SPIRITS UK MARKET: Viva Vodka

With imported whiskey the only brown spirit showing solid growth in the UK, vodka has overtaken blended Scotch whisky as the nation’s favourite spirit, says Ben Grant

The meteoric rise of vodka in recent years has undoubtedly stolen the spirits headlines. There is no question that the category resonates well with consumers and has managed to post impressive and sustained growth figures. Conversely, blended Scotch appears to be losing favour with consumers, registering a gradual decline in year-on-year sales.

Euromonitor figures over the last decade paint a relatively bleak picture for the leading Scotch brands. Total volume of blends has shrunk from almost 82 million litres in 1997 to just over 66m litres last year; that’s a sorry compound annual decline of 2.6%. And the value figures make even less comfortable reading; in 1997 the category was generating sales of £1.77 billion, but this has decreased at a rate of 4% each year so that by last year the segment generated just £1.28bn.

The contrast with vodka, the powerhouse of the white spirits sector, could scarcely be
more stark. The stats indicate that in 1997 the category shifted 47.8m litres, generating value of £1.5bn. By last year Euromonitor recorded that value has shot up to £2.2bn with 74.5m litres of vodka being sold to UK consumers. That’s an impressive 55% representing compound annual growth in volume of 5.7%, while value has held up well registering compound annual growth of 4.9%.

Thus, according to Euromonitor, in just eight years the blended Scotch business has shrunk by 18.9% in volume terms, and value has fallen  by an enormous 27.6%. Meanwhile, vodka volume shot up by 55% with value up
by a slightly more modest, but still highly encouraging 46.8%.

The data from Canadean provides little more comfort for the blended whisky trade. In 2002 the category was shifting over 7.6m cases in the UK; that’s almost a million more than vodka could manage. Only two years later the white spirit had almost drawn level moving 7.3m cases, just 100,000 short of the blended total. Last year, according to Canadean, vodka overtook its rival. And the category appears to be continuing to surge ahead; the forecast for this year envisages vodka outselling blended whisky by over a million cases, with total volume just over 8m cases.

With the two categories generating such a dominant share of total sales of brown and white spirits respectively these numbers appear to suggest a seismic shift in UK consumers’ spirits preferences.

Into the light

Elsewhere in the tussle between white and dark spirits, the divide may not be quite so stark as in the heavyweight category, but the numbers do still tend to stack up in favour of white spirits. Aside from vodka, the most dynamic segment
is white rum, driven almost exclusively by sales of Bacardi. During the past eight years this “one horse race” category has grown volume by 23.6%, while value has outstripped this with an impressive 31.7% rise to £486m. The numbers for gin are rather more modest, but still indicate a category that is moving in the right direction. Annual compound growth of 1.2% volume and 0.4% value took the tally for gin to 29m litres and £709m respectively last year.

Euromonitor’s figures for brandy and Cognac, on the other hand, make less comfortable reading. Volumes for brandy have declined slightly, down 4.2% during the last eight years, but the drop in value has been significantly more pronounced, with total sales down 14.1% to £295m. The story from Cognac is perhaps more worrying, especially given the supposed pre-eminence of premium products in today’s marketplace. The category has managed to boost volumes by more than 10%, but these increased sales have generated paltry receipts, with value down a modest but worrying 2.5%.

There are, of course, exceptions to the rule; after all, the light versus dark spirits debate is not a clear-cut black and white affair. While the blended business appears to be in a rather dramatic nosedive, the other whisk(e)y categories look to be in rude health – suggesting, perhaps, that the failure of blends has been to not provide a sufficiently premium proposition for consumers who are increasingly inspired to trade up.

Single malt Scotch volume has been boosted by 37.5% to 6m litres, however the growth in value has been at less than half this rate, up 17% to £237m. US whiskey, meanwhile, has been one of the spirit world’s biggest success stories. This dynamic segment has more than doubled volumes, but this performance has certainly not been driven by discounting; the total value of sales has almost tripled from £205m in 1997 to £607m last year.

On and off
White spirits naturally tend to lend themselves better to on-premise consumption, while brown spirits have traditionally fared better in the off-trade. According to Canadean, 28% of the total volume of vodka sold in the UK is served in the on-trade, whereas for whisky the number stands at around 17%. The growth of white spirit volume in the off-trade is slightly more modest, but the trend is still very much in evidence.

