Analysis: Vodka’s performance in six key markets
As vodka’s key markets continue to stumble over macroeconomic hurdles, producers are targeting bright spots in little-explored territories. The Spirits Business analyses the struggling category’s new world map.
*This article was originally featured in the April 2017 edition of The Spirits Business magazine
Headline volume sales figures for vodka in 2016 convey a mixed picture: one of long-running declines, stagnation and a few bright spots of growth.
The past few years have taken their toll on the category, with political strife, economic turmoil, tax hikes and a growing black market hitting its Eastern Europe bastion, while market saturation, flavour fatigue, pricing and competition from brown spirits have knocked the wind out of global brands in North America.
Globally, vodka’s volume sales declined by 2% in 2016, when the majority of other spirits categories witnessed growth. However, the category is not prepared to sing its swansong just yet: a number of emerging markets, relatively unexplored by vodka producers until now, may hold the key to its revival.
“Despite the long-term decline of its largest market, Russia, vodka has shown
itself to be a key growth driver for international distillers,” says Jeremy Cunnington, senior analyst, alcoholic drinks, at Euromonitor.
“The flavourless liquid has proved very popular globally thanks to its mixability, and has meant dynamic growth in both mature and emerging markets, led by the US.
“However, despite large volume growth expected in these markets, many of these traditional growth regions are problematic for international distillers. Producers need new markets.”
Diversifying away from vodka’s traditional heartlands is a tactic already reaping rewards for brands, allowing them to record strong growth, if from a relatively small base.
Cunnington highlights Asia Pacific as having “great opportunities” for vodka brands, while the growth of middle-class consumers in Africa and the Middle East also presents new potential for the category.
Click through the following pages for an in-depth, market-by-market analysis of the vodka category.
As the world’s second-largest vodka market, after Russia, North America continued to see sufficient single-digit sales growth in 2016, with nine-litre case sales increasing by 1.6% to 81m. Global brands such as Smirnoff and Absolut, however, saw their performances knocked by a number of market difficulties.
Vodka’s various price segments have experienced varying fortunes in the market over recent years, with widespread declines at lower levels and solid increases for premium-and-above brands.
In the last six months of its 2016/17 financial year, Diageo reported growth in organic and reported terms for all of its spirit categories except vodka, which was impacted by the 2% organic declines of Smirnoff and Ketel One.
Other leading brands have been affected by strategic price changes. “Here in the US market, the overall vodka category has seen a decline in pricing, which is being driven by the millennial consumer,” said Global Spirits CEO Maxim Dubossarsky. “Flagship brands like Grey Goose and Absolut have reduced their prices to compete, but are often viewed by millennials as ‘their parents’ brands’, so they’ve migrated to Tito’s and Svedka, and other brands are setting their pricing around these leaders.”
Beam Suntory, meanwhile, is still trying to arrest the declines of Pinnacle vodka – one of the casualties of ‘flavour fatigue’ in the US. “As consumers’ tastes continue to evolve, we are seeing more interest in the clean, smooth taste of Pinnacle’s unflavoured expressions, and a shift away from confectionery flavours,” claims Clayton Wai-Poi, VP of marketing, Beam Suntory Vodka.
In its FY15/16 financial results, Pernod saw sales of its Absolut vodka brand decline by 4% because of a “highly competitive” category and tough pricing in the US, despite “improvement in underlying trends” in the market.
Absolut’s brand director, Henrik Ellström, echoes Wai-Poi’s thoughts: “We believe that flavours will continue to be relevant for consumers in the future but that the category will move away from increasingly differentiated and niche flavours to more authentic and approachable flavours.”
Pernod Ricard launched a strategy to “stabilise” Absolut vodka in the medium term, focusing on the development of super- premium Absolut Elyx and the addition of its Absolut Lime favour. Ellström adds: “We will keep focusing on revitalising the Absolut brand in the US market, to drive relevance with a new generation of consumers looking for authentic brands and new innovative products.”
Wai-Poi concludes: “Volume in the vodka category is growing, but not as fast as total spirits, thanks to growth in whisky, Tequila and Cognac. Still, vodka remains the largest spirits category and is experiencing healthy consumption trends.”
