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Paying your premiums
“standfirst”>The premium vodka market seems to be the height of fashion, but how profitable is it? The Grey Goose sale suggests "very" is an appropriate answer. Dave Broom reports
THE DRINKS STORY of the year so far has been Bacardi’s US$2bn purchase of Grey Goose from Sidney Frank, the largest brand purchase in history.
It confirms that when it comes to spirits, vodka is still where it’s at and, while the price paid is undoubtedly outrageously high, it backs up the belief that super-premium is now a serious andprofitable sector of an enormous market – much of it down to Grey Goose.
It‘s worth recalling Frank’s words when he started out. "A bottle of Absolut sells for US$20 a bottle," he said. "Vodka is just water and alcohol, so if I sold a bottle for $30, the $10 difference is almost all profit."
Grey Goose delivered good margins for producer, distributor and retailer. In 2000 the brand sold 200,000 cases. Last year it topped 1.4m. Not bad for alcohol and water. Even still, in the US, Grey Goose is small potatoes compared to the brand which kick-started the premium category, Absolut.
In the US, V&S had to airfreight extra supplies of Absolut Vanil to New York when demand outstripped supply at the launch, a launch which had seen the firm virtually buy an entire series of Sex and the City in order to blatantly product place the new brand.
Here, Vanil received a few column inches and has virtually disappeared. For once, the UK which usually follows where the US leads – be it malt, rum, or Iraq – has yet to take to premium and super-premium vodka.
Although the UK is a vodka drinking nation – this year will undoubtedly see it overtake Scotch as Britain’s No.1 spirit category – this is the one spirit category which has managed to resist the shift to premium.
Recent Nielsen statistics for the off-trade (see table) suggest that Smirnoff (Britain’s No.1 spirit brand) is approximately 20 times bigger than the sole premium brand in the top 10, Absolut.
In fact, Smirnoff Red is not only growing faster than its premium rival but is outstripping the category. The rest of the top 10 is mostly taken up with tertiary brands. People, it would seem, like vodka but they won’t pay for it.
Nielsen figures in the ontrade suggest a similar scenario, though Gordon Muir, Maxxium UK brand manager for Vladivar has some reservations about the way in which the data is collected.
"The on-trade data comes from an audit of a selection of outlets which is skewed towards ‘traditional’ pubs," he says. "It is light on outlets catering for younger people: high-street bars, nightclubs, and style bars where the majority of premium vodka is sold.
The brands which sell well in these outlets are hugely underestimated – a problem for Absolut, whose sales in the on-trade are actually up 25%." That said, Muir still accepts that vodka’s growth isn’t coming from premium, but the mainstream and tertiary sectors.
Though the lack of penetration of premium and super-premium in the offtrade is noticeable, the "eyes" would suggest the situation is different in the style bars. Every one has a backbar brimming with elegant sleek bottles, but mostly that is precisely where they stay, acting as nothing more than eye candy for the drinker.
For Match Group’s md Jonathan Downey, this lack of penetration of premium is down to two factors: "consumer ignorance – they just want a drink – or consumer savvy – they realise that a Belvedere and cranberry will taste the same as a Smirnoff and cranberry.
It’s probably a bit of both," he goes on. "The first group are design- and priceconscious so they want to be seen drinking in a bar which looks and feels good, but they don’t want to pay for the privilege of doing so.
Those consumers who are into quality and service are savvy enough not to be hoodwinked into believing that a Grey Goose Seabreeze tastes any better than one made with Smirnoff."
Is this lack of premium penetration worrying for brand owners trying to crack the UK market? Not for Justin Bade, UK manager for the New Zealand super-premium, 42 Below. "Vodka drinkers are more educated into what they are drinking," he claims.
"We’re seeing an upsell to super-premium and those people at the top-end, those who are interested in fashion and music are the ones who pass on the trends. I’d say it was a matter of time, there is definitely an increase in awareness."
