A Dichotomy in Spirits

FILED JUNE 10, 2011

Dear Client:

We're seeing a shift in the industry - a dichotomy if you will - as some spirits companies are cutting back on promotions, and others are still chugging along. Also interesting, many of the larger brands are flat or even slightly down, as smaller, premium brands fuel the growth. This tells us that although consumers are increasingly turning away from value brands (particularly value vodka), they are still looking for deals - that much is evident in NABCA's control-state data for the month of April.

"The big winners in US spirits are Beam Global, driven by Maker's Mark, Courvoisier, and Cruzan, and Sazerac, with value brands such as Platinum 7x ($10) and Crown Russe ($5) driving growth," writes Bernstein Research's Trevor Stirling in a research note. In all, April was a solid month for the spirits industry, with rolling three-month volumes gaining 2.8%. Volumes for Sazerac grew 7.4%, Beam Global rose 4.8%, Heaven Hill (3.2%), Pernod Ricard (2.5%), Constellation (2.2%), Bacardi (0.1%), Diageo (-0.2%) and B-F (-0.2%).

Looking at the top 20 brands by volume, the impact of brand mix on value growth was flat. But if you expand that to the top 50 brands, mix was up 0.6%. As we noted above, this is because "the fastest growing brands in the current market are smaller, more premium brands such as Woodford Reserve, Ketel One, and Jameson, which drive strong value growth," says Trevor. That coupled with the decline of value vodka brands is helping improve mix.

For the first time in a year, Pernod Ricard posted volume growth (2.5%) that was below the total spirits market on a 3-month basis, but that was largely due to tough comparisons as it lapped its price reduction on Absolut (taken a year ago). Volumes for Absolut rose 1% in April, while Seagram's Gin fell -5% and Kahlua declined -3%. But that was offset by Jameson and Fris, with volumes gaining 24% and 39%, respectively. Meanwhile, The Glenlivet, Ballantine's and the Martell family have leading value mix of 1.1%, ahead of the market. Volumes grew 6%, 3% and 11%, respectively.

Diageo's volumes (down -0.2% in the 3 months) are still taking a hit as they continue to reduce promotional intensity. This is largely due to Smirnoff "as the brand suffers from a 'post-promo hangover' and competition from imported brands at similar price points such as Svedka, Fr�s and Sobieski." However, Diageo's value-mix is ahead of the market, up 2.1%, thanks largely to Ciroc, which grew a whopping 101% in volume. Excluding Ciroc, Diageo's value mix was up 0.9%. While Diageo's top 5 brands are lagging, with volumes for Smirnoff up 1%, Captain Morgan flat, Crown Royal up 1% (with Crown Royal Black on fire), Jose Cuervo down -5% and Seagram's 7 down -5%, it is getting the bulk of its growth from Ciroc (volumes up 101%), Ketel One (7%) and Tanqueray (5%). Trevor notes that Captain "has suffered in the last months from aggressive price-based competition from 'me-too' brands such as Admiral Nelson and Sailor Jerry and reduced promotions."

Beam Global's volumes grew 4.8% but that growth "over the past few month has been achieved at the expensive of price-mix." However, Trevor notes that "as promos fall price-mix is firming." Beam's fastest growing brands are Maker's Mark (volumes up 15%), Courvoisier (11%) and Cruzan (13%).

Brown-Forman's volumes were down -0.6% and has been under-performing the market since September 2009. Brands including Woodford Reserve (18%), Gentleman Jack (7%), el Jimador (34%) and Chambord (19%) posted impressive growth, while Jack Daniel's "is still weak but trending better," with volumes up 1%. SoCo was down -3% on a 3-month basis and Canadian Mist fell -5%.

TERLATO'S SANTA MARGHERITA CASE CLOSED

A US district judge in the central district of California has ordered Thomas Wine Imports to cease importing and selling "gray market Santa Margherita" pinot grigio. (To read our coverage of the initial complaint, copy and paste this link in your browser: http://www.winespiritsdaily.com/publications_daily.php?id=1464). The defendant consented to the final judgment and waived any right to appeal. Thomas has 15 days after the judgment (signed June 2) to provide "Santa Margherita with detailed information on the quantity and value of sales of Gray Market Santa Margherita Wine by month and by customer for the time period" they imported and sold it in the US. However, purchase orders for the last 12 months " shall be provided immediately." They have 30 days to destroy all the gray market inventory, and also must "send letters to its customers" identified in the lawsuit - including California's Whole Foods, LA Wine Co., Wine House, Lincoln Fine Wines, K&L and Jolly King - that they will no longer be able to supply the wine. And there you have it.

WSD BRIEFS:

DIAGEO TAKES A STAKE IN ZACAPA. Diageo has reached an agreement with Industrias Licoreras de Guatemala to take a 50% controlling stake in Zacapa rum. Note that in 2008 Diageo struck a three-year distribution agreement for the brand with the option to purchase a stake at the end of the term. Details of the transaction were not released.

DIAGEO CLOSE TO SEC SETTLEMENT. The Financial Times is reporting that Diageo is close to a settlement with the US Securities and Exchange Commission under which it would pay somewhere around $10-20 million to end a bribery investigation, according to unnamed sources. For several years the agency has investigated "whether Diageo employees or contractors paid bribes to government officials in South Korea, India and Thailand."

CA DISTRIBUTOR WINE WAREHOUSE has appointed Greg Akins president and coo. He joined the company in 1989 and most recently served as coo of the northern California operations. James Myerson is now chairman/ceo, while his father, Bob, is chairman emeritus.

PRECEPT WINE BRANDS, the second largest winery in the Northwest, has changed its name to Precept Wine, effective immediately.


Until Monday, Megan

"He who asks is a fool for five minutes, but he who does not ask remains a fool forever."
Chinese Proverb

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