Vodka’s performance in six key markets

Vodka may be hot stuff in some of the world’s emerging markets, but in its established haunts, the spirit must evolve to reignite sales. By Becky Paskin and Melita Kiely.

The global marketplace for vodka has grown more complex in recent years

The global vodka scene has endured a shift in consumer trends, economic turbulence and political unrest in the past year, and has found itself in the midst of a sales slump.

Volume moved at just 0.5% in 2013 to 496.4 million nine-litre cases, and is predicted to have shifted by just 0.2% in 2014 when official figures are released by the IWSR in a few months. The five-year forecast looks even bleaker, with less than 0.1% CAGR predicted between 2014-19 thanks predominantly to the continued slowdown in Russia.

There are many obstacles standing in the path of vodka’s return to meaningful growth, not least the competition from brown spirits. But if the category stands any chance of counteracting the general inertia and reliving its former glory days, then reinvention is going to be key. “Vodka is in this space where it needs to reinvent itself to keep its growth going,” says Matt Bruhn, global brand director, Smirnoff. “We’re in a period of inflection in the category. Vodka has always been on the edge of trends and needs to keep reinventing itself – that’s the biggest challenge.”

Vodka has come a long way since its heyday in the 90s, but equally the category’s loyal drinkers have also evolved over the years. Consumers are now looking for much more from brands through provenance and an authentic story, and are demonstrating a demand for premium products. On a global level, these are the major trends that will shape the vodka landscape for the foreseeable future.

Flavour fatigue

Reinvention is “key” for the vodka category to grow sales

On a more regional basis, the wave of growth from the US seen in the past couple of years as consumers lapped up an extraordinary variety of flavours has begun to wane as ever-more discerning drinkers grow tired of the whipped cream and cake creations, turning their attention to more traditional expressions and even flavoured innovations from alternative spirits categories.

Meanwhile, political unrest in Russia and Eastern Europe has encouraged many producers to set their sights on alternative regions, although there are still pockets of growth in rapidly developing countries. Whereas for Western Europe, on-going hardships as a result of the Eurozone crisis have made for a tough playing field for vodka – though brands are trading rather successfully in one or two specific countries.

Perhaps the greatest potential for vodka has in fact manifested itself in Brazil, where an emerging middle class, blossoming cocktail culture and a nationwide predilection for white spirit cachaça, has created the perfect storm for vodka to flourish.

Asia, on the whole, is being treated as a long-term project by international brands, while Australia is peddled as a region with small, but dynamic, growth. Even Africa, with its penchant for beer and RTDs, and little experience of mixed drinks or cocktails, is showing sure signs of promise for leading vodka brands.

For our annual analysis of the global vodka landscape, The Spirits Business has partnered with the IWSR to present exclusive data, commissioned by leading wine and spirits trade show Vinexpo. The exhibition, which takes place this 14-18 June in Bordeaux, France, commissions research from alcoholic beverage market analyst IWSR each year so as to harness key insights into the development of both spirits and wine. The annual collaborative research allows SB to take a closer look at how vodka is performing in different regions throughout the world.

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

Russia and Eastern Europe

It’s no secret that Russia and Eastern Europe have proved troublesome regions for many brands, both international and domestic, over the past few years. Economic and political turmoil in a handful of countries have moved some vodka brands to practically abandon all efforts to achieve growth, instead choosing to focus their gaze on more profitable markets in the region.

Ironically, the trickiest market for vodka is Russia, where official production fell by 17% between January and November last year (Federal Service of State Statistics), despite consumer demand remaining. Why the decline? Efforts by the Russian government to increase the minimum unit price of vodka over the past five years has driven a thriving black market for illicit vodka, which, according to the Center for Federal and Regional Alcohol Market Studies, has risen by up to 65% since the MUP strategy was implemented in 2009. Cash strapped Russians are swapping what have become expensive legal brands for often dangerous, but affordable, moonshine.

To alleviate the situation, the government reversed its MUP escalator in February this year from 185 rubles (£1.75) for half a litre, down 16% from a record high of 220 rubles (£2.08), although the effect is yet to be seen. While the national press has lamented the introduction of any MUP at all, some brands are seeing a small positive effect. “We are gaining shares in Russia,” says Carmen d’Ascendis, global managing director, Finlandia. “We grew at approximately 10% last year, which is encouraging for us. The MUP is driving consumers up the value chain, which is playing well in our favour.”

