Vodka’s performance in six key markets
The king of white spirits has suffered a tumultuous few years, but pockets of growth are emerging. The Spirits Business assesses the state of vodka in key markets around the world.
*This feature was originally published in the April 2018 issue of The Spirits Business
Vodka experienced a small, but not insignificant, sales lift in 2017. This followed three previous years of volume decline as the flavour boom went bust, and the category has been slow to recover the 24.5 million cases that were lost.
However vodka reported marginal growth of 0.2% last year as the category slowly but surely clawed back sales – and analysts predict this will be accelerated in 2018.
If we look at value, vodka appears to be growing even faster, with global sales jumping from US$64.61 billion in 2016 to US$67.49bn in 2017 – this follows two years of decline.
While consumption levels may be lower, vodka drinkers are demonstrating a continued thirst for premiumisation. Clearly, the trend for drinking less but better that has gripped the wider alcohol beverage world has also reached the white spirits sector.
“As the ripple effects of the saccharine waves washing over vodka and the resulting flavour fatigue begin to subside, transparency, a shift of focus back towards provenance, a return back to vodka’s unpretentious positioning and high energy roots, and its evolution through hyperlocal campaigns and local iterations will begin to stem the tide in its still haemorrhaging core markets,” says Spiros Malandrakis, senior analyst at Euromonitor International.
“Since the downward pressure is ultimately cyclical, the roaring performance of the past decade will not be back, but pockets of opportunities will begin to resurface.”
And the shoots of growth are already starting to bloom – most notably in Africa and the Middle East. In a region where many countries are caught up in political battles, wars, and economic turmoil, vodka producers are managing to gain traction with their brands, thanks to growing cocktail culture and an emerging middle-class population.
But what of the impacts from changing tastes in vodka’s heartland, Eastern Europe? Trendsetting millennials and evolving cocktail culture in North America?
All the data has been provided by Euromonitor International.
Click through the following pages for an in-depth, market-by-market analysis of the vodka category.
Eastern Europe is the heartland of vodka, and it has the volumes to boot: in 2017, the market shifted 167.07m nine-litre cases. This may seem like an impressive figure, but vodka has been in longterm decline in Eastern Europe and has lost more than 29m cases from its sales register since 2014.
This drop can be partly attributed to premiumisation and consumers upgrading to more expensive international brands – that is, they are drinking less but better. Since 2015, value sales of vodka in Russia have been steadily increasing, hitting US$9.2bn in 2017.
However, broader socio-economic factors have undoubtedly stymied volume growth, particularly in the CIS states.
According to Sergei Dobrovolski, chief sales officer at Ukrainian brand Nemiroff: “In the past two years, it has been difficult to keep sales and leadership in the imported vodka segment in the CIS countries because of the currency devaluation and an increase of local excise duties.”
However, positive market trends are on the horizon. He continues: “We can see signs of a stabilised situation at the start of 2018, and consumer demand in the imported vodka segment is being reestablished.”
As the broader Eastern European market starts to normalise, vodka faces the risk of increased cross-category competition, but Dobrovolski is optimistic. “Vodka will hold its 85%90% share of the strong alcohol beverage market for decades,” he claims.
In recent years, vodka in Eastern Europe has been heavily affected by tax hikes and the black market. However, Ruslan Grigoryev, export director for Russia-based drinks group Ladoga, notes that prices have stabilised in its home market and the introduction of the Unified State Automated Information System (EGAIS) means that counterfeit trading has declined significantly. “Now this share is no more than 15%, so we are not too worried,” he says.
In 2017, sales of Ladoga’s flagship Tsarskaya vodka brand grew by 10% in Russia, while exports shot up by 74%. Shipments to Latvia are growing, thanks to a duty hike in Estonia – meaning consumers are crossing the border to purchase their booze. For Ladoga, Belarus has proven to be a difficult market because of “multiple measures for the protection of local spirits”.
It’s not only homegrown brands that see the potential in Eastern Europe – international vodkas are targeting growth here, too. Tito’s Handmade Vodka has soft launched in Russia and is finalising its partnership in Lithuania and Latvia. The brand has “hit the ground running” in Kazakhstan and is “doing very well” in Ukraine.
