Competitive US vodka market damages Pernod and Diageo sales

Over-saturation in the US vodka market is blurring category boundaries and damaging sales of established premium and super-premium brands.

Absolut hopes its Elyx super-premium vodka will create a halo effect for the brand

According to Pierre Pringuet, CEO of Pernod Ricard, the influx of “hundreds” of new vodka brands over the past few years has negatively impacted sales of the group’s premium vodka Absolut.

Depletions in the US during the 2013/14 financial year came in at -2%, causing overall volume sales of the brand to decline 4%.

“ Let’s be honest, we are not pleased with the performance of Absolut in the US,” Pringuet said during a presentation of the French drinks group’s end-of-year financial presentation. “The reality is that there are several hundred new entrants in the market. Basically 99% or more of these brands will not survive, but the problem is that they do take market share.

“Our response to that first of all is to continue to invest, because we consider it a strategic market and even though it’s a Swedish vodka, the US is the home market for Absolut.”

To help combat the declines, Pernod has thrown its weight behind super-premium brand extension, Absolut Elyx, by creating a separate division headed by former vice president of global marketing at The Absolut Company, Jonas Tåhlin. “Even if we disconnect the sales of Elyx in the US with this new division headed by Jonas, we do expect a halo effect benefit on the Absolut brand,” Pringuet added.

Smirnoff woes

Diageo meanwhile has witnessed a similar effect on Smirnoff and Ciroc, both of which recorded volume declines in the US of 4% and 3% during 2013/14.

Ivan Menezes, CEO of Diageo, said earlier this summer: “In the US what did happen is you’ve had a lot of competitive entry; I think there are over 200 brands or items that came into the market in the last two years.

“We’ve been on a track of driving value in vodka, and so we’ve been taking price increases the last three, four years and a lot of the industry has not.”

Despite the challenges presented by over-saturation, the US vodka market grew 1.1% in 2013 (Discus), boosted by premium and high-end premium expressions. Super-premium vodka meanwhile fell by 0.4% during the year.

“A lot has been written about the end of vodka in the last few months. It’s not true,” added Menezes. “Whisky and vodka are still the two fastest growing segments.”

He added that Diageo would therefore continue to invest in Smirnoff in particular. “We will be building the brand and we’ve got advertising, packaging, on-premise execution, distribution behind it. And we will not be taking price increases as rapidly as we have, so that we get the competitiveness of Smirnoff back.

“This is a very important priority for Larry Schwartz and the team in the US, to get Smirnoff back into growth.”