WHITE SPIRITS – VODKA: The world is not enough

Vodka continues its inexorable rise throughout the globe, with key emerging markets, such as India and China, apparently within its grasp. By Ben Grant

When it comes to examining key emerging vodka markets, perhaps the most difficult question is: where on earth to begin? The past decade has seen this most flexible of spirits spread its reach around the globe, surging into virtually every market and notching up phenomenal growth in almost every territory it has conquered. The dramatic acceleration of sales has come as the category has swept aside the traditional stalwarts of brown spirits and local specialities. When attempting to discover where vodka is performing well, it’s actually probably easier to chart the markets where the category is not generating impressive growth, for such markets are few and far between.

There are various factors that have generated vodka’s success, and intriguingly they tend to be diametrically opposed. Accessibility has undoubtedly played a part: while other spirits trade on the complexity of the flavours they impart, vodka is proudly unobtrusive, making it a logical selection for palates that don’t want to be tested; yet the rich variety of distinct flavours at the high end have been critical in the category’s sustained momentum. Then there’s fashion: the explosion in popularity in the US three decades ago came about because the unashamedly stylish spirit was embraced by trendy city slickers, and as the category has penetrated each new market, the fashion factor has certainly played a part; yet provenance and rich heritage have played an equally vital role.

These are just a few of the features to which we can attribute the runaway success of vodka – but they all perfectly illustrate the category’s principal appeal. The inherent flexibility of vodka makes it attractive to a spectrum of consumers far broader than any other spirit. It can be adapted, chameleon-like, to suit the environment. And it is this quality, more than any other, which has made it an increasingly appealing selection for ever more drinkers, resulting in strong growth around the world.

Anecdotal evidence suggests that the category is on the up in virtually every territory: emerging markets are registering vigorous, fast-paced growth (albeit from a small base), while even the long-established regions where volumes are already sky high are still managing to keep the category on a steady upward curve. But, while territories around the world are performing well, the identity of the markets that are registering the most dynamic growth should have the vodka suppliers rubbing their hands together with glee. According to Euromonitor figures, France, India and China all feature among the five fastest-growing markets. And while the latter two countries are operating from a pretty small base, the potential for future growth is simply stratospheric. After all, they are home to not far shy of half the world’s population.

Chinese whispers
It will come as little surprise to hear that China is one of the fastest-growing markets for vodka, with the total value of sales tripling to US$97.4m in the three years to 2006. After all, as Stolichnaya brand organisation president Iain Jamieson points out, “Every [category is] focused on China at the moment, and Scotch and Cognac are already very strong.” This focus on the market is well warranted because, says Vodka World CEO Rey Karpf, “the Chinese are very open to all types of spirits”. But the inspired performance of vodka in recent years gives plenty of reasons to believe that vodka could be destined for greatness.

The rapidly emerging middle class is fixated by Western perceptions of luxury, and when individuals become affluent enough to purchase non-essentials, they are instinctively drawn to imported products. However, such goods do not necessarily fit in with their traditional tastes and preferences. The growth of brown spirits – pioneered by Chivas Regal and leading Cognac houses – has been impressive, but these products are a far cry from traditional favourites. Which begs the question: are these purchases inspired by an appreciation of their taste, or their prestige?

The question of taste is not an issue that the vodka brands need to face up to. Chinese consumers are used to drinking strong, rice-based white spirits – making the shift to vodka a far less intimidating leap. Jamieson is also quick to point out that a number of players are positioning their vodkas at the top end of the market, meaning that the category can play the prestige card just as effectively as the brown spirits brands. “China is brand driven, not category driven,” he says, “so consumers will gain an understanding of the category by interacting with brands.”

The key to success is therefore establishing a strong distribution network – but in the world’s largest country, this is no simple task. The key to building brands in China is similar to elsewhere – seeding the product in the top on-trade outlets in the major cities. As a result, a number of brands are concentrating their activity on “doing a lot of education work, explaining the category to bartenders and making them aware of the cocktail culture in the aspirational cities like London and New York”.