Russia and Eastern Europe
￼￼To say vodka’s heartland has had a tough few years would be something of an understatement. A free-falling rouble, political instability, sharp tax hikes and the subsequent rise of the black market in Russia and Eastern Europe have created a perfect storm for vodka, and caused the category to shed sales of roughly 10 million cases in 2016. Since 2013, the region’s vodka sales have fallen by almost 50m cases, and the decline is set to continue.
“It is a very serious problem, especially for the products in the middle-range segment,” Marine Urtane, export manager of Kremlyovskaya, says of the tax increases that have blighted the region. “Because of this, shelf prices become higher and products become less available, meaning customers go to low-cost products, or the black market. As such, sales of middle- price-segment products go down and become not very competitive.”
Peter Kucko, head of export for Goral Vodka Master, pinpoints Ukraine as a country that has been impacted by counterfeit products. “Nearly one third of vodka bottles on the Ukrainian market do not comply with legal requirements,” he says. “It affects the pricing politics of vodka exports and sales.”
According to Ruslan Grigoryev, export director for Ladoga Group, producer of Imperial Vodka, Russian producers upped their game against counterfeiters in 2016 with the launch of the Unified State Automated Information System. “This tries to control alcohol sales in all channels, starting from the producer through to the consumer. The Federal Service for the Regulation of the Alcohol Market in Russia receives the full report and examines counterfeit sales.”
Ukraine faces unique challenges due to its conflict with Russia, which has led to sanctions between the two countries. At the start of 2016, Ukraine extended its list of banned Russian items to include vodka.
Urtane continues: “The biggest part of Ukraine’s vodka market are brands with production in Russian territories, so sales of Ukrainian vodka fell a bit, but it is a totally different situation for products made in Russia for export to Ukraine – for them the market is totally closed. Kremlyovskaya is made in France, but has a Russian brand name, so for us the market is also closed.”
Turmoil has also hit the broader CIS region. “Due to the economic recession in CIS countries, we faced different challenges, such as the shift to less expensive products, excise increases, and burgeoning state regulations limiting hard liquor consumption,” says Maxim Dubossarsky, CEO of Global Spirits. “Pricing, rather than branding, seems to be a bigger trigger.”
However, as disposable incomes are squeezed across the Russian, Eastern Europe and CIS markets, and currencies plummet, consumers are looking to ‘trade down’, meaning there are positive opportunities for local brands – which are often taxed at a lower rate than their international competitors.
In line with trends seen in established markets around the world, vodka in Eastern Europe, particularly Russia, is facing stiff competition from Scotch, Bourbon and Irish whiskey. “The situation in Russia is a complex one, and it is difficult to estimate the impact tax increases and the black market have on the vodka industry,” says Eugenio Litta Modignani, CEO of Tovaritch! “Consumers seem more focused on brown than white spirits in the premium category.”
Thanks to competitive prices and diverse consumer tastes, vodka volume sales in Western Europe have been slowly and steadily inching up over the past few years. Yet in 2016, sales were pretty much stagnant, increasing by just 0.67%.
The region was, however, one of the key drags on Smirnoff’s sales. In the last six months of parent firm Diageo’s 2016/17 fiscal year, the brand recouped “momentum- gaining share” in the off-trade and on-trade but net sales were down by 6% in the UK. Its performance was also weak in France.
Poliakov’s junior international brand manager, Johanne Theveney, believes there is still potential in the market. “In 2016, the vodka category in France was renewed with growth, especially in the off-trade channel. Compared to the rest of the world where vodka weighs about 30% of spirits (excluding local spirits), in France, it weighs 8% so we do believe that there is still potential growth coming up.”
Despite obstacles, it does seem there is light at the end of the tunnel, and producers are seeing some uplift. Absolut is upbeat about Western Europe, claiming it is experiencing a “strong sell-out performance”, particularly in the UK, Germany and France, driven by strong brand activation, including digital and in-store, and the launch of its Absolut Facet bottle. And the brand is planning more campaigns in the future. Brand director Henrik Ellström attributes the success to “refocusing our strategy and activation to win a new generation of consumers”.
Playing into millennials’ quest for legitimacy and locality, vodka brands with a compelling story about the use of raw materials are capturing consumer imagination and building emotional links with that core audience.