John McDonnell, managing director international for Tito’s, observes: “The reason for [our] success, particularly in Ukraine and Kazakhstan, is because consumers look to the US for trends. They’ve seen the craft movement and adopted Tito’s as their own.”
North America is undeniably the land of opportunity for spirits. In particular, vodka brands covet its trendsetting millennial population and world-leading cocktail scene. However, the category has faced a challenge from gin and Bourbon in recent years, as innovative brands – boosted by classic cocktail serves – have moved in on consumer mindshare.
Nevertheless, the data tells a more positive story for vodka than the anecdotes – in 2017, the category’s North America volume sales grew by 1.51m nine-litre cases, totalling 81.75m case sales. North America retains its place as the second-bestselling vodka market by some distance, more than 85m cases behind Eastern Europe and 44m cases ahead of Asia Pacific. The category’s North America volume growth is forecast to continue in 2018.
Swedish vodka brand Svedka, owned by US drinks group Constellation Brands, is the third-largest vodka brand in North America and is its number one imported vodka. “Despite the talk about brown spirits, the vodka category still represents one out of every three drinks in [the US],” Bill Newlands, chief operating officer and president of Constellation Brands, told SB late last year.
“So we still have a lot of opportunity to expand on the Svedka franchise. We are investing more consumer marketing spend than we have ever invested before, and we’re very excited about the potential growth in that area as well.”
Despite the well-noted decline of flavoured vodka, Svedka has benefited from careful flavour innovation – its new Blue Raspberry edition has proved to be “the most successful flavour launch in the brand’s history”, Newlands claimed.
Smirnoff is the largest vodka brand in North America, with a market share of about 14%. However, after a tough few years, the brand has struggled to propel itself back into growth in the region, and declined by 2% in the six months to 31 December 2017. Smirnoff has tried to regain its footing through an assortment of US-centric line extensions and marketing initiatives. In its half-year results, Diageo noted that Smirnoff’s North America decline had slowed compared with the previous year. The group’s financial report stated: “[Smirnoff] continued to remind consumers that it is a quality vodka at a great price through a campaign involving celebrity influencers, new packaging with quality cues and local activation against multicultural millennial consumers.”
Its stablemates Cîroc and Ketel One also had a disappointing six months in the market, declining by 12% and 13% respectively. “Execution of improved plans on Cîroc and Ketel One vodka started in the first half and are expected to take time to impact performance,” Diageo said. In total, the group’s North America vodka sales declined by 8% in the first half of its fiscal year.
It was a monumental moment in December 2017 when the Australian government approved equal marriage laws. In February this year, to celebrate the law change, Skyy Vodka, a longstanding advocate of LGBTQ rights, launched a limited-edition can format for its premixed vodka, soda and lime expression, which featured an engagement ring instead of a ring pull.
But it’s certainly not the only brand tapping into Australia’s discerning vodka drinkers – many of which are finding success. Tito’s Handmade Vodka reports that it is “doing well” in Australia’s domestic market. The brand has been working with distribution firm South Trade and now boasts listings with one of the country’s biggest liquor retailers, Dan Murphy’s. In New Zealand Tito’s is also finding an inquisitive vodka audience, resulting in new listings.
While the overall figures for vodka in Australasia show a rather stagnant market – growing by only 0.3% in 2017 – there is evidently excitement and energy to be found in the region.
John McDonnell, managing director international for Tito’s, says Fiji is also a market to watch and has set an ambassador to work on building the brand’s presence in the country.
Asia Pacific tells a similar story of close-to-stagnant growth (0.4%). However, vodka distillers are still seeing huge optimism in the region. Texas-made Tito’s has made no secret of its excitement for the emerging vodka market in Asia. In 2017, the brand unveiled ambitious plans to plug gaps where it sees potential in the region, and believes it has now filled at least 50% of this anticipated room for growth.