At Asda, vodka has been the runaway success story, according to spirits buying manager Harvey Lees. However, he reports that the progress of the blended whisky sector has not been as desperate as Euromonitor and Canadean’s numbers might suggest. The supermarket’s top priority has been to push higher-margin branded products with an aggressive and continual promotional strategy. This has generated strong growth virtually across the board; vodka is up over 20% year on year, while blended Scotch has recorded a more modest (but still considerable) 8% growth. The “most disappointing” segment, says Lees, is single malt Scotch, which has increased by only 5%.

The contrast at Waitrose couldn’t be more pronounced. Spirits buyer, Giles Fisher, reports that the top-performing category has been single malts, up by 20%, with Cognac the other “hot” category. Interestingly, Waitrose has not experienced the boom in vodka sales that other retailers have registered. “We never had the growth that others enjoyed in vodka over the last few years. We’ve seen gin move on instead,” says Fisher. He believes, however, that although it has not performed exceptionally to date, vodka still has plenty of opportunity for growth. “With the right brands and activity in place we will start to capitalise on the potential for premium vodka in our business,” he says.

Mass appeal
Tesco, meanwhile, has been riding the crest of the vodka wave. Spirits buyer, Simon Dunn, reports that, “White spirits are growing fastest, especially vodka.” Blended Scotch, by contrast, is “treading water”, posting minimal gains. The Tesco philosophy is, put simply, being all things to all people. “We need to appeal to every single customer in the UK,” says Dunn. “It’s not about just targeting particular demographics, we want to meet everybody’s needs.” 

In order to ensure optimum coverage of market trends Tesco implemented a major review of its spirits business last month. The overarching theme appears to have been adding breadth to the category. Far more lines were added to the mix than were removed, and there has also been a drive to present more references in each location. Intriguingly, Dunn reports that two of the categories that have benefited most from the restructuring are imported whiskey and Cognac.

Asda’s Lees is confident that vodka can sustain its steady march, capitalising on the growing demand for “high-energy drinking occasions”. Younger consumers are increasingly drinking at home prior to a night out; highly sociable and gregarious gatherings, which are better suited to white spirits consumption. Dunn also points out the accessibility of the category, and the fact that white spirits are well suited to drinking with mixers.

While the segment boasts a plethora of excellent products, because of the high incidence of drinking with mixers, light spirit consumers tend to be less discerning than drinkers of dark spirits. Standard references and own-label products are thus far more prevalent. Asda reports that, while some 25% of its blended Scotch is own-label, for vodka the figure stands at over 50%. But according to Lees there is a gradual switch towards premium brands as consumer understanding of the category increases.

Pulling power
Then, of course, there is the marketing factor. White spirit brands have done an exceptional job speaking directly to younger drinkers and positioning themselves as a more valid proposition to a growing demographic. And the RTD-effect has also played an important role; it is certainly no coincidence that the two market leading alcopops, Smirnoff Ice and Bacardi Breezer, have engendered at least a small sense of brand loyalty among younger drinkers.

By contrast, blended Scotch is simply not managing to find favour with new drinkers. The supermarket buyers argue strongly that while leading vodka suppliers and Bacardi have done an excellent job making their brands (and, indeed, categories) relevant to younger drinkers, the blends have most certainly not. “Younger consumers will only buy if there is product differentiation and innovation,” Lees explains. “We’re just not seeing new consumers being recruited into blended Scotch – this may be [due to] the ageing population, but I think that the Scotch industry has not managed to be as innovative with its marketing.” Dunn agrees: “The brands are not doing enough to recruit. They focus on marketing to the existing consumer base, fighting for market share.”

While today’s drinkers are clearly drawn towards lighter spirits in their younger years, opinion is split over what direction their spirits drinking will follow as the years pass. Lees believes that most of the vodka drinkers will ultimately mature to brown spirits, with a relatively small number remaining loyal to premium vodka brands. Dunn, on the other hand, is not so sure that this will be the case.

To talk of the death of brown spirits would be far from accurate, but the numbers clearly demonstrate a seismic shift towards lighter, more accessible and, crucially, well-marketed products. Vodka in particular has ridden a phenomenal upward curve, with more and more drinkers willing to pay increasingly significant prices for premium products, while the non-premium whisky segment has just not managed to engage with today’s consumer. Savvy marketing, it seems, is more fundamental to a spirits brand’s success than its taste profile.

© db November 2006