Brown-Forman strengthens its position in premium vodka
With Brown-Forman increasing its stake in Finlandia Vodka Worldwide (FVW) to 80%, Euromonitor looks at how it will access strong growth potential in the dynamic premium vodka sector, and considers its next move.
Owned by Altia Group Oy, Brown-Forman first gained the distribution rights to Finlandia in 1996 for the US, expanding to most world markets in 2000. In the US volume sales have increased by over 20% per annum since 1996, with a rise of 28% in 2001 making it the country's fastest growing vodka.
Finlandia has benefited in the US from the increased popularity of vodka as a mixer, with the sector achieving an average annual growth rate of over 3% between 1997 and 2002, almost double that of the spirits market as a whole according to leading global market analyst Euromonitor. In comparison to this value growth rates for vodka have been even higher at over 5%, representing the shift in consumer tastes towards super premium spirits.
Despite being priced in the standard vodka bracket, Finlandia has used marketing initiatives, notably targeting college graduates aged 25+ and establishing itself as James Bond's vodka of choice, to position itself as a premium product. Its growth in comparison to the decline in 2001 of its Scandinavian counterpart Absolut, is testament to the success of this super premium differentiation.
Skyy vodka is a good example of what can be achieved in this market - only introduced in 1992 it experienced phenomenal growth to become the eighth largest selling vodka within 10 years, with sales now approaching 12 million litres. With Finlandia's sales being some 15 times lower than those of Absolut in the US, Brown-Forman plans to devote more resources to achieve the brand's potential - even as the competitive environment gets tougher with more premium brands from Eastern Europe making their way into the US market.
In 2001, 26% of Finlandia's volume sales were generated by North America, which also contributed almost all of the 8% increase at world level. Undoubtedly North America will remain a key focus for the company, but gaining global ownership of the brand will also see Brown-Forman co-ordinate its efforts to improve sales internationally.
Although globally, the world vodka market is set to shrink between 2002 and 2007, at an average of 1.2% per annum, this is principally due to Russia, which accounts for 66% of global demand. Other regions, most notably Western Europe and to a lesser extent Asia-Pacific, are set to grow at a healthy pace.
However, Brown-Forman face challenges to growing Finlandia globally. Finlandia aside, the company itself is still overly reliant on North America, which prior to its recent acquisition accounted for over 70% of the company's spirits volume sales and has now only decreased slightly to just under 69%.
Furthermore it has not invested in an extensive international distribution network, traditionally pursuing instead a strategy of partnership based on forging a number of agreements and joint ventures.
To redress this, Brown-Forman has nurtured strong links with Bacardi. In April 2002 it announced the establishment of the Gemini Alliance - the result of a distribution agreement between the two companies in the US, which has since been effected in Mexico and the UK.
The likelihood is that this strategy will be extended to other major markets where both companies already operate. Both have enjoyed close ties since the failed joint bit for Seagram's wine and spirits assets in 2000, and speculation has been rife about a possible merger, although Bacardi's family ownership represents a significant barrier.
Buy or be bought?
Finlandia is an important addition to Brown-Forman's portfolio, giving it access to the growth premium spirits sector, and improving its position in an increasingly consolidating market. It also allows it to diversify away from its reliance on whiskey and liqueurs through its two core brands Jack Daniel's and Southern Comfort.
However, even after the incorporation of Finlandia, it will only achieve a ranking of 15th and as such its spirits division is still vulnerable to a take-over bid. If it is ever to challenge industry leaders, notably Diageo, it might find a merger is its most viable option, with Bacardi the most likely candidate.
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