“Just as with gin, consumers are increasingly interested in who makes the vodka, where it is made and what the ‘story’ is. As a result, there will be more interest in local, independent brands,” says Paul Currie, managing director of The Lakes Distillery. “As this happens, there will be more opportunities for English vodka, as consumers will be willing to try new brands.”
Tovaritch! experienced “great growth” in 2016, especially in the on-trade, which is showing “huge potential”. As such, the brand is channelling its efforts towards UK bartenders. “The UK has proven to be our fastest-growing market in the on-trade, which is a great achievement for us, seeing how competitive the market is,” says Tovaritch! CEO Eugenio Litta Modignani.
But the UK comes with its challenges. “Every brand wants and needs to be represented, especially in the on-trade. It requires key investments and a distributor that really believes in your product and its success,” adds Litta.
When it comes to trends, Currie says: “The opportunity over the next years will be when consumers get tuned into vodka in the way they are with gin – where there is an understanding that the liquid can be really interesting, and that different vodkas can be truly different.”
Central and South America
Despite an extensive roster of currency woes, South America was a successful region for vodka in 2016, with sales growth of almost half a million cases. Take a closer look at recent financial results from some of the world’s largest vodka producers, however, and it becomes clear that struggles could be felt across this region, too.
In its 2015/16 financial year, Diageo, maker of Smirnoff Vodka, lost almost £330m in net sales because of unfavourable exchange movements and weak currencies against the sterling, in particular the Venezuelan bolivar and the Brazilian real. In the second half of the 2016 calendar year, Smirnoff’s organic net sales plummeted by 17% in Latin America and the Caribbean. Diageo’s organic sales rose by 11% in the region, but this was predominantly spurred by its mainstream whisky brands Buchanan’s and Old Parr.
Meanwhile, Smirnoff’s main competitor, Absolut, saw “modest sales growth” in South America, despite “a challenging macroeconomic situation” in Brazil, says Henrik Ellström, global brand director for Absolut.
Challenges clearly persisted for the global giants, but according to William Borrell, co- founder of potato-based Polish vodka brand Vestal Vodka, there is still an appetite for vodka in South America. The producer claims he has received some “lovely approaches” from Mexico and Brazil, but notes the difficulties small, independent vodka brands face in securing distribution partnerships across the region.
John McDonnell, international managing director for Texas-made Tito’s Handmade Vodka, says his brand is already established in Panama and Costa Rica, where it is “doing very well”. Tito’s will aim to vastly increase its presence in South America this year. “Our goal this year is to launch in Colombia, Chile and Argentina, and we are actively looking for partners in these markets,” says McDonnell.
Before the IAADFS Show of the Americas this year, McDonnell noted the growing ‘craft’ segment within these markets as consumers seek “quality brands with authenticity”.
Referring to opportunities in South American travel retail, he said: “Craft spirits are one the biggest purchasing blocks in the world right now and as a pioneer of the movement, we recognise the strength of this trend and believe that if operators display craft products together, they will attract more shoppers in store and increase sales across the board.”
Travel retail is a key channel for vodkas, from standard brands with large-format bottles to limited edition ultra-premium expressions. The full-year 2016 financial results of the world’s largest travel retailer Dufry convey a mixed, but improving, picture for travel retail in South America.
“Brazil saw an important acceleration in the second half, recording double-digit growth,” said the retailer. “Other operations in South America also did well, such as Ecuador, Peru and Chile, while Argentina remained negative throughout the year, but showing improvements so far in 2017.”
Africa and Middle East
In recent years, vodka producers have been drawn to Africa and its emerging middle-class population like a bee to honey. As expendable incomes rise and create a widespread desire for international brands, distribution has been ramped up, and localised marketing campaigns have become a priority.
In the first six months of Diageo’s 2016/17 financial year, Smirnoff vodka’s organic net sales increased by 33% in Africa – while Guinness declined by 8%. The global shift of
consumer interest from beer to spirits is particularly striking when examined in the context of Africa.
Speaking to investors last year, John O’Keeffe, president of Diageo Africa, outlined his ambition to grow Diageo’s “portfolio in beer fast, but spirits faster” on the continent, which he called “the most exciting growth region in the world”.