But for the most part, it seems international vodkas are willing to leave Russia to the local brands, which dominate the market. “We are choosing our battlegrounds and where to invest the most of our resources, and right now we don’t see Russia as a big opportunity,” says Rudy Aldana, global marketing manager, Cîroc. “One, because of the macroeconomic issues they face, and also the size of the market for ultra-premium vodka is very small.”

Political tensions

The Ukraine, which has felt a huge economic squeeze following its political spat with Russia, has proven similarly tough for some brands. For Belarusian brand Bulbash, the Ukraine has become such a challenging market that the company “almost stopped” all activity altogether. Further north, in its local market of Belarus, the landscape looks more promising. “The main challenge in Belarus is that due to excise growth the consumption of vodka and other spirits has been declining for the last five years,” says Andrey Butovsky, marketing director for Bulbash. “Nevertheless we managed to grow by 50% last year while the overall market drop was 9%. We achieved such incredible results thanks to our investments in supporting strong Bulbash brands.”

Butovsky also points to the Baltic states as being an area showing promise, citing 49% growth in the last year “mainly due to distribution spread”. Elsewhere, ­ Aldana highlights Turkey as a region “having a really good year” despite the challenges presented by being a dark market.

But the highlight of the region is undoubtedly Poland, which despite introducing a 15% excise tax increase in January 2014, has become an area of keen interest for international and domestic brands. According to Stock Spirits CEO Chris Heath, the tax increase has converted to a shelf price rise of up to 8%, but consumers haven’t been fazed as much as anticipated. “Potentially that could have been a big shock to the system, but from a consumer perspective it wasn’t too bad,” Heath explains. Although the disruption took the blame for a 14% sales dive for Stock Spirits, Heath is upbeat about the market’s recovery. “Volumes were down a bit but the value of spirits consumption went up. Consumers have largely become used to the new price points now, and the economy is pretty robust – GDP went up 3.3% last year and consumer confidence is at a five-year high, so we are optimistic about the future for Poland.”

As for the biggest consumer trends sweeping across Eastern and Central Europe, watch out for growing demand for brands with heritage and provincial roots, traditional berry and citrus flavours, and a greater focus on the base agricultural product.

Western Europe

It’s been a tempestuous few years for Western Europe with the ongoing economic troubles of the Eurozone. While some brands were quick to discount to save volumes as consumers became more conservative about their spending habits, Brown-Forman’s d’Ascendis insists Finlandia has not – and will not – go down this route. “Sales are fairly quiet in Western Europe,” he says. “Overall I would say they are flat. I think our challenge is to target occasions – vodka is popular because it’s a sociable drink. This is what we need to build on.”

However, there does seem to be light at the end of the tunnel and producers are seeing some positive outcomes. Diageo’s Smirnoff has seen signs of success in the UK and is channeling its efforts primarily in the on-trade, having launched a new £15m campaign last year designed to “reinvigorate the vodka category through education around versatility and mixability”. Matt Bruhn, global brand director, admits the UK remains a “tough market”, but hopes to use it to the brand’s advantage as a “spring board” to other countries such as Germany and Spain.

Differing consumer interest

Cîroc is also upbeat about the situation in Western Europe, claiming the brand is “booming”, particularly in the UK, Germany and Spain, with off-trade sales more than doubling at 103% last year. The brand plans to play on this further with more marketing campaigns and focus on nightclubs.

Nadège Perrot, brand manager of modern spirits at La Martiniquaise, owner of Poliakov vodka, describes Western Europe as a region that really shows how consumer interests differ from one country to another. “Where gin is very popular in Spain and Portugal, vodka is getting stronger in other countries,” she explains. “A tell-tale example is Belgium, where vodka sales have exceeded genever – the local spirit – in the off-trade market.”France remains Poliakov’s main country of interest, where the brand claims the number one spot and more than a third of market share.

