Analysis: Vodka in six key markets

Once the all-powerful white spirit that could do no wrong, vodka has in recent years become a byword for controversy and crisis. Amy Hopkins and Melita Kiely report on a category facing up to a challenging future.

Currency woes, geopolitical discord, import bans and illicit spirits have produced a complex vodka market

*This feature was initially published in the April 2016 issue of The Spirits Business magazine

The drama of vodka’s recent turbulence reads like a tabloid affair. It’s a tale of currency woes, geopolitical discord, import bans and a rapidly rising black market; a narrative which has conjured a storm of struggles for the category.

There was a time when a staunch following of fans in Russia and Europe drove the category to dizzying heights of success. Vodka was the omnipotent spirit on a seemingly unending upwards trajectory; the envy of other categories. But ongoing tension between Russia and Ukraine, weakened currencies and soaring prices have pushed producers into a tricky situation.

Then there was the recent flavour boom in the US that only spurred vodka further on its path to apparent global rule. But an overwhelming level of saturation has left a bitter taste and, as a result, the race is on to save the sector from incurring further losses.

“Caught between a maturity and a stagnation-induced state of torpor in its Eastern European bastion, and the hard reality of committing the cardinal sins of over-indulgence, navel-gazing and inflated pricing in Western markets cyclically abandoning the categor y, the hangover for vodka will set in further,” predicts Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor.

“Following decades of unflinching, seemingly infinite growth, its short to medium-term future will hence become increasingly more polarised.”

Emerging markets seem to hold the greatest reasons for optimism. Long-term promises of success are being sought in the likes of Australia, Africa, the Middle East and South America, but such success looks to be anything but straightforward.

Continue to the following pages for an in-depth market-by-market analysis of the vodka category.

Russia and Eastern Europe

If there’s one region that has presented a minefield of issues for vodka brands over the last year, it’s Russia. According to data from the Centre for the Study of Federal and Regional Alcohol Markets, Russian vodka and spirits exports plummeted 42% to 43.5 million litres last year – the lowest figure since 2005.

The drastic declines have been largely attributed to the dramatic devaluation of the rouble and continued political tensions between the West and Ukraine.

So fragile is the situation that some brands have chosen to abandon their strategy in the region altogether. “We have decided to delay our launch in Russia and other CIS countries due to their current economic challenges,” explained John McDonnell, managing director international, Tito’s Handmade Vodka.

It seems some global brands are leaving it to local producers to cater for the market, and who can blame them? Figures from Euromonitor depict just how bleak the economic situation has become in Russia and Eastern Europe. This past year, volume sales declined 5.2% in 2014-15, while value sales crashed 28.7%.

Illicit vodka

The figures point towards a serious trade down when it comes to vodka in Russia, backed further by reports of the growing popularity of counterfeit products. The media has been awash with articles on Russia’s escalating illicit vodka trade, with Russian prime minister Dmitr y Medvedev urging a crackdown on illegal alcohol production towards the end of last year.

Stolichnaya has admitted the brand has suffered in certain Russian and Eastern European markets, and despite its production facilities in Riga, Latvia, its Russian heritage has stirred up strife. “In Ukraine we have a big task communicating that Stoli is actually from Latvia and not from Russia, but we’re suffering and our volumes are coming down there,” said Lars Vestbirk, international marketing director, Stoli Group. “We know the task ahead; we’re still doing okay in the rest of that region, but clearly Russian aggression is affecting us.”

Looking forward

Forecasts for the next year suggest a change of pace for vodka’s demise, with volume declines predicted to slow to -3.4% and value sales expected to grow by 2.5%. Perhaps there is still room for optimism, as seen from select international producers who are not shying away from such troublesome territory.

“Last month [March] we signed a deal for distribution in Russia, the first English vodka brand to do so,” said James Chase, marketing director Chase Distillery. “Sales are still small but it just shows you the power of brand GB.”