“We are now hopeful we will plug the remaining distribution gaps, which are Japan, Indonesia, Laos and Myanmar in the coming months,” says McDonnell. “We’ve changed distributors in Taiwan and China, and since then have gained many new listings. In 2018, we will be building on our success with Telford in China, and will support the brand through social media.” Furthermore, Tito’s is seeing sales perform well in Hong Kong and Macau, where “we are stealing market share”.
And it’s not the only vodka brand reaping the rewards of a booming cocktail culture and stabilising economies in Asia. Ladoga has seen sales of its vodka brands grow solidly in the past year. “We have two strong partners in Vietnam,” explains Ruslan Grigoryev, export director. “In China, our sales of the Tsarskaya brand increased by 20%, and we also started to work on flavoured vodka and brand Ladoga.” It seems there are still pockets of consumers who are still seeking out flavoured expressions.
Vodka’s potential in Asia abounds, and UK producer The Lakes Distillery intends to make a beeline for the region in 2018 as a result. Paul Currie, managing director of the company, cites East Asia in particular as having “the most potential there, not only for our vodkas by also our wider portfolio of spirits”.
Long-term opportunities look good for vodka in Western Europe, where volume sales have been maintaining slow but steady growth. In the region, sales increased by 0.6% to 32.03m cases in 2017.
Western Europe is one of the main markets for French vodka brand Poliakov, which enjoyed a “great” performance in Luxembourg, Portugal and Denmark in 2017. Constance Descamps, Poliakov’s international senior brand manager, said that the firm will boost its marketing strategy with a new activation this summer to highlight the brand’s “extreme and connected universe”. According to a report from UK drinks supplier Bibendum, vodka is predicted to make a comeback in the country’s on trade in 2018 as consumers move away from both cheap and expensive labels to settle on ‘craft’ brands.
Paul Currie, managing director at The Lakes Distillery, believes there is an opportunity for local brands in the vodka market. “As is happening with gin and whisky, consumers are looking for new and different spirit brands to try, and this gives English vodka some opportunities,” he says. “These are primarily the brands that have turned to ‘craft’ production.”
Tito’s Handmade Vodka’s managing director international, John McDonnell, agrees. “Europeans have fully backed the craft gin movement in recent years. The good news now is that we are starting to see that interest shift towards craft vodka as well.”
Tovaritch! experienced “significant growth” in the UK, where it is the third bestselling Russian vodka. “This is mainly attributable to the well-functioning distribution network, the product quality and the right price for the on-trade,” says Elena Manuylova, vice-president at Tovaritch Spirits International. The company is aiming to become the second best-selling Russian vodka brand in the UK on-trade by 2020 through an “innovative” marketing campaign that has been designed to connect “personally” with consumers.
But Western Europe comes with its challenges. Russian spirits group Ladoga saw a 10% decline in vodka sales in retail chains in Germany. In the UK, the company is looking for a distribution partner for its Tsarskaya vodka.
“We have difficulties in finding a partner in the UK – Tsarskaya is a premium brand, so we need a strong distributor with good opportunities,” says Ruslan Grigoryev, export director at Ladoga.
Looking ahead, Currie believes that vodka producers need to focus on quality, rather than advertising and packaging. “Vodka brands need to offer something different as they need to compete with the rise of gin, particularly in those markets where gin is growing in popularity – for example the UK and Germany.
“The quality of the liquid really matters – it’s not just packaging and the marketing of a brand that’s important. Total vodka sales, however, are still huge, and there is still a big opportunity.”
The second of only two regions to witness a decline in 2017 was Latin America, where vodka sales slipped 0.7%. Last autumn, the region suffered at the hands of earthquakes and hurricanes Irma and Maria, which hit spirits producers in the Caribbean.
The region was, however, one of the strongest for the area’s best-selling vodka brand, Smirnoff. During the first six months of its 2017/18 financial year, parent firm Diageo saw its net sales increase by 12% in Latin America and Caribbean. Smirnoff’s net sales in the region were up by double digits, with the brand returning to growth in Brazil, its largest market in the region. Here, net sales increased by 8%, supported by new formats to drive accessibility.