42 Below is just one of the latest clutch of superpremiums trying to make their way in the UK. In the recent months Diageo has unveiled a super-premium variant Smirnoff called Penka which joins Stolichnaya Elit, Absolut Level, Kauffman, Belvedere, Ketel One and (many) others in this small, though profitable, sector.
"The fact that Absolut, Stoli and Smirnoff are now all in superpremium shows that they are realising it is category," says Bade. "That said, the only brands which will stick are the ones with depth, those which build loyalty rather than relying on the marketing methods of yesterday."
Though there are a host of new and newish brands they are like the thousands of aspiring footballers who, every year dream of playing in the Premiership. Only an infinitely small number will make it.
The rest will be lucky to get as far as a trial with Partick Thistle. Will things change? Can super-premium grow the same way in the UK as it has in the US? Not until there is a significant culture change, says Bade.
"In the US, consumers call spirits a lot more," he says, "and by doing so they become educated about brands. Here, people ask for a vodka and tonic and get the pouring brand." To make matters trickier, there is a growing boredom with vodka in the top-end bar trade where mixologists are sick of being sold yet another super-premium vodka brand often with spurious credentials.
42 Below is meeting this growing cynicism head on with its Vodka University. 200 bartenders attended the first session and the brand is now in 150 bars in London. "The key to our success has been spending a lot of time with the bartender, building long-term loyalty and having a product with a clear point of difference," says Bade.
"We can talk up the fact it’s the only one from the southern hemisphere, its purity." Ah yes, purity. Vodka’s greatest asset is also potentially its Achilles heel. From the moment Smirnoff first appeared in the US it was sold as a spirit with no aroma, something which couldn’t be smelled on your breath.
Vodka is light, it is mixable – those are its greatest assets, but they are the very things from which consumers can also infer that vodka is neutral. Why bother paying more money for an expensive brand if it doesn’t taste of anything?
"There is a perception among consumers that vodka has no flavour," says Muir, "and our research with Vladivar suggests that 95% of vodka is drunk mixed, so the flavour of the vodka itself is certainly diluted.
Many mainstream vodka consumers take the view that as long as their vodka is ‘good enough’, there is little point in paying much more when the end drink will taste of Coke, Red Bull or Cranberry Juice." That’s a pretty bleak outlook for premium and superpremiums.
"Anyone who says vodka tastes of nothing is wrong," says Bate, "but this is part of our major educational job. It is crucial to get that message across." But suppose you do upspend to a premium brand.
If you, a vodka amateur, can’t necessarily taste the difference then how can you impress your fellow drinkers? As Downey points out premium consumption is primarily conspicuous consumption. These consumers are into bling and no spirit is more bling than vodka.
"That’s the problem," he says. "When they order a vodka what do they get? At best, a glass with a clear liquid in it. How can they tell people that they’re drinking Belvedere and tonic? Vodka has to realise that it is working in a celebrity obsessed market – it needs to sell the bling.
If I order a bottle of Krug in a bar they give me the bottle in an ice bucket and everyone can see me. If I order a premium vodka, I get a glass of vodka." That matters.
If image is so important, then the issue facing the premium and super-premium sectors comes down to selling the brand. "Designer trainers don’t make walking any easier," says Muir.
"Functionality isn’t the whole story. Brands are important to people, helping them to express themselves and their personality, so it is vital for the continuing health of the category that the big mainstream brands continue to invest in this area."
Premium and superpremium are new categories and there is undoubtedly a time-lag between the US and the UK. That said, the brands operating in these sectors need to address the issues raised if they are to succeed in the long-term.
They will, because as Franks showed there’s money to be made in alcohol and water. Lots of it.
UK off-trade top ten spirits brands (AC Nielsen)
Value to June 2004 (£m) % change vs 2003
Smirnoff Red 149.9 +14
Glen’s 80.7 +15
Chekov Imperial 19.3 +18
Royal Czar 17.2 +124
London Gin Distillers 14.7 +7
Vladivar 13.8 +16
Landmark Prince Consort 10.4 +2
Red Square 8.5 +16
Absolut 7.7 +3
Smirnoff Blue 4.8 +65
Total £571.4m +8