Having made a conscious effort in recent years to focus only on its big-selling core brands, Diageo revealed last week that it is in talks to acquire the relatively small vodka brand, Ursus. Chris Brook-Carter investigates what it is about Ursus which might have caught Diageo's eye.

Diageo, the world's largest spirits company confirmed late last week that it is in negotiations to acquire the Dutch vodka producer Ursus Vodka Holdings. On the surface, there is nothing remarkable about the deal. In fact a company of Diageo's scale can make an acquisition of this size without breaking stride.
 
However, in more ways than one, the deal, which is thought to be at a comparatively early stage, may have significance. Firstly, it is seemingly in direct contradiction to Diageo's recent and successful strategy to focus almost exclusively on its core brands for growth. Since the company formed in 1997 through the merger of Grand Met and Guinness, it has been divesting itself of its "tail" brands and non-core operations. Marketing spend has then been channelled into its most important brands in their most important markets with generally good results.

The acquisitions Diageo has made, the most notable of which was the Seagram deal in 2001, were about adding significant brands, such as Captain Morgan, to the few holes in the company's portfolio of blockbuster spirits.

Ursus is not a significant brand. In fact, while Ursus vodka currently sells just 400,000 cases, Diageo's leading white spirit Smirnoff shifts 23m cases every year. It is a difference in size reflected in the reputed purchase price for Ursus of around £14m.

Ursus has enjoyed considerable growth in the years since it launched in the 1990s, but it has been from a small base. Originally an Icelandic drink, Ursus was acquired by Dutch firm Hombergh in 1995. The company began marketing it three years later. It now ships about 400,000 cases to more than 60 countries, with strong sales in Greece, where it has become the market-leading white spirit. "Where the brand could be interesting for them is in their Greek business because Ursus is doing well there and Greece is a relatively small percentage of group EBIT," one analyst told just-drinks.

However, the Greek potential notwithstanding, the addition of another vodka is hardly a priority for Diageo given the recent launch of two premium vodka brands from within the existing portfolio, Ciroc and Smirnoff Penka.

Why then has the world's number one spirit company moved to snap up this small producer from Holland? The answer may lie in the Ursus spin-off brand Roter and the declining state of the RTD market, which for a number of years now has driven considerable growth at Diageo, with brands such as Smirnoff Ice and Archers Aqua.

Ursus Roter is a red vodka drink with a blend of Vodka and sloe berries. The result is a delicate, very mixable vodka drink, which can be drunk straight, on the rocks or mixed with soft drinks or juices. Some analysts have suggested that Roter could symbolise the next generation of RTDs.

However, whether or not it would have sufficient international potential for Diageo remains to be seen. "It doesn't sound like the kind of brand that has huge export potential beyond some of the pretty specific markets," one analyst told just-drinks. "But it's definitely interesting from the point of view of Greece."

Nevertheless, Euromonitor believes that the success of brands such as Ursus Roter in certain European markets augurs well. "The emergence of a new type of vodka-based spirit, spearheaded by such brands as Ursus Roter, owned by Dutch company, Ursus Vodka Company NV, has taken a couple of European markets by storm. Indeed it may be heralded as the next hit product to create dynamism in the spirits market in the next few years," the consumer goods analyst Euromonitor told just-drinks.

Other brands marketed along similar lines include German company Berentzen's Pushkin Red, a vodka-based drink containing blood orange juice, and Dutch company's Hooghoudtstraat's Royalty Red.

These brands seem to have fallen somewhere between the RTD category and the original spirits they are derived from, and indeed Ursus Roter has been attacked by critics for marketing itself as a vodka at all because it only contains 21% abv.
 
"The very fact that the new vodka-based products fall between two stools, being neither a FAB nor a standard spirit, has been beneficial to their positioning," says Euromonitor. "Ursus Roter is mixed with a fusion of sloe berries, which gives it a distinctive sweet and fruity taste, a characteristic which has appealed strongly to the younger generation of drinkers."

Euromonitor continued: "Initially introduced in the Netherlands in 1998, and then in Greece in 1999, the brand was launched as a "red vodka". However, it is this clever positioning as "vodka", as opposed to just another FAB alternative, that has helped create a potentially more successful and secure market. Most notably, in aligning itself with vodka, it appeals to male consumers. This is a significant consumer segment which FABs have continually failed to impress due to their feminine image and sweet taste. Moreover, these products can be mixed with a variety of soft drinks, as well as being consumed neat, which also allows for a more adult male-orientated positioning."

In addition some commentators seem to believe that Ursus Roter, with only 21% alcohol content, could get around new European duty rises on RTDs, such as those in Germany, which are aimed at the sugar content of alcopops such as Smirnoff Ice.

Diageo has stood firm behind its commitment to the RTD category, even as sales of its leading brands have declined, pointing out that as a category based upon style, it was always going to need to evolve. The company may well have earmarked Roter as the next stage in the evolution.