Could 2016 be the year of vodka's comeback tour? - Analysis
Cocktails have helped drive vodka's popularity, according to Bernstein
Vodka might not make the headlines as much as the likes of whisk(e)y and gin these days, but it's still the largest global spirit category. Not only that, but the potential for long-term growth - especially in the US - is alive and kicking, according to Bernstein analysts.
With its low barriers to entry and high margin potential - coupled with its recent successes - vodka remains a key part of many a drinks company's portfolio. In 2014, the category represented 15% of global spirits in volume and 16% in value, according to Bernstein. Value gains in the US and Western Europe - the segment's higher-value markets - were driven by growing consumer interest in cocktails and the ongoing popularity of vodka with mixers.
Within the broader category, however, flavoured vodka, which had been driving much of the industry growth in the US, came off the boil in 2014, says Bernstein. The likes of Sazerac's Fireball took over as the shot of choice. Meanwhile, established players in the country felt the squeeze from newer entrants, such as Gallo's New Amsterdam and Fifith Generations' Tito's Handmade Vodka. That 2015 saw some revival in the US shows that vodka's potential for growth remains.
Taking a closer look at the big players, analysts note that Diageo's organic net sales value (NSV) growth in vodka went from 13% in fiscal-2012 to 5% in fiscal-2013, before hitting zero in fiscal-2014 then lifting slightly to 1% last year. "This (performance) was due to declines in Smirnoff... somewhat offset by Ciroc," says Bernstein. Indeed, speaking at the Diageo's capital markets day in November, Matt Bruhn, Smirnoff's global brand director, admitted the company had "made mistakes" where Smirnoff was concerned. The future may remain problematic for the brand: "Smirnoff could come under renewed pressure in the US," Bernstein warns, "as it laps the impact of the prior year's price cuts."
Meanwhile, Pernod Ricard's Absolut brand went from 5% sales growth in fiscal-2013 to a decline of 1% in fiscal-2015. Bernstein suggests that the brand has been squeezed by the likes of Tito's. "However, there have been some very early signs of improved performance for the core variant in the US," the analyst noted.
Tito's producer, Fifth Generation, came under fire for using the term 'handmade' in the brand name. Then, in late-2015, the brand - which boasts annual sales of around 2.3m cases - announced plans to expand its European distribtion. Perhaps craft criticism and eyes abroad will give Absolut some breathing space in the US this year.
At Campari, Bernstein says that Skyy has slipped from 9% growth in 2012 to +2% in 2015 - although this was an improvement on 2014's +1%. Analysts put the slower growth rate down to Skyy's "weakness in the core US market".
In its Q3 and YTD results, released last November, Campari described Skyy's performance in the US as "flattish". CEO Bob Kunze-Concewitz said at the time, however, that healthier growth was on the cards, with positive reactions to a packaging change being heard in the country.
As for the category's future? "We believe the outlook for vodka remains positive, with plenty of opportunity to grow volume for the category in both mature markets (US, Western Europe) and emerging markets," Bernstein believes. "In particular, we see a mid-long term opportunity in emerging markets as women become more important as purchasers and consumers of alcohol."
At the cheap end, the vodka segment is very crowded, leaving room for movement to standard and on to premium, according to Bernstein. "A company with the right marketing skills and distribution infrastructure can still make very attractive returns," analysts conclude.
2016 could be the comeback year that vodka's big players have been hoping for.
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