Diageo had previously announced a strategic shift away from premium to mainstream spirits in emerging markets such as Nigeria. “Mainstream spirits are made locally, and increasing local production will also help us mitigate the effects from further economic and foreign exchange volatility,” O’Keeffe said.
Economic upheaval, however, does not seem to have hampered the performance of vodka in Africa and the Middle East, which has seen consistent volume gains for a number of years, and is forecast to hit 8.4m case sales in 2017. It is a priority region for producers with ambitious international growth plans, such as Ladoga.
“We will expand our footprint in the emerging markets in 2017,” claims Ruslan Grigoryev, export director for the company. “The first phase will target the Middle East with distribution across the United Arab Emirates, then later in the year across sub- Saharan Africa.”
While the majority of US-made vodkas focus their export efforts on the ‘craft’ hubs of Western Europe and Australasia, the Middle East is Tito’s Handmade Vodka’s strongest international region. “Within that, Bahrain is our strongest market,” says John McDonnell, international managing director of the brand. “Qatar, where there are two US military bases, is also growing nicely. We are doing extremely well in UAE and Lebanon, activating in both the on- and off- trade.” McDonnell adds that Tito’s has recently launched in Jordan, and is “very optimistic” about its future in Israel, where the brand recently changed distributors.
Local partners with expertise on the nuances of trading in Africa and the Middle East – where many countries are torn apart by war, political conflict and economic strife – are essential. There are few other places on earth that demonstrate such disparity in consumer wealth, or are so heavily subject to prohibition laws and curtailed alcohol advertising.
“Our biggest expansion and growth will come from South Africa,” says Eugenio Litta Modignani, CEO of Tovaritch! “We have amazing and dynamic distributors locally who really believe in our brand.”
Asia Pacific and Australasia
Long-long opportunities look good for vodka in Asia Pacific, thanks to a blossoming cocktail scene and stabilising markets. It’s a key region for the future development of the global vodka industry.
“Countries such as Thailand, China, Vietnam and South Korea are all offering strong growth from small bases and, more importantly, great opportunities for international vodka brands,” says Jeremy Cunnington, senior analyst, alcoholic drinks, Euromonitor International.
“All these markets have similar characteristics with the strong growth of vodka being driven by many of the trends that drove growth in western markets.”
As the market becomes more accessible, new consumers are being drawn in – most notably millennials and women – aided by the rising influence of Western culture.
“Tito’s Handmade Vodka’s international managing director, John McDonnell, agrees: “This appeal is coupled with a growing interest in Americana, a trend that is partly fueled by more non-stop flights from the region to the US.”
Cunnington adds: “Another key element has been growing gender equality, which has seen more women in the work place. This, in turn, has led to greater disposable income but also – particularly in Vietnam, where socialising with work colleagues or clients is expected – greater female consumption. It has also been helped in Thailand, where there is less social stigma attached to women drinking.”
Distribution agreements are also of great importance to brands in strengthening their ties with Asia. One of the largest export markets for Ladoga is China. “In 2016 shipments to China increased five times in comparison with 2015, thanks to joint efforts with our new local distributor,” says Ruslan Grigoryev, export director for Ladoga Group.
Establishing the brand
Meanwhile, Tito’s Handmade Vodka is making “big strides” in the Asia Pacific travel retail market. McDonnell says: “Following recent gains in the region, such as in Hong Kong, Singapore, South Korea, Australia and New Zealand, the company is focusing on filling distribution gaps and establishing the brand in other key markets, including China, Taiwan and Japan. Asia Pacific is an important region for Tito’s because 60% of the world’s millennials, its target demographic, live in Asia.”
Meanwhile in Australia, Absolut was successful, with “strong growth” behind its ready-to-drink performance, as well as solid brand activation in the on-trade and off-trade. However, there were challenges for the brand in South Korea due to “adverse market conditions”.
Tito’s McDonnell is also positive about the region. “We are really pleased to be working with new partners in Australia and are very excited about the future.”
“Our biggest expansion and growth will come from Australia. We have amazing and dynamic distributors who really believe in our brand and product,” adds Tovaritch!’s Litta.
Herefordshire-based Chase Distillery’s global brand ambassador, James Chase, predicts that a craft vodka movement is coming back in Australia, along with a “huge demand” for British products.