Smirnoff’s net sales returned to growth in Mexico, with “improved performance” from Smirnoff 21 and the launch of Smirnoff X1. Meanwhile, the brand grew net sales in Argentina, driven by increased distribution. It’s a region that is also showing promise for Texas-based Tito’s Handmade Vodka, which recently expanded its distribution footprint by launching in Chile and Peru in February this year. The company entered the market through regional distributor Webb Banks and local distributors Viña Santa Rita and Perufarma.
“We have set our sights on significant expansion in South America as the region develops economically,” says John McDonnell, managing director international for Tito’s Handmade Vodka.
“Peru has a fabulous heritage in gastronomy and cocktails so we expect Tito’s to be quickly accepted. Chile is at the beginning of its craft journey but this gives us a great opportunity to seize the early adopters and we look forward to playing an active role, as the trend accelerates both here and in Peru.”
Meanwhile, Pernod Ricard’s Absolut vodka brand is the second-largest-selling vodka in the region. In the first half of its 2017/18 financial year, Absolut performed well in travel retail Americas, Mexico and Brazil, thanks to resumed brand interest.
Mexico will become an important market for Tovaritch!, which is planning to focus its efforts on the country in 2018.
“We have several ongoing campaigns in cooperation with our local partner, mainly in the on-trade,” says Elena Manuylova, vice-president at Tovaritch Spirits International.
Travel retail is also a key channel for vodka. Tito’s teamed up with regional duty free distributor Edrington Travel Retail Americas to launch with Dufry in Brazil. This will be followed by Argentina, Chile, Peru and Uruguay.
“South America represents a big opportunity for Tito’s. The region’s economies are in good health and although craft is not as developed in South America as North America, word is spreading fast,” adds McDonnell.
Africa & Middle East
Economic headwinds and political turbulence have done little to dampen vodka’s performance in Africa and the Middle East this past year. The presidential election in Kenya last October threw greater political difficulties into the mix – but the category has been resilient in the face of uncertainty. Africa & the Middle East displayed the greatest growth by volume compared with any other region last year, with sales leaping 5.4% by volume – nearly three times more than the next bestperforming market (North America). The figure of 9.56m nine-litre cases shifted last year is expected to grow just as quickly in 2018 to reach 10.08m, continuing the region’s annual growth spurt.
As a result, numerous vodka producers are keeping a watchful eye on the area as opportunities abound. If brands want to be anywhere, it’s here.
Less than two years ago, Diageo announced its intention to focus on “mainstream” brands in the region rather than premium products because of currency fluctuation. During the first six months of its 2017/18 financial year, Diageo saw organic net sales of Smirnoff grow by 13% in Africa – compared with just 7% for blended Scotch whisky brand Johnnie Walker. Interest in vodka is evidently rife in the market.
Pernod Ricard is also keen to cut its teeth in the region with Absolut. Henrik Ellström, brand director, Absolut Vodka, sees promise in the emerging market as a result of the younger generation of consumers who “want to differentiate themselves from traditional local consumption”.
In terms of trends, while western markets such as the US and Europe seem to be craving more “traditional” vodka styles in the aftermath of the flavour boom, French brand Poliakov has witnessed keen demand for flavoured expressions in Africa and the Middle East. “We noticed the strong appetite of MENA [Middle East and North Africa] countries for flavoured vodka,” says Constance Descamps, Poliakov international senior brand manager. “They represent an opportunity more than becoming strategic references.” Nonetheless, Poliakov plans to ramp up its promotional activities in stores and create more digital operations this year.
The market is also of paramount importance for Tito’s Handmade Vodka, which made its debut in South Africa last year after signing a distribution deal with Truman & Orange – and the brand has set its sights on expanding to more countries on the continent this year.
“The Middle East is doing very well for us,” adds John McDonnell, managing director international, Tito’s Handmade Vodka, “specifically in Bahrain, where we have US military servicemen and women. We’ve been building Tito’s globally for four-and-a-half years, and it feels like we are starting to see the Middle East and Africa embrace craft spirits from America.”
If brands can tiptoe their way around economic difficulties blighting the region, 2018 could be a promising year.