Craft Spirits Fattening their Piece of the Pie (and why it

FILED APRIL 4, 2013

Dear Client:

A funny thing happens when you examine spirits growth trends from 2012. All of the big spirits players like Diageo, Pernod Ricard, Bacardi etc. grew sales in the single to double-digit range, but if you look closer they also lost dollar share. Diageo lost -0.7 dollar share points, Pernod lost -0.2 and Bacardi lost -0.4 points, per SymphonyIRI year-to-date scans for December 30. How can that be? Well, it's because they're not keeping pace with the category growth, which grew about 12% for 2012.

Alcohol industry consultant Bump Williams told listeners at the American Distilling Institute's annual conference that mid-sized and small craft brands are filling in the gaps and adding to their share what the big brands are losing out on. The craft distilling and "the smaller folks" have picked up almost 2 share points and it's a good thing for the entire category.

Bump says craft distillers are doing three things to help build the category: (1) they're bringing new shoppers into the fold, (2) they're increasing the frequency that consumers buy spirits and (3) they're increasing the amount of spirits that the average consumer buys.

"I happen to think that the spirits business is a little bit different from what I see in the wine and what I see in the beer business because the big distillers... they love [craft]. They love the innovation, they love the creativity and they love the passion." In the beer business "the big brewers want to squash the craft guys."

SWITCHING SIZES: For the 52-weeks ending February 24, SymphonyIRI trends show consumers moved away from the large 1.75 liter bottle size to the smaller 0.75 liter and 0.375 liter. This trend works in craft spirits' favor because that's what the majority of them are packaged in, says Bump. More specifically, 1.75 liter bottles lost -3.5 volume share points, while 0.75 and 0.375 liter bottles picked up 1.5 and 2.6 volume share points, respectively. "I think a lot of that is probably tied to the economy, and price increases have definitely gone up for the 1.75. People just don't have that $40 or $50 to drop down at one time," says Bump. But he added that the change in consumer size preferences also reveals they are doing more sampling.

WINNING IN RETAIL: The spirits category had about 1,900 new products last year, which represented about 7% of the total sales of the category. And retailers are facing tough decisions because retail shelf space for the category isn't growing nearly that rate. If you think you or your distributor are influencing them on how the shelves are set, you're wrong, says Bump. "The retailers make up their own mind." When retailers talk about brand building, they aren't talking about the spirits brand. "They're talking about the name on the outside of the store." If you want to win at grocers and retailers it's a good idea to figure out how you're going to help them increase foot traffic in their store and build their brand. For the craft brands Bump says: "I think starting out you really want to target select stores - places where the owners understand who you are."

Bump says the big spirits companies look to craft to bootleg off of successful craft trends. The look at the craft category as an incubator for ideas, but he says it's really not feasible for them to do copycat craft brands with any real authenticity.

"The big guys can't think small. That's one of their faults right now. They're going to try and come out with bootleg craft brands, or artisanal brands, whatever they want to call it. They've got deep pockets and wicked long arms. They're going to try to outspend [craft] with distributors and retailers," says Bump. " But guess what? It's innate in them to think 'I gotta sell a million cases, that's what I have to do because every 90 days I have to make a report to Wall Street."

TOP NEW SPIRITS PRODUCTS: But they are out there launching new products. Last year the Top 10 new spirits brands in terms of dollar sales (in descending order) were: Skinnygirl vodka, Monarch vodka, Wild Turkey cordials, Malibu cordials, Monarch Rum, Bushmills specialties, Island Squeeze prepared cocktails, Three Star Domestic Vodka, Little Black Dress vodka and Shellback rum.

"I think Skinnygirl has done an awesome job at introducing a low-calorie pretty good-tasting product out there that's easy to get at. It's really been a massive draw, almost exclusively for the female consumer."

In the next ten years the spirits industry is expected to increase volume by 5% - 7%, says Bump. And from what we've heard at the American Distilling Institute's conference this week, there's a lot of equity firms, Wall Street investors and big industry players watching the segment very closely.

WSD BRIEFS:

GOV. LEANS ON THE LEDGE TO PASS PA PRIVATIZATION BILL. The Pennsylvania privatization bill has passed the House and moved on to the Senate, where it is expected to have a more difficult time passing in its present state. But if it's up to Governor Tom Corbett they'll get it done as soon as possible. He is pressuring the Senate to finish the job by the end of June, reports News Works. "Expect some phone calls, because I've asked the House to talk to their members of the Senate to convince them that we need to move this bill forward. And I hope that they will do so in a quick and expeditious manner. I'd like to see this bill by the time we finish the budget," he said in a press conference this week.

RUSSIAN STANDARD NAMES VP OF ON-PREMISE. Mike O'Connell is set to step into the role of vp, on-premise national accounts for Russian Standard,where he will be responsible for the development and execution of the strategy and business development of those accounts. Mike has been in the business for more than 30 years in both distributor and supplier management positions. Most recently he was at The Patron Spirits Company, where he spent the last seven years as vp of national accounts. He also spent 12 years at Allied Domecq.

WA SEEKS TO PREVENT MARIJUANA USE IN BARS. The Washington State Liquor Control Board voted yesterday to create rules to prevent consumers from smoking marijuana in bars and restaurants with liquor licenses. The board will be taking public comment on the new rules until May 22, and then there will be a public hearing in June. "It is important that the board clarify now that consuming marijuana in a state liquor-licensed establishment is not acceptable," says board chair Sharon Foster in a statement. "Public consumption of marijuana is clearly illegal under Washington's new law."


Until tomorrow, Emily

"The man who never alters his opinion is like standing water, and breeds reptiles of the mind."
- William Blake

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