Canada spirits market ‘never been more volatile’

Canada’s spirits market is lively but volatile. With minimum pricing in effect and state-run liquor stores to deal with, plus the introduction of recreational cannabis around the corner, brands have to be agile to make a mark.

*This feature was originally published in the July 2018 issue of The Spirits Business

As The Spirits Business went to press, Canada announced a 10% tariff on American whiskey imports in response to US-imposed duties on steel and aluminium. The move will test the loyalty of Canadian drinkers to a category that was worth US$48.7 million in exports last year. Beyond lies the fear of an ongoing reprisal that would damage all western spirits. As Bernard Walsh, founder and managing director of Ireland’s Walsh Whiskey, says: “Nobody wants a trade war. Nobody wins. It’s a total waste of energy.”

The tariff will come as a blow for international spirits, which see Canada as an exciting land of opportunity. Although Blair MacNeil, Bacardi’s MD in the country, adds a note of caution: “It’s a great spirits market,” he says, “but I would say it’s never been more volatile.” He points to the buzz around craft spirits and the cocktail renaissance as positives in contrast to the government’s indexing of federal excise tax. There is also the unknown impact of cannabis, which has just been legalised.

Imposing a tax escalator pegged to inflation is a well known trick of the UK Treasury played on hapless drinkers, and in 2016 the Canadian government followed suit. “That was a bit of a blow,” says MacNeil. “I would have thought, two years in, that it would have generated a bit of a trade down in spirits. Yet if you look at whisky, vodka, Bourbon, gin and Tequila it’s the ‘premium’ and ‘super­-premium’ that are outgrowing ‘standard’ pretty substantially. All the brands that have grown the fastest right now are all well above floor­-pricing.”

Spirits tasting with Cameron Millar, Edrington portfolio ambassador for eastern Canada (Credit: onUP photography)

Apart from Alberta, all Canadian provinces have some form of minimum pricing. In Ontario standard 750ml bottles of 40% abv spirits start at CA$27 (US$20.50), which is where you will find a scrum of Canadian whisky brands competing with blended Scotch. According to MacNeil, Canadian whisky was in decline a decade ago, but it has recently joined the whisky resurgence, with lots of flavour innovation including apple, rye and hopped versions. Among them are Wiser’s, Gibson’s and Forty Creek, which is Campari’s top­-selling brand in Canada and “growing steadily outside of Ontario, its home market”, says Massimo Mottura, MD of Campari Canada.

Of Mottura’s other brands, he mentions Appleton Estate Rum, whose biggest market is Canada, and Grand Marnier, for which Canadian sales are second only to the US. The Campari brand is enjoying annual growth of 15%, driven partly by the current craze for Negronis, while younger Canadians have latched on to Aperol Spritz. Yet being such a vast territory, with everything from controlled provinces such as Ontario, with its state­-run liquor stores, to free­-market Alberta, you wonder what system works best for a firm such as Campari?

“I wouldn’t say either of them is better or worse, they are just different,” says Mottura. “Barriers to entry are obviously much higher in purely control states, but we need to only negotiate promotions with one entity, which increases efficiency. In Alberta, we have the ability to customise programmes for chains and independent small retailers, which can give us more creative freedom to meet the needs of their particular customers, but, of course, that can take more time.”

According to MacNeil “market access is definitely better” in privatised Alberta and Saskatchewan, though he describes the liquor boards as “very sophisticated, and definitely better at focusing on consumers”.

Bacardi: its Cazadores Tequila brand is enjoying strong growth

LEVEL PLAYING FIELD

To some degree, preferences depend on scale. For Bernard Walsh, the control boards offer a more level playing field for smaller brands, while Chris Spalding, CEO of Edrington Americas, says: “With the LCBO (Liquor Control Board Ontario), if you bring a good product with a good brand proposition that’s relevant to consumers and show that you’re willing to support it, they are willing to give it every opportunity to compete.”

Yet George Puyana, Brown­-Forman’s general director, Canada, prefers the privatised system because “there are not so many bureaucratic rules”. And MacNeil adds that a personal frustration is the way Ontario allows 600 grocery stores to sell wine and beer, but not spirits. “That suggests some old mindsets are still at play,” he says.

With the control boards, promotions tend to be fewer and less deep, given that discounts are totally funded by suppliers, while local brands often benefit from extra shelf space and merchandising. According to Puyana, this leads to some strong provincial players among craft spirits, but few national ones. As for whether we will see more privatisation and less state control in Canada, he believes this will happen, albeit slowly. Chris Watt, Whyte & Mackay’s vice-­president for North America, agrees up to a point, at least for Western Canada; he doesn’t see Ontario, whose LCBO accounts for almost 40% of the country’s spirits market, changing any time soon.

Puyana describes the country as “a really interesting and evolving consumer landscape”, and says: “It’s in the top five for premium­-plus whiskey, which makes it a priority market for Brown­-Forman.”

American whiskey is growing by around 6% compound annual growth rate (CAGR), and has been doing particularly well at the top end, with Canada now Woodford Reserve’s third­-biggest market after the US and UK. Meanwhile, Irish whiskey has jumped by 14% CAGR in the past five years, claims Anne Martin, vice-­president of marketing at Pernod Ricard’s Canadian affiliate – Corby Spirit & Wine. That said, she admits the category “is still a small piece of the whisky pie”, with a 5% share.

Bernard Walsh (l) with Russell Woodman of Woodman Wines & Spirits

Pernod claims to control 83% of the Irish category in Canada thanks to Jameson, with a helping hand from Powers and its pot still whiskeys such as Redbreast, not that Bernard Walsh is put off. “We started with our Writers’ Tears brand,” he says. “It’s now the number-­one deluxe Irish whiskey, so we’re encouraged.” He feels Canadians are influenced by the US, where Irish whiskey has enjoyed growth of 880% since 2002, according to the Distilled Spirits Council. A much bigger, older category is Scotch whisky, where blends are under pressure, as Watt explains: “If you go into any of the liquor control stores, the amount of shelf space is beginning to become ever smaller, and I think the category will continue to flatten out.”

At Pernod, Anne Martin quotes CAGR growth for blended Scotch of just 0.3% since the start of 2013, which marks an improvement on previous years, apparently. Whyte & Mackay has kept its faith in blends by recently launching its John Barr Reserve brand alongside Shackleton blended malt. Edrington’s Chris Spalding, who believes the social and historical ties with the UK still have an impact, says: “Brands that are well-respected in the UK can still do very well in Canada.” That said, single malt is the really dynamic category in Scotch, particularly those retailing above CA$60, according to Watt.

One way to predict how the market might evolve is to see what’s happening in the US – and that’s one reason why there’s a real buzz around Tequila. Bacardi reports that Cazadores, which retails for CA$35-­CA$40, grew by 18% last year, while Patrón is up by around 8% despite a shelf price pushing CA$100. The category accounts for just 2% of total spirits. “It is under-­developed, relative to the US, but it’s probably the fastest-growing category in Canada,” says MacNeil, who notes that Tequila brand promotions have spread from Cinco de Mayo to the Day of the Dead.

Fraternity Spirits CEO Raffaele Berardi believes the market has the potential to match per capita consumption in the US, which bodes well for Tequila Corralejo, while MacNeil is also tracking Canada’s growing thirst for gin, and Bombay Sapphire in particular.

Helped by the profusion of craft brands, he reckons: “It’s probably one of the most premium categories in the country.”

On the following page, we ask two experts what their predictions are for the North American spirits market.