When it comes to trends, d’Ascendis says he has noticed Western Europeans looking for “light refreshments” and that mixed vodka drinks will be a key growth driver in the year ahead. 

South America

All eyes were fixated on Brazil in 2014 as the globe cheered on the football World Cup. As a market already infatuated with white spirits, it comes with little surprise that producers are excited about the country. Plus, the figures speak for themselves.

The IWSR predicts overall volumes in the Americas will grow a modest 1.5% from 2013-14, marginally lower than the 1.7% growth experienced between 2012-13, but still above the majority of other global regions. Volumes remain small, but potential seen in the eyes of producers is anything but.

“Vodka is red hot in South America,” raves Smirnoff’s Bruhn. “Brazil has real vibrancy in the category and the vodka is well accepted and embraced by consumers, but there are a few economic headwinds on that market we have to fight through,” he adds, referring to the country’s GDP slowdown.

Younger, aspirational consumers are switching from local spirits to imported vodka brands, as Megan Kilbride, senior marketing director, vodkas, Gruppo Campari, divulges. “In a market like Brazil, we have gradually seen younger consumers migrate from cachaça and the Caipirinha to vodka and the vodka-based Caipiroska,” she says, before adding consumers are also developing a penchant for premium labels.

Premium trajectory

Finlandia’s d’Ascendis agrees, describing Brazil as a “value game” with increasing interest in high-end luxury vodka brands.

“In Brazil, you have an emerging economy with aspirational consumers looking for ways to signal their success,” he explains.

Moving to Mexico and Bruhn notes the region is displaying the right conditions for “explosive growth”, highlighting a millennial shift of interest from Tequila to other spirits categories as a partial reason behind the amplified attention. “We have Smirnoff Black through Diageo in Mexico,” he says. “We have a huge focus on making sure we can relaunch Smirnoff in Mexico given the demographics and scale of that market – it’s a big opportunity”.

Meanwhile, Poliakov claims to have enjoyed double-digit growth in Mexico, but a “stable” performance in Chile. Overall, it looks as though the on-trade will be the deciding factor in determining the future success of vodka in South America.

US

The headline volume sales of vodka in the US tell a rosy story of almost 2% growth in the last year, but behind the rise is a story of two halves, woven with “aggressive” competitiveness, flavour fatigue and a purported image crisis in the on-trade.

As the second-largest vodka market in the world – although some three times smaller than Russia, the US presents what seems to be a profitable market that’s home to an increasing population of spirits-savvy Millennials with a rising disposable income. While that’s completely true, the going is anything but easy for some brands.

The craft spirits boom of the past few years, coupled with the cocktail renaissance, has seen hundreds of new vodka brands flood the market. As a result, competitiveness, particularly at the value, standard and premium end of the scale, has driven significant price reductions and caused one of the most challenging marketplaces vodka has seen in the US. “Price compression has certainly impacted the majority of vodka brands, both domestic and imported,” says Tracey Clapp, marketing director, vodka, Sazerac. “Consumers have many choices at varying price points.”

While some brands have opted to reduce prices to remain competitive, others have chosen to take the hit to their sales on the chin, letting consumers who have become fickle through too much choice be swayed by price. Rob Cullins, CEO of Stoli Vodka, says: “We’ve chosen to respond in measure but not all the way. We’ve done some reductions because there can’t be that big of a disparity with what the consumer is seeing on-shelf, but at the same time, we don’t want lose brand equity.”

Competitive pricing

Earlier this year Diageo CEO Ivan Menezes admitted the group priced Smirnoff “a little high”; a bold strategy in a competitive market that resulted in a 5% volume decline in H1 2014/15. “Vodka got very competitive and all the pressure went the other way,” he explained at the time. “We won’t roll back prices but we are going to moderate [price increases].”

However the battle seems reserved for the vodka brands on the premium and below shelves, excluding the likes of Cîroc, Ketel One and elit by Stolichnaya who play in the super-premium-and-above realms. In fact, Cîroc saw volumes soar by almost 8% following the launch of Cîroc Pineapple in August, which now amazingly accounts for 50% of the brand’s sales. Rudy Aldana, global marketing manager, Cîroc, says: “Pineapple cannibalised as always; the nature of launching new flavours is that you take some of the volume out of some existing flavours for sure, but at the end of the day it drove growth for the total brand.”

