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Why the usual vodka suspects will have to sit out the short-term in the US - Comment

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What are the prospects for vodka in the category's vital US market? Spirits commentator Richard Woodard takes us back, to look forwards.

Growth for vodka in the US is being driven more by brands like Titos Handmade Vodka than the usual suspects

Growth for vodka in the US is being driven more by brands like Tito's Handmade Vodka than the usual suspects

It's been a decade since the world teetered on the brink of economic meltdown - months of chaos, punctuated by high-profile corporate failures, with even bigger banking collapses only prevented by government bailouts which taxpayers are still paying off to this day. For many, the tipping point came on Monday 15 September, 2008.

On the morning that Lehman Brothers came crashing down, I happened to be in France, researching a report into the state of the Champagne industry for just-drinks. That week, as I moved from meeting to meeting in the well-appointed offices and boardrooms of Reims and Epernay, one thing was glaringly obvious: nobody had a clue what was going on, or what was going to happen next.

I get the same kind of feeling today when I look at the US vodka market. Not in the sense that I think it's going to implode in the way that consumption of upmarket French fizz did during 2008-9; just a similar sentiment of uncertainty and puzzlement.

Whether you're a bull or a bear about vodka Stateside, you can find ammunition to back your optimism/pessimism. Just take a look at the latest Global Vodka Insights report from just-drinks and the IWSR. Vodka hit a record high in the US in 2017, with total volumes moving up 1.4% to 75.8m cases; excluding low-price and value products, the increase was a fractional 0.5%, but the 52.5m-case total was another record for the category.

According to the IWSR's forecast data, by 2022, the US will be selling an additional 3.3m cases of vodka (ex-low price and value) a year, compared to 2018 levels.

No other market in the world comes close to those numbers.

The bears have their day when you take a closer look, though. Of the top ten brands, only three - Tito's, Svedka and New Amsterdam - posted gains last year (and those of Svedka and New Amsterdam were relatively trivial). Whatever their other merits, all three brands are price fighters, with value-for-money a key part of their appeal.

The other seven - Smirnoff, Absolut, Skyy, Pinnacle, Grey Goose, Ketel One and Stolichnaya - would be considered the glossy, marquee flag-bearers for a highly profitable vodka category. All fell in 2017; in some cases, dramatically.

This is an inversion of what's happening with gin, where growth at the top-end is creating a more lucrative category and casting a beneficial halo downwards. Gin's old, low-priced and volume-driven brands are the ones taking a battering.

Why is this happening to vodka? Partly, it's about scale. It's been more than three decades since vodka took the lead in the US spirits market, overtaking staid old American whiskey (remember those days?) with a 20%-plus share of overall volumes. In the years that followed, growth was never less than steady, and often spectacular. Market share passed 30% a decade ago, peaking at 35% in 2012. In 2017, it was still as high as 33%.

Does anyone seriously think that, in today's highly-diverse and -fragmented US drinks scene, one spirits category can continue to command more than one-third of the market in the long term? Anyone?

Vodka's problem is not one of consumption declines, but of lagging the market

For the moment, vodka's problem is not one of consumption declines, but of lagging the market. Or, to be more precise, lagging the market when more supply is being loaded into the front end. Last year, there were more active vodka brands than ever in the US - more than 300, in fact.

More brands… declining market share… is it any wonder that, as a result, competition among vodka brands has intensified, leading to price deflation and a discount-driven mentality?

The reasons for the rise of Tito's go beyond price, exploiting a more subtle consumer shift that eschews glitz and allure in favour of something more homely and authentic-feeling. But, that in itself is hardly an argument in favour of higher-priced products that seem to favour style over substance.

There are pockets of optimism. Flavoured vodka is still in the midst of medium- to long-term decline, but at least some recent innovations have displayed more maturity in their choice and sourcing of new flavours, as if in reaction to the shark-jumping hubris of the segment's peak in 2012/3.

There's a belated nod to provenance from imports like Belvedere and Absolut, and imaginative initiatives such as Hangar 1's exploration of fusing spirit with California wine grapes. After all, what is vodka if not a blank canvas on which to explore outside-the-box creativity?

But, the bigger picture is one of a category that, while it may continue to grow in volume terms, will do so more slowly, and less lucratively, as time progresses.

No brand encapsulates these changes better than Absolut, the (literal) poster boy for vodka's inexorable ascent in the US. After years of false dawns and strategic rethinks, brand owner Pernod Ricard has finally signalled that it won't be throwing good money after bad.

"Now, we're not going to over-invest [in Absolut] for the sake of over-investing behind the brand," said CEO Alex Ricard recently. The company has also indicated that it won't be pushing through price increases on the brand.

In the current environment, how can it?

Less investment; deflationary pricing in real terms; it would be a rank exaggeration to say that the company is giving up on the US vodka market for Absolut, but there are better places for it to spend its money.

In Pernod's last financial year, sales outside the US accounted for more than half of Absolut's global revenues for the first time, thanks to a 4% decline in the country and a 6% gain in the world outside.

I'm reminded of the company's ruthless treatment of Chivas Regal when the boom ended in China: Pull investment from Chivas, prioritise Martell, and put up with the inevitable sales declines that followed. Only when the market looked rosier last year did Pernod ramp up investment behind Chivas, and guess what? Sales recovered.

The vodka brands primed for growth in the US have a very different character and business model to the likes of Absolut and Smirnoff

The problem for vodka in the US is that I don't see the same long-term positivity that was obviously still there in China, for all its short-term challenges. The vodka brands primed for growth have a very different character and business model to the likes of Absolut and Smirnoff, let alone Grey Goose, Cîroc or Ketel One.

Others will make the running now, and the category's former vanguard may have to sit on the bench and wait things out for several years or more. It's a scene that's almost unrecognisable from that of a decade ago, but at least vodka's vast American consumer base makes the category too big to fail.

Then again, we've heard that before.


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