Research - Vodka marketers may find the frugal habit hard to shift

The recession has prompted trading down in the spirits market, even putting the brakes on the seemingly ever-increasing premium vodka category. With reference to a new IWSR/just-drinks report, Ben Cooper examines whether the new frugality seen among vodka drinkers will remain when economic conditions improve.
 
The rigour of the downturn notwithstanding, vodka has been the star performer in the spirits market for many years. Not only is it the largest category with sales of 512.7m cases but it has maintained a compound annual growth rate of 3.5% for two decades.

Not surprisingly, however, the downturn has caused an interruption in that growth trajectory and, according to figures and forecasts in a new just-drinks/IWSR report, the market is set for a period of slower volume growth in the post-recessionary period. 

The report, Global market review of vodka - forecasts to 2014, predicts that having risen from 485.8m cases in 2004 to 512.7m in 2008, the global vodka market will fall back to 501.7m cases in 2009, falling further to 496.0m cases in 2010. Indeed, volumes are forecast to stay around the 494m to 495m case mark until 2014.

The report also points out that the premium end of the market in the US, for so long the jewel in the crown of the vodka category, is under pressure. "In the US, there are signs that premium-and-above purchasing is softening," the report states. Super-premium vodka sales rose by 2.3% in 2008 to 5m cases, well below the five-year CAGR for the US of 17%, while premium fell by 1% to 11m cases, compared to a five-year CAGR of 5%. Meanwhile, standard-priced vodkas rose by 12.5% and low-price brands increased by 0.58%. 

In spite of the received wisdom that because premium spirits are an affordable indulgence sales hold up better in a downturn than big-ticket items like cars and holidays, the reports suggests pressure on discretionary spending has caused consumers to become more conservative in their brand choices. "Consumers are less willing to experiment with new premium brands and are instead moving back toward tried-and-tested brands," it states.

The recession has also given premium vodka marketers another problem. Premium and super-premium vodka consumption is skewed toward the on-trade, but in many key markets, notably the US and UK, there has been a shift in consumer purchasing from on-trade to off-trade channels. "This venue shift also implies consumers are trading down to some extent," the report states. "Consumers who are drinking at home tend to be less concerned about purchasing status brands." 

Trading down is hardly surprising in a recession. But the worry for vodka marketers is that some believe the new frugality could be permanent rather than a temporary blip.

Research by Rabobank suggests some consumers who were once prepared to buy premium products have now become focused on value and may be less prepared to resume their premium spending habits after the recession.

"An economic recovery would help loosen up consumer purse strings and improve some of the consumer confidence levels," says Rabobank's food & agribusiness research and advisory executive director Stephen Rannekleiv in the report. "But many of the pre-recession spending trends were somewhat unsustainable. I think consumers have changed. 

"Food and beverage companies need to be prepared for more frugality from consumers," Rannekleiv continues. He believes that frugality could be an important consumer trend for the next five years, citing increased savings rates among consumers. As the economy turns around, consumer confidence may increase, spurring higher spending, but consumers may not return to past levels of spending owing to heavy indebtedness and changing social mores. 

Rannekleiv says even if an improvement in the economy brings back "a strong level of consumer confidence" this may not mean a return to spending patterns seen before the recession. "I think consumers have changed," he adds.

Research conducted at the University of Leicester suggests the recession has brought with it a new 'economic ethic', with conspicuous consumption losing some of its allure. In the alcohol business, the report suggests, this could result in less 'badge drinking'.

"Experiencing harder economic times, consumers' desire to differentiate themselves via the exhibition of luxurious brands will be suppressed by financial constraints, social awareness and ethical considerations," says the report's author, Georgios Patsiaouras. "Sliding into the depths of a global financial recession, the levels of heightened materialism and ostentatious economic display will be reduced."

Patsiaouras suggests a new type of consumer will have emerged when economies have recovered. "Perhaps a 'moderate' consumer who distances himself from excessive and ostentatious consumption activities will emerge as an archetype of advertising strategies," he says.

Brand marketers are understandably scornful of such pessimistic prognoses, suggesting that the market will recover as it has from previous downturns. "There is no collapse of the premium segment. There is a slowdown, but not a collapse. We believe premium brands will continue to be the future," says Thierry Billot, deputy managing director in charge of brands at Pernod Ricard.

Another reason why vodka marketers may be more sanguine about the future in spite of worries over the premium recovery and the volume growth projections for the next five years, lies in the potential of emerging markets.

"Perhaps the greatest cause for optimism is the recent performance of the so-called BRIC markets," the just-drinks/IWSR report states. "While Russia is obviously an established and vast vodka market, the recent growth in India and Brazil has been impressive. Sales in China are small today, but the potential is considered to be enormous given the size of the indigenous white spirits market. Twenty years from now it would not be surprising if these were the four largest global markets."

Vodka sales in India rose from 1.23m in 2004 to 4.80m cases in 2008, and are forecast to reach 8.44m cases by 2014. Meanwhile, sales in Brazil are forecast to increase by 72% to 7.3m cases by 2014.

So while there may be question marks over whether the premium vodka category will resume its meteoric trajectory after the recession, vodka marketers can at least be certain that plenty of new consumers will be coming through during the next five years.