baauw, director of white spirits in global duty free at Diageo, is uniqueness, exclusivity and premiumisation, which is why the group is launching Smirnoff White this summer.
“Our main driver is premiumisation and differentiation, and that’s no different for a brand like Smirnoff,” she says. “Part of our large domestic audience doesn’t see any reason for purchasing Smirnoff in travel retail because they feel they can buy it at home for very reasonable prices.” Smirnoff White, a freeze-filtered vodka, will be the group’s first major travel retail exclusive, giving the world’s largest vodka brand a point of difference in the sector.
Walter Kooijman, MD of global travel retail at Russian Standard, however, is bullish on his brand’s success in travel retail, after experiencing “more than double-digit growth” in 2012 versus the category average. “The duty-free market is not as saturated as some domestic markets,”he claims.
The bulk of Russian Standard’s sales are confined to Russia and CIS, strengthening the conclusion that brand success in travel retail rests largely on the region. One thing is for certain: provenance plays a key role in a vodka brand’s success. World Duty Free Group, which operates out of the UK and Spain, cites “strong sales” for English producer Chase’s Marmalade expression, while Canada’s Pur Vodka claims to have been “one of the best-sold products since launch” in Montréal-Trudeau airport. Pur Vodka is now sensibly planning launches in Toronto, Calgary and Vancouver international airports this summer.