Gallic spirit
The rate of growth of the vodka category in France – up 72% by volume and 75% by value during the past three years, according to Euromonitor – has been impressive. But the fact that the category is performing well will come as little surprise. After all, although they’d never dream of imbibing another nation’s wine, when it comes to spirits, the French are distinctly international in their outlook. And it’s a rule of thumb that is borne out in the vodka category itself: French-ness has played a key role in making Grey Goose a sensation in other markets – but at home, the brand has had relatively limited impact, and it certainly doesn’t trade on its provenance. Diageo’s Cîroc, meanwhile, scarcely even registers on the French radar.

The French have traditionally had an enormous thirst for Scotch and pastis, but vodka has been making dramatic progress across the board in recent years. “The growth rate has been very quick,” says CEDC sales director Iain Grist, “you can really sense the changing trend.” He argues that the principle driver behind this shift is the fact that the historically introspective French are increasingly international in their outlook. “There is more interest in global magazines and culture [leading to] an interest in this global, dynamic trend.”

As elsewhere, the early growth has been focused on the on-trade, which commands upwards of 90% of total value sales. There are signs, however, that the category is gradually making inroads into the off-trade. But, rather less encouragingly, it appears that there is a significant tendency towards products at the lower end of the price spectrum (albeit with a focus on low-cost brands like market leader Eristoff, unlike the UK tendency towards cheapo own-label offerings). “At this stage, there appears to be a real focus on products that offer value for money. This means consumers are very fickle and have little brand loyalty,” he says.

In such circumstances, Grist is correct when he points out that the category is driven by younger consumers purchasing low-price vodka.

However, the evolution in more developed markets seems to indicate that there will gradually be a shift towards slightly more mature drinkers buying into more sophisticated (and expensive) brands. It’s an emerging trend that is already under way, according to Russian Standard Western Europe CEO Chris Lucas. “People thought it would just be a classic generation shift, with the young people moving away from their parents’ choice. But, while we are indeed seeing many young people going straight into vodka, there’s also lot of older consumers shifting from Scotch.” He ambitiously predicts that “it’ll take less than 10 years for vodka to dominate the French market.”

Indian summer

Given the strong tendency towards brown spirits – a phenomenon that has the top Scotch brands scrabbling to crack into the market – it may come as something of a surprise that vodka is also on the rise. But, while this trend is still very much in its infancy, there is undoubtedly a shift towards the spirit, with the value of sales virtually doubling since 2003.

United Spirits, the liquor arm of the UB Group, has a vice-like grip on the market; capitalising on the grossly unfair, protectionist import duties to give it a massive competitive advantage. According to company president Vijay Rekhi, white spirits only account for some 5% of the spirits market – but that’s still more than eight million nine-litre cases, and growing fast. “Vodka consumers tend to be young, fashion conscious and live in the first-line cities.” Seeing as the country boasts a population of more than 500 million people under the age of 25 – pretty much all of whom aspire to this idyllic, urban lifestyle – the room for growth is almost immeasurable. Given the strict advertising rules marketing is a challenge, but as the box (left) explains, celebrity endorsement is becoming a major factor in driving the category.

However, it is not just the young city-slicking elite who are turning to the category. According to Rekhi, there is also a major opportunity for the category among “people who do not wish to make it obvious that they are drinking, or to smell of alcohol… there are taboos and cultural reasons why people don’t want to be identified as drinking alcohol – this is true in many parts of India.” The category’s odourless, flavourless quality is thus playing a major role in opening up new opportunities.

From an international perspective the market is, of course, riddled with the complicating factor of the steep taxation structure. As Andreas Berggren, V&S Absolut Spirits vice president international, explains, “India is certainly one of the markets that we are very interested in, but the import duty makes this very difficult.” For his part, Rekhi magnanimously declares that “there is plenty of room for the international brands”, though for the time being, UB is sitting pretty with an incredibly dominant position in the market.

The massive acceleration in demand has been both the cause and the consequence of the staggering number of new brands entering the category. From the Netherlands to New Zealand, vodka is now produced in a vast number of countries, and barely a day goes by without a new brand hitting the market. The lack of any codified definition of the category combined with the (relatively) simple and speedy production process means that the supply is unlikely to struggle to keep pace with demand. And it’s good thing too, because if the rate of growth continues in China, India and France – let alone the rest of the world – then the bright star that is vodka will continue on its inexorable rise.

© db November 2007