Ladoga claims combined sales of its Czars and Imperial vodka brands grew 53% between 2011 and 2014. It also enjoyed 5% sales growth in Russia in 2015, despite plummeting sales within the overall category.

“In spite of the expected difficulties described above, we are waiting for a 20% increase of our premium vodka in Russia,” enthused Ruslan Grigoryev, development director of Ladoga Group. “We developed a number of programmes for sales increases of Czars and Imperial Vodka with our partners in CIS and Eastern Europe, including listings in new retail chains, price promotions, and replacing the ‘dying’ labels of our competitors.”

Western Europe

As Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor, told The Spirits Business earlier this year, the Western European spirits market has been “stuck in reverse” for quite some time.

White spirits have dominated the market for years, but the region seems to have ended its infatuation with the category and consequently vodka sales have taken a tumble.

From 2014-15, volume sales were almost stagnant, dropping 0.1%, but value sales suffered a -6% decline – perhaps not a surprise given the economic malaise and currency devaluation affecting the region. The maturity of the market could leave little wiggle room for brands to grow and recoup sales, but ever-optimistic producers are not bailing on the region just yet.

“In Europe, the market is mature but there are opportunities in Germany, the UK and France, where Absolut is performing well with strong growth,” explained Craig Johnson, VP global marketing, Absolut, who highlighted the brand’s double-digit growth in Germany and the UK.

For Stolichnaya Vodka’s Lars Vestbirk, Western Europe presents abounding opportunities in the on-trade.

“In select markets we are starting to introduce Stoli in the off-trade, but it is an on-trade brand in Western Europe,” he commented.

South America

Take a look at Diageo’s headline vodka figures for H1 2015/16 in South America and the region’s potential for vodka becomes evident. In the first six months of its fiscal year, the group’s vodka sales soared 22%, driven by Mexico and Brazil.

While this sharp uptake was largely the result of the Smirnoff and Cîroc’s pre-duty ‘buy in’, other countries across Latin America and the Caribbean also put in a strong performance.

In total, South America’s vodka volume sales rose 4.2% to 12.4m cases in 2015. Value sales slowed to +2.3% in the year to US$4.7bn compared with a rapid 16% increase in 2014, suggesting leading brands have made considerable price adjustments.

Nevertheless, this growth is particularly impressive when analysed in the context of South America’s economic and political woes. Almost every country in the region has experienced currency devaluations, the most drastic of which was in Venezuela, where Diageo saw its FY 2014/15 net sales plummet to just US$5.6m.

Sustained growth

“Brazil is, and will remain in the short-term, a difficult market,” warns Absolut’s Craig Johnson. “Absolut, however, performed very well and in the long-term Brazil will remain a growth driver for us. In Chile and Mexico, Absolut already has a good position and we want to keep sustained growth here for the next few years.”

For Melanie Batchelor, global vice president for spirits at Gruppo Campari, South America is among the emerging markets where vodka brands can benefit from a continuing premiumisation trend. “Skyy Vodka is expanding in China, Africa and South America,” she says. “Premium vodka has solid momentum in these markets and Skyy’s positioning is resonating with consumers.”

North America

Irrefutably the world’s most important value market for vodka, North America continued to see moderate single-digit sales growth in 2015 – a fact that may come as a surprise to some. Still suffering an extended hangover from a plethora of wacky flavoured releases and facing increased competition from emerging brown spirits categories, vodka in the US has managed to keep its head afloat against the odds.

“The vodka category in the US became a vacuum of overindulgence in recent years and flavours started to cannibalise the market,” claims Spiros Malandrakis of Euromonitor. “And of course you have the rise of brown spirits, which are taking a share of mind and throat from vodka, while micro-distilleries are also now moulding the category.”

In terms of volume, North America is the second largest vodka market after Russia, which is dominated by local brands, and saw nine-litre case sales increase 1.5% to 78m. By value, the category grew 3.8% to US$20.8bn, vastly outperforming other leading vodka markets such as Eastern Europe and Western Europe.

