Ready-to-drink brands (RTDs) have been likened to their more controversial precursors, the alcopop brands of the 1990s which enjoyed strong growth, like RTDs, but then slumped. With leading RTD players reporting a drop in sales over the past 12 months, Ben Cooper asks if history is about to repeat itself.


The news that Diageo‘s sales of ready-to-drink (RTD) brands fell by 3% over the past 12 months has raised the serious prospect that the bubble has burst in a sector which, thanks to its strong performance, has become increasingly important to major drinks companies in recent years.


Given that RTD brands are descendants of the “alcopop” brands on the 1990s whose day also came and went – and went in rather spectacular fashion too – some have suggested that the likes of Bacardi Breezer and Smirnoff Ice could be set for further problems.


However, there are important reasons why the current slump in RTDs differs from the collapse of the first wave of “alcopops”. In the first place, the slowdown in RTD sales reported by both Diageo and Bacardi, the two majors most involved in the sector, needs to be seen in the context of the rise in excise duties on these brands which came into effect in the UK in April 2002.


“The category has definitely suffered since the budget increase in April 2002 and has been significantly affected by the increase in the duty,” industry analyst, Pat Brazzier, told just-drinks. “The category as a whole has suffered and the major brands have suffered the most.”

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The excise increase was about 60%. Prices were increased which hit volumes and there was also a rush by retailers to buy ahead of those increases. But the negative comparisons with 2002 should ease somewhat in the second half and some analysts are predicting a return to modest growth for the RTD sector in 2004, though the growth will be nowhere near as strong as it has been in previous years.


Nevertheless, fundamental questions are now being asked about the long-term potential of the RTD sector and the exposure of major companies, notably Diageo and Bacardi, to a fashion-conscious and notoriously fickle market.


In one sense, when it comes to marketing to the 18 to 25 age bracket, major drinks companies can’t win. As 18 to 25 year-olds are aspirational and relatively high-spending consumers, drinks companies have to target them. If they are successful, as Diageo and Bacardi have been, some will then say that they are over-exposed to a highly volatile and fickle marketplace.


In 2002, Diageo derived around 12% of its net sales from RTDs which in comparison with Allied Domecq and Pernod Ricard is high but Bacardi-Martini has the highest exposure with around 17% of sales coming from ready-to-drink brands.


However, this is where another key difference between the RTD sector of today and alcopops of the past becomes critical. Quite deliberately, brands such as Bacardi Breezer and Smirnoff Ice are themselves extensions of flagship spirits brands. The idea is that if and when consumers graduate from RTDs, they are more likely to move to the parent brands such as Smirnoff and Bacardi, or one of the many other spirits brands which has spawned RTD offerings, particularly in the US.


This use of RTDs or malternatives in the US to bolster the consumer image of mainstream brands has become an accepted strategy for spirits brands. However, it is possible that the fact that today’s mainstream RTDs are badged with “adult” spirits brandnames rather than the cartoon figures seen on alcopops, and are generally perceived as more serious and less controversial products has lulled the major drinks companies into a slight sense of false security. RTDs may not be “alcopops” – as the virtual mantra of spirits companies constantly assures us – but they are still appealing to the same consumer base.


While Smirnoff Ice may carry the weight of one of the world’s biggest selling spirits brands, this by no means negates the fact that it is appealing to a highly capricious and promiscuous consumer base. While a considerable proportion of the current downturn may be attributed to the excise increase, there are other contributory factors.


The price premium of RTDs to beer brands, around 20% to 30%, is thought to have played a part but most critically analysts believe that consumers simply tire of the brands as they become ever-present and dominant. This market by its very nature will look always for something new.


This means that in spite of their dominance and huge leverage, companies like Diageo and Bacardi are more exposed to competition from smaller players in the RTD sector than in other core spirits markets. In the UK, there are thought to be around 100 RTD brands with some 350 product variants.


To a degree, the majors have been countering this with new product development, refreshing their brands with new flavours and variants such as Smirnoff Black Ice and Bacardi Breezer Diet Lemon. It is clear that to remain ahead of the game in the RTD sector requires regular new product development. One analyst reckoned that the likes of Smirnoff Ice and Bacardi Breezer would have to introduce a major new variant every 24 months to keep demand stimulated.


The critical question, on which a recovery in 2004 and 2005 may yet hinge, is whether the sector has reached saturation point with regard to new flavours and variants. If it has it could be that this faddish, image-led market is already looking for something else.


Furthermore, the major companies in the sector have another conundrum. Because their RTDs are designed also to be pathfinders for their core spirits brands, the likes of Diageo and Bacardi will not want to stray too far away from their core brand identities. And it remains to be seen whether simple variants to the Smirnoff Ice and Bacardi Breezer brands will be sufficiently differentiated to stimulate consumers or if more substantial new launches might have to be considered in order to sustain growth.


However, the RTD brands do still appear to have some product development cards up their sleeves. For instance, packaging innovation may hold a key to growth for the RTD sector. Diageo has introduced Smirnoff Ice on draft in Scotland while the introduction of individual shot formats is also being tried. Multi-packs have also been a successful innovation in the off trade. Other diet, low-cal options are also a possible route to growth as are “shot” extensions.


Pat Brazzier believes that RTD brands have possibly been too focused on the female market and some of the current slump can be attributed to the loss of male consumers. He believes the recent launch of Smirnoff Ice in a can was partly induced by this trend and that other similar product innovation could bring more male 18 to 25 year-olds back into the sector.


It has also been suggested that pricing-led initiatives, bringing RTDs closer to a par with beer pricing, could re-energise the category. In any case, just like alcopops before them, the big-selling RTDs are vulnerable to cheaper “me-toos” and general price-led competition. This is another area where smaller competitors can cause a disproportionate amount of trouble for the bigger companies. As one analyst put it: “In tough times the additional noise created by smaller players can be a nuisance to major companies and means they have to spend more on advertising and promotion. Your marketing can get lost in the white noise of the sector.”


However, in spite of the current difficulties, it would appear that today’s RTD market is qualitatively different from the boom and bust alcopop market of the 1990s and there remains some medium to term growth potential for the sector. Currently, the sector is around 5% of the size of the beer and analysts forecast that this could be pushed in the long term to around 6.5%. The poor comparables with last year caused by the excise hike will ease during the second half of 2003 and there could be low single-digit growth in 2004.