Is Premiumization Dead?


Dear Client:

Most of the U.S. spirits industry’s major brands that have driven profitability for decades and some in recent years are in a free fall, leaving many in the industry to wonder if and when they’ll recover. Industry execs have warned since last October that spirits is not recession proof but recession resistant. Indeed, we are doing better than other industries. But spirits (and yes wine, but that’s another story) are taking a disproportionate hit.

For the most part we know why volume is declining. What to do about it, though, is another question. People are drinking more at home and when that happens they tend to choose wine or beer mainly because it’s easier (popping the top versus mixing). Spirits brands are built on-premise, so when no one is drinking at bars and restaurants, they feel a lot of heat.

We’ve also heard that many analysts and other data guys don’t believe consumers will swiftly return to their old spending habits once the recession turns around. They will continue to watch their money closely. However, recent polls from Nielsen reveal that once the recession does end, consumers first anticipate spending a little more money on wine, then spirits, followed by beer. So the spirits business isn’t first or last on that front, but few people in the industry seem to think trading up will resume to its heights in 2007.

DEUTSCHE PREDICTS END OF PREMIUMIZATION. A new report from Deutsche Bank is encouraging the spirits industry to start moving away from premiumization into an almost entirely new direction. After thoroughly analyzing the global spirits industry, Deutsche analysts found that “the ‘era of premiumisation’ is over, in our view.”

Since we’ve started writing this newsletter roughly 3.5 years ago, top companies were determined to shed their lower-end value brands and focus on building dollars, not volume. But was that the wrong way to go?

Says Deutsche: “If the era of premiumisation (and easy growth) is broadly behind us, the winners over the next two to three years are likely to be the companies that can drive volume growth, are less reliant on trading up and who continue to invest in advertising and promotional spend behind their volume brands.”

Their reasoning is that intra-category trading up, or pure-mix, will be neutral at best. They also predict that price increases “will be harder to come by.” Mix in developed markets (including the U.S.) “is highly cyclical and trading down, partly driven by the shift of on-trade to off-trade will be a major headwind for the industry over the medium-term.”

DIAGEO UPGRADED DUE TO “MAINSTREAM” PORTFOLIO. With that said, Deutsche Bank made the following changes to its recommendations: Diageo was upgraded from hold to buy; Pernod downgraded from hold to sell; Campari downgraded from buy to hold; and Remy downgraded from hold to sell.

Deutsche Bank believes Diageo’s “more mainstream and well diversified portfolio should allow it to outperform the industry.” The company’s volume performance in recent years has also been what Deutsche considers “best in class.”

Meanwhile, it downgraded Pernod because of its expensive stock, high debt levels and a potential cut to A&P, which could hurt long-term growth potentials. “We also believe that Pernod Ricard’s focus on premiumisation over recent years will work against it in a more difficult market where price/mix gains are more difficult to come by,” said Deutsche analysts.

S&P LOWERS RATING ON BROWN-FORMAN. Meanwhile, Standard & Poor's Ratings Services lowered its ratings outlook on Brown-Forman Corp. (BFB) because of the alcohol producer's weakening earnings. S&P also believes that trading down could accelerate in the next several years. The ratings outlook for Brown-Forman is now negative. S&P has the company rated at A, midway between AAA and junk territory.

A LOOK AT MEGA-BRANDS VIA IRI. WSD’s analysis of IRI scanner data shows that a big chunk of the major brands (with a few exceptions) in vodka, rum, gin, tequila and other categories are losing major momentum. Yes, we know what you’re thinking: IRI only gives a small idea of how the off-premise is fairing since it doesn’t track liquor stores. However, it gives us an idea of the off-premise, and we can assume the on-premise (which has taken the biggest hit in the recession) is doing even worse.

VODKA. Smirnoff, Absolut and Skyy together represent about 30% volume share of the category and for most part are holding steady in the four weeks to June 14. In terms of volume, Smirnoff grew 0.1%, Absolut grew 2.5% and Skyy grew 2.7%. Interestingly, Absolut showed much improvement from its 52-week numbers (with volumes down -8%), while Skyy was much stronger in the 52-weeks (up 17.1%). In recent years Grey Goose was a force to be reckoned with. However, volumes in the four weeks declined -5.2% and -5.9% in the 52-weeks.

RUM. Bacardi, Captain Morgan and Malibu all took hits in the four week period, with Bacardi declining the most, down -7.5%. Captain Morgan fell -4% and Malibu Rum declined -1.1%.

WHISKEY. Despite the assumption that Bourbon is doing especially well in the recession, Jack Daniel’s declined -8.1% in the four weeks, while Jim Beam fell -10.8% and Maker’s Mark was down -6.2%. It’s notable, though, that Maker’s Mark performed much stronger during the 52-weeks (+4.5%), while Jack gained 0.1%. Jim Beam, however, declined -7.4% in the year period.

Canadian Whiskey’s darlings in the U.S., Crown Royal and Black Velvet, also had a rough 4-weeks, with both declining -4.5% in volume.

Johnnie Walker Blended Scotch showed volume increases of 5.7% in the four weeks but only 0.7% in the 52-weeks. Dewar’s declined -5.1% in the month but grew 9.1% in the year. And finally, Clan Macgregor Blended Scotch grew 1.2% in the four weeks and 3.9% in the year.

Jameson Irish Whisky continues to grow amid the recession, with volumes in the four weeks up 21%, slowing from the 52-week results (30.7%).

TEQUILA. Mega-brand Jose Cuervo declined -3.3% in the four weeks but gained 3.1% in volume in the 52-weeks. Sauza, meanwhile, declined -0.2% in the four weeks and -0.6% in the 52 weeks. Lastly, Patron grew above and beyond the latter two, up 11.3% in the four weeks and 14.1% in the 52-weeks.

GIN. The top three representatives from the gin category declined in the four weeks but we’re not too surprised given that gin has had problems mounting a resurgence in recent years. Tanqueray was down -6.6% in the month, followed by Seagrams (-0.6%) and Bombay Gin (-13.9%).

We strongly value your insights, so please drop us a line on spirits and premiumization at As always, all names and identifying factors are kept anonymous.

Until tomorrow, Megan

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”
George Burns

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