“The US is of course the most challenging market, but at the same time one of the most appealing,” believes Craig Johnson of Absolut, which suffered a value write down last year.

“In the US we want to stabilise the brand in the short-term and bring it back into growth in the long-term,” he adds. Similarly, rival brand Smirnoff has embarked on a campaign to grow dwindling US sales, and successfully boasted a 4% net sales increase in the country during the first half of its 2015/16 fiscal year.

Traditional flavours

According to Malandrakis, the market is now starting to “normalise” following its much-discussed flavour fallout. Carmen d’Ascendis, VP global brand director at Brown-Forman’s Finlandia, concurs.

“We welcome the move away from ever more niche flavours. We participated early in the more traditional flavour business, but we declined to join the confectionery and frivolous flavour movement, preferring to focus on our classic expression.”

In the face of a potential “craft fallout” brands are also taking steps to convince consumers of their authenticity, believes Malandrakis.

“I think we have seen some backpedaling from major producers who have tried to go into craft,” he claims.

“It’s just a marketing ploy and from now on I think they will be much more casual, leaving the heavy craft messages with smaller producers and allowing the market to become more polarised.”

Buoyancy

Sitting between the leading international brands and ‘craft’ players, a number of mid-tier labels have experienced rapid success in the US market of late. A Rabobank report published late last year stated that it is these companies that steal share from big brands, as opposed to small-scale producers.

“There are a few brands that are helping to buoy the overall category in the US,” says Eric Schmidt, director of alcohol research at Beverage Marketing Corporation.
“Tito’s continues to sustain strong growth along with brands like Deep Eddy, New Amsterdam and Svedka. These brands either have an authentic brand story, or are positioned at a value price point.”

Africa & The Middle East

As far as emerging markets go, Africa and the Middle East (MENA) are both showing pockets of promise for vodka producers. Market sales have demonstrated growing consumer interest in the category, with volume sales up a respectable 3.7% between 2014-15 and value sales leaping even higher at 6.2% over the same period. Are consumers already trading up to more premium brands? It certainly seems that way.

One producer excited about market prospects here is Tito’s Handmade Vodka, which has a decidedly “bullish” approach to vodka in the Middle East. The Texas-based brand officially launched in Lebanon in February and the reception so far has “exceeded our expectations”, according to John McDonnell, the Tito’s international MD, who is also preparing to launch the brand in Jordan during the third quarter.

French vodka brand Poliakov has experienced a warm reception in Africa, notably in the South, with its classic and revamped flavoured expressions.

Distell has also noted “increasing” sales in the region, driven through “off consumption”. However, as a smaller player in the country’s vodka market, the brand has shifted its focus to the value price segment in the short term so that it can “establish a foundation to work from”.

Going forwards, Craig Johnson of vodka titan Absolut notes there is “room for growth” in North Africa.

Asia Pacific

Emerging markets in the Asia Pacific region have historically been seen as the Holy Grail for brown spirits brands seeking to grow their global presence. However, China, India, Singapore, Korea, and other neighbouring countries are quickly gaining a reputation as important export markets for vodka brands, particularly as Asian cocktail culture grows.

“China is an untapped source of growth for vodka and we have been taking a really simple approach here, teaching people how to drink our products,” believes Craig Johnson at Absolut.

Asia Pacific has faced political instability across a number of markets in the last year, as well as widespread economic uncertainty. Nevertheless, the region produced strong single-digit growth in 2015, with volume sales increasing 4.3% to 41m cases. According to Melanie Batchelor of Gruppo

Campari, Skyy Vodka’s image as a “status brand” in the emerging markets means it is now the second best-selling premium vodka in China. However, Nadège Perrot, of Poliakov, says that China remains a difficult market to crack.

Meanwhile the craft craze has landed in Australia, driving interest in the vodka sector, says Chris Payton, co-founder of New South Wales-based Small Mouth Vodka. “As consumers become educated in Australian spirits and seek them out more, they then tend to trade up as a result,” he claims.