Western Europe on the road to recovery

The Western Europe spirits market has been a story of struggle and strife over the past year, with troubles in the Eurozone plaguing sales. But is the region’s fate set for change?

Western Europe’s spirits scene has found itself on the rocky road to recovery

What a tempestuous time the Western Europe spirits market has witnessed over the last few years. The ongoing troubles of the Eurozone have plagued sales, and the overall performance in 2014/15 was stagnant at best.

“In general the market has been stuck in reverse and remained static for a while now,” says Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor.

“It’s not just about spirits though, it’s a toxic mix of macro-economic headwinds and geographic issues. It’s a bit of mess to be totally honest, and I find it hard to find any real source of optimism apart from in some Scandinavian regions and, to a certain degree, a slight resurgence in the UK. But there are pockets of resistance.”

These “pockets” have been scouted by some of the big players, such as Pernod Ricard and Diageo, which have seen minor improvements in the region in their full-year financial results.

In its 2014/15 report, Pernod Ricard described the Western Europe spirits scene as “resilient” despite overall sales flatlining. France expressed “modest growth”, driven by the firm’s top 14 brands – which include Absolut vodka, Chivas Regal, Jameson, Ballantine’s and Beefeater gin – with notable performances from Ballantine’s which grew 8%, Aberlour which saw 11% growth, Havana Club which leapt 19% and Absolut which rose 7%. Spain also appeared to be fighting back against one of its worst recessions in history to report a 2% growth for the firm, largely ascribed to a “very good” performance of gins and a “clear improvement” in whiskies.

English gin brands such as Tanqueray are providing reason for optimism in Western Europe

Grounds for optimism

And even more recent results paint an optimistic picture in Western Europe, with figures for the first quarter of Pernod Ricard’s 2015/16 fiscal year reporting a 3% increase in sales. While France declined as a result of reversal of forward shipments in June, there was “confirmed rebound” in Spain, a “strong start” for the top 14 in the UK, a “strong rebound” in Poland with double-digit growth, and “early improvement” in travel retail, which faced double-digit declines in the 2014/15 full-year report.

“The beginning of the financial year is consistent with our scenario of continued gradual improvement in sales in a contrasted environment,” said Alexandre Ricard, CEO of Pernod Ricard in a statement at the time of the results’ release. “We continue to implement our long-term growth strategy, while increasing investments behind our priority brands and innovations and remaining very disciplined on costs and pricing.”

Last year saw Diageo return to growth in Western Europe, a market it says is driven by consumers looking to trade up to more expensive brands – the perfect storm for the drinks group’s Reserve portfolio, which includes Cîroc vodka, Zacapa rum, Bulleit Bourbon and Ketel One vodka. Net sales

for the Reserve brands skyrocketed 20%, credited to the trend of “premiumisation across Europe”.

Overall, momentum is on the up, if only marginally, with net sales in Western Europe showing a 1% improvement with growth in the UK (3%) and France (2%). This was however offset by a “more volatile” environment in Greece and “continued weakness” in Austria and Benelux.

“Our business stabilised in fiscal year 2014 and last year Western Europe was back in growth,” comments Edward Pilkington, marketing and innovation director, Diageo Europe. “The way people are drinking has changed over the last few years; we are seeing more early evening drinking and less late night drinking, for example.

“The spirits market is performing across price points – premium and super-premium spirits in particular are growing – showing real health in the category, while standard priced spirits are holding up well. We see these trends continuing as consumer confidence returns and people make their favourite spirits brands a part of their lifestyle choice.”

Looking at individual categories, and the only sector to have shown growth from 2009 to 2014 was white spirits, albeit at just 1.1% growth (Euromonitor). As Malandrakis observes: “White spirits are losing momentum when they used to be seemingly untouchable. We’re now moving away from an era of vodka, though it still accounts for the vast majority of white spirits. For example, English gin is tightly tied with the growing craft segment, so that is one source for optimism.”

Diageo is looking to innovate in Scotch with the launch of its Whiskey Union project

‘A tough time’

Whiskies on the other hand have had a tough time, a trend Malandrakis says is partly to do with maturing demographics and macroeconomics. Scotch whisky suffered heavy losses globally over the last few years, but the Scotch Whisky Association (SWA) reported signs of normalisation in the sector during the first half of 2015.

However, while the category claws back sales other whiskies are busy making themselves known within Western Europe. Scotch has “lost its appeal” among the millennial demographic, whose money is being spent on Bourbon and Irish whiskeys. Walsh Whiskey Distillery cited the region as a “strong performer” for the firm, naming France and the Netherlands as particular drivers of success. And even Japanese whisky, though still relatively small in the grand scheme of things, is playing a dynamic game and gaining popularity.

However, Scotch producers are taking initiative to remain competitive, such as Diageo’s “experimental craft whisky” arm, which launched in November 2015 – Whiskey Union (see page 38 for more details). Speaking about the launch, David Gates, head of premium core spirits at Diageo, said: “We believe these brands and a new way of bringing them to market will allow us to reach a new group of people who will not have engaged with whiskey before.”

Other spirits categories tell a similar tale when it comes to spirits volumes in Western Europe: brandy and Cognac fell 4.8% between 2009 and 2014, liqueurs were down 1%, rum was almost flat with a 0.2% dip and Tequila and Mezcal were down 0.9% (Euromonitor).

Looking ahead to the coming year – and beyond – and Malandrakis is no more optimistic about a resurgence for spirits in Western Europe. “I’m not expecting to see any improvements,” he laments.

“Scotch is seizing the opportunity to raise its head from slumber and the opportunities are there within the environment, but there’s no doubt it will remain bleak and could get even worse. The macro-economic finances of Western Europe have not improved and completely changed people’s spending and drinking habits. In eight years we still haven’t managed to escape the dark days of the previous recession.

“The UK is slightly coming out of it, but most of Southern and Central Europe have been stuck there for a while. It doesn’t mean bad news for all spirits brands, but ‘winter is coming’, as they say.”