Readers Respond: Premiumization Alive and Kicking

FILED AUGUST 1, 2009

Dear Client:

Yesterday we considered whether premiumization is dead, particularly among the major spirits companies and mega-brands. Recall that in a research note from Deutsche Bank, analysts believe we are headed for a reversal in the spirits business. They argue that producers set to win in the coming years must practice the following: invest in advertising and promotion and build volume over dollar. As a result they upgraded Diageo but downgraded Pernod Ricard, Remy Cointreau and Campari (or Skyy Spirits in the U.S.).

After perusing the note, we took to IRI scan data in the period to June 14 to learn what mega-brands are growing in the U.S. and which are slowing. We analyzed the top 2-4 brands in each spirits segment. According to the data, the top four vodka brands aside from Grey Goose continue to grow, but rum, bourbon, Canadian whisky and gin were losing volume share. Irish whiskey, Scotch and tequila, like vodka, also posted some solid numbers.

We also asked for feedback from subscribers and luckily you did not disappoint. As we expected, several readers asked us to highlight the smaller brands that are doing great right now and even benefiting from the recession. Many respondents stated that although the mega-brands are losing some steam, smaller brands are making inroads. Is this merely a fleeting trend or will it stick around long after the recession? There’s a general feeling in the spirits industry that niche or craft spirits will carve a place for themselves similar to craft beer in the next 5 or so years. We’ve also echoed this sentiment. Here’s a look at what some of our readers had to say:

“Let’s not forget that significant forward thinking entrepreneurs such as Sidney Frank, Maurice Kanbar, Robert Mondavi, Ernest and Julio Gallo, Martin Crowley, and Harvey Chaplin built very successful wine and spirits businesses with their drive, passion, and strong commitments to perfection. This contributed to the “premiumization” we know today. As a former CEO of a Fortune 500 company, an investor, and a proud entrepreneur I do not believe “Premiumization” is dead. Consumers are learning the growth to success is not a straight line, and variances occur along the journey of life. Yes, they will be more knowledgeable in the future, just like our parents and grandparents were after the Great Depression, but they will always value their lives and what they put in and on their bodies. I believe premium brands will resume the upward momentum once the economic downswing lightens, and consumer confidence comes back. I believe that brands that discount, offer lower “deals”, and change their direction for temporary gain will succumb to a form of suicide. Brand equity is all important along with the highest quality products that can be made. Sales of wine and spirits may change from on to off premise, and back and forth, as times change, but great premium brands will continue to surface and grow,” said Gary Shansby of Partida Tequila.

“What's next, a lesson in finance from someone's Creative Director? All joking aside I don't see the era of anything being over. In tough times the stupid and ridiculous get weeded out. Ed McMahon's premium vodka and silly flavored rums are probably not a good bet now but then they never were in the first place. There was just so much froth in the market that they could get launched and would live a little while before dying. The long term data shows that quality sells - Tito's, VeeV, Hirsch bourbon, Bluecoat gin - and BS smells. People buy brands that are worth talking about. Right now people are talking about value so brands that over deliver on the category promise are growing. Those that don't, won't. A quick look through your data proves that point,” said Ted Wright, managing partner of Fizz Corp.

“I would recommend taking a look at Cachaça and what our category is doing...Our business is growing significantly, and our research shows that awareness of the category has grown from basically 'nada' in 2005, to 19% awareness in the main markets (NY, CA, FL). Same thing for the Caipirinha, which had 5% awareness in 2005, and is now at 28% awareness in the main markets. With the US' TTB about to publish a new rulemaking allowing Cachaça to be treated as an appellation like Cognac or Champagne, I think we're going to see some pretty significant growth in awareness and adoption of the category,” said Steve Luttmann of Leblon Cachaca.

“Growing up in Mexico, with four brothers and sisters, we learned at a very young age to look for quality products not a brand name or a fancy package. I believe that people are thinking more and more like this, and realizing the benefits,” said Will Elger, co-founder of Muchote Tequila.

“I think that consumers are trending away from overpriced brands towards value and towards new value propositions. These are all examples of that: Lotus, Sailor Jerry, Three Olives, Sweet Tea/Firefly, St Germain, Veev, TyKu, Leblon, Nuovo and X Rated,” said Rob Bailey of Lotus Vodka.

“Could it be that some of these declines are due to the whacking of the very sales & marketing staffs that help keep brands front and center during trying times? It’s a great time to be a contrarian, and market share will also go to those who were smart enough to hold onto people, especially their most experienced and savvy people, so there’s boots on the street to take advantage of opportunities. Consumers will always move up a bit once they feel comfortable again, and that day will likely be here sooner than pundits think. There’s an energy back in many bars and restaurants that hasn’t been there in a while. Nobody likes to simply stay home,” said an anonymous subscriber.

SOME TOP BRANDS. We admit that yesterday was a somewhat gloomy letter, so here are some brands doing noticeably well. Svedka immediately comes to mind. In the 52 weeks to June 14, IRI scan data shows that volume was up 46.6%. In the four week period, volume rose 19%. Three Olives is also performing strongly among its vodka brethren. Volumes were up 28.6% in the 52 weeks and 16.6% in the four weeks.

Vitali Vodka gained 24% in the 52 weeks and rose 89% in the four weeks. Gran Legacy was up 38% in the year and 75% in the month. Sobieski Imported Vodka gained up 600% in volume in the 52 weeks and a little over 500% in the month. And finally, Firefly domestic vodka had the most enormous volume growth in the period, gaining 37,000% in the four weeks

RUM. Another industry hot shot is Sailor Jerry Rum, with volumes up a whopping 92.3% in the 52 weeks. In the four weeks, Sailor Jerry rose 84.2%. Admiral Nelsons rum gained 34.8% in the year and 26.5% in the month.

SCOTCH. In the whiskey category, Buchanan’s Blended Scotch grew 39% in the 52 weeks and 17.8% in the four weeks.

GIN. Although we said yesterday that gin is still struggling to gain traction in the U.S., Gallo’s New Amsterdam may have proven us wrong. Volumes in the 52 and four weeks grew almost 400%.

COGNAC. Overall Cognac is lagging in the U.S., down -3.7% in volume in the four weeks, but some X Rated is shining nonetheless. X Rated Cognac was up 42% in the year and 20% in the month.

Ed Note: [We realize this doesn’t include every hot brand out there, but it gives you an idea of some that exist and bring an interesting dynamic to the industry.]

WSD BRIEFS:

ILLINOIS TAX INCREASE TAKES EFFECT SEPT 1. Effective September 1, Illinois’ will raise taxes on wine about $1.39 per gallon and on spirits about $8.55 a gallon. Beer’s taxes will rise about 2 cents per gallon. For more information, click here.

EVAN WILLIAMS HONEY RESERVE FLAVORED BOURBON will be shipped to select markets in the U.S. in September, retailing at about $14.99 for a 750ml bottle.

CRUZAN RUM IS LAUNCHING A NEW AD CAMPAIGN with a focus on the key markets of Florida, Texas, New York, New Jersey, Seattle and Southern California, said Beam Global. The campaign highlights St. Croix, which is where Cruzan is produced.

TALBOTT VINEYARDS has named Dan Karlsen winemaker and general manager. He joined the winery in April 2008 as consulting winemaker, said the company. He most recently served as winemaker and general manager for Monterey County’s Chalone Vineyards and Estancia Winery, a position he held for a decade.


Until tomorrow, Megan

“Eat breakfast like a king, lunch like a prince, and dinner like a pauper.”
Adelle Davis

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