Obviously some flavours work remarkably better than others, particularly traditional fruit expressions, and is a key aspect of the category that is not likely to die out any time soon, despite cries of “flavour fatigue” from across the nation. Instead, the biggest threat to flavoured vodka comes from another category entirely. “The biggest challenge facing vodka at the moment is growth from other categories, such as North American whiskey,” says Ewan Topping, global marketing manager, Ketel One. “It’s the flavour side of the market where we’ve seen the biggest slowdown; it’s cause for us to think about what our US strategy is.

“Ketel One is returning to the basis of the plan that grew the brand in the US in the first place – there’s a much bigger focus now on the on-trade where we are counting on bartender recommendations, because we know the bartender is such a strong gatekeeper in the US market.”

Africa

As an emerging market, Africa is still an extremely small region for vodka but one that has certainly captured producers’ attention. Matt Bruhn of Smirnoff quotes greater growth in Africa as a “priority” for the brand in the coming year. “One of our biggest focuses is making sure we are applying unique growth strategies to emerging markets, because they are fundamentally different,” he says.

Cîroc is also excited by the prospects lying here, and is using a few famous faces to drive brand awareness and consumer engagement. “We are now going into Africa where we’ve seen tremendous growth, and Nigeria and Kenya posting great numbers,” says the global marketing manager, Aldana.

Rise of the middle class

Looking at South Africa in particular, Johan Hugo, South African category manager for whisky, white spirits, liqueurs and brandy, Distell, says value-driven vodkas continue to hold the strongest share of the market. However he tells of growth within the super-premium sector, due to “the increase in South Africa’s middle class and the rise in disposable income”.

But while consumers are leaning more toward premium brands, flavoured vodkas have not caught on here like they did in the US. “Traditional expressions dominate the market by far,” stresses Hugo. “Although flavoured vodkas are offered by many of the leading brands, their consumer acceptance is still at a nascent level.”

Skyy vodka claims to be the number one premium vodka brand in South Africa, enticing consumers with its flavoured range and striking design. “Skyy continues to post strong growth in global markets, particularly in emerging markets in Africa,” says Gruppo Campari’s Kilbride.

Looking to the future, Hugo is optimistic – though growth looks set to be minimal – due to Africa’s burgeoning cocktail culture, with the biggest gains made at the higher end of the market by the well-known international brands.”

Asia-Pacific

Long-term opportunities abound for vodka in Asia Pacific and producers are keen to lay the foundations of their long-term plans here. In terms of volume, vodka grew 10.5% in 2013 in the Asia Pacific region – significantly more than anywhere else in the world. This percentage growth is forecast to decelerate to just 3.6% in 2014, but volumes will remain higher in comparison to all other markets.

In China, while sales of Scotch and Cognac are declining, consumers don’t seem quite ready to embrace vodka with open arms – though signs of change are visible. “Even though this region is mainly dark spirits, this trend seems to be slowly evolving,” says Nadège Perrot of Poliakov vodka. However, China’s flourishing cocktail scene is playing in the category’s favour. “The cocktail trend is also doing its work and the popularity if vodka – known for its mixability – is growing,” Perrot adds.

Significant opportunities

Outside China, d’Ascendis of Finlandia vodka cites Thailand and South Korea as “both showing a lot of promise and activity”. Smirnoff is also eyeing pockets of growth in Thailand and Indonesia off the back of Smirnoff Ice. “Thailand is an increasingly decent market for us,” comments Bruhn. “I wouldn’t say it’s huge but it’s good. We think that the whole region is attractive from an analytical standpoint.”

Cross over to Australia and Cîroc global marketing manager, Aldana, enthuses this is one of Diageo’s “biggest opportunities”. This viewpoint is echoed by Ketel One’s global marketing manager, Ewan Topping, who describes Australia as “the big one” when it comes to Asia. Australia has been showing “tremendous growth for over a decade” for Smirnoff. As Bruhn says: “Now there is a level of competition with many new entrants, and our challenge remains how you become more expansive, grow the category and bring in more millennials.