Comment - Spirits - US Vodka Wars throw up Strategy Conundrum
The US vodka market remains a fierce battlefield. New products continue to flood the sector, while "predatory" pricing policies affect some US states. What should be the approach of established producers? Stand firm and persuade consumers to look beyond price, argues Chris Mercer
Last week, comments by Campari's CEO, Bob Kunze-Concewitz, that a "very important imported brand" is effectively dumping cut-price vodka in California caused a few ripples through the US vodka sector.
No one will confirm it, but it seems clear Kunze-Concewitz was referring to Stolichnaya, with its owner SPI Group set to go it alone in the US at the end of this year.
What his comments highlight more than anything, however, is the pressure on vodka producers to foster loyalty among their consumers by offering a clear, consistent message around their product.
Of course, this is far from easy in a market that analysts and producers commonly refer to as the most competitive vodka selling arena in the world. Product launches are hard to keep pace with, and the US Distilled Spirits Council (DISCUS) counted 171 new products launched in 2012, of which 122 were flavoured.
And, no doubt, the task of holding consumers' interest becomes even more frustrating when one is forced to watch margins being jeopardised by the pricing strategies of rivals.
Reports of "predatory" vodka pricing in a number of US states have reached just-drinks' ears of late; it's not just in California and it isn't just one brand.
Plus, in terms of the overall market, a wobbling underbelly of cheap vodkas priced between $5 to $8 per bottle means that the vodka category accounts for 32% of US spirits sales by volume and only 26% by value, according to Sanford Bernstein estimates.
This is changing slowly. "2012 continued trends towards premiumisation, with the two higher priced segments outgrowing the cheaper ones," said Sanford Bernstein analysts earlier this year.
In particular, recent figures suggest that super-premium vodka is blazing a trail in the market, with volumes up by a tenth in 2012, albeit to only 6.3m cases. Value sales in this segment rose slightly slower, but were still up by 9.5%, at $1.3bn, according to DISCUS, which labels super-premium as bottles selling above $30 retail price.
With the lower-priced 'value' segment holding its own, all of the real jostling is taking place in the squeezed middle tiers.
Price is clearly important. Sanford Bernstein analysts have noted that, at the end of 2009, Pernod Ricard back-tracked on an early attempt to raise prices on Absolut. Volumes subsequently increased.
Still, more recently, the firm's confidence on pricing has grown. “On Absolut, we have been selectively taking price up since last year on the back of strong momentum on the brand and consumers’ renewed appetite for trading up,” Maxime Kouchnir, VP of marketing for vodkas at Pernod Ricard USA, tells just-drinks.
She adds that the company still sees dynamic growth in US vodka at the premium and super-premium end, “despite some players putting downward pressure on price in the hope of offsetting declining brand images”.
Chester Brandes, president and CEO of Imperial Brands, a subsidiary of Sobieski vodka owner Belvedere Group, believes it is possible to create a sense of brand value in which price is only one aspect; and this is a key challenge for vodka distillers.
"The reality of the situation for us is that the consumers who are going to switch brands for $2 or $3-a-bottle are not really our sort of consumers in the first place," he tells just-drinks.
No one has quantified the number of consumers willing to skip between brands based on price discounts, but Brandes, who has worked in the vodka industry for close to 40 years, believes it could be around 20%.
Sobieski has garnered something of a cult following via its 'Truth in Vodka' campaign, positioning itself as a no-nonsense, authentic Polish vodka. In 2011, it hit annual sales of 1m nine-litre cases within four years of launch in the US.
That said, critics could argue that a brand like Sobieski already has a relatively low price, sitting at the lower end of the premium sector and not in the same league as a brand like Absolut.
Brandes says: "What I would really like to do, if the resources are there - and that depends on the situation with the Belvedere Group and the new shareholders - I would like to take the pricing up and let the competitors be damned, even if we sold below what we do now. I believe our margins would increase."
He adds that such a strategy would clearly only have a chance of success if "we had a serious above the line spending campaign; otherwise it would be extremely risky".
He says that "if more people thought that way, we wouldn't have this predatory pricing going on".
In one sense, then, Campari's Kunze-Concewitz had a point when he voiced concern about price pressure on vodka in the US. But, it's a bigger problem than just one brand, and perhaps it is even a perennial issue for a sector that is inundated with new products annually.
Still, to use a sports cliché, all producers can do is focus on themselves. Those in it for the longer-term can only succeed in such a climate if they can persuade a significant core of their consumers to look beyond basic price tag.
This month's just-drinks management briefing focuses on environmental sustainability in the global wine sector. In part one, Ben Cooper considers the production chain, from grape to glass....
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