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LUXURY: VODKA – Pure profit

20 December 2007 By db staff writer

While premium whisky trades on age, heritage and scarcity, how does high-end vodka, with its connotations of neutrality and purity, justify an elevated price point? Richard Woodard investigates

It’s a function of free market economics that a product is worth whatever the end consumer is willing to pay for it. And to inform that buying decision, we look for certain signposts as indications of quality or scarcity to justify the expense.

It’s easier at the luxury end of some drinks categories than others: paying $12,000 for a bottle of single malt whisky looks obscene, but when that single malt is 55-year-old Macallan encased in a limited edition Lalique crystal decanter, that eye-boggling price tag starts at least to make some sense. Even leaving aside the desirability of the Macallan and Lalique brands and the cost of the packaging, that simple number – 55 – is an indicator of scarcity and perceived quality. Any whisky maturing since Sir Winston Churchill was Prime Minister ought to be pretty special.

But how much would you pay for a bottle of vodka? A product which trades mostly on purity, not flavour? A product that by its nature is unaged? How do you judge quality and value then?

These are the issues which the ever-growing number of high-end vodkas in the UK market have to address. And, just as vodka has myriad sources – from beet to potatoes to wheat to rye – brand owners have a multiplicity of answers to these key questions.

Breaking the mould

Distinctive, sculpted packaging is an essential part of the mix if you’re to persuade consumers to pay £30 or more for a bottle of vodka. For some years, the frosted bottle championed by Grey Goose, Belvedere and others was de rigueur, but brand owners are increasingly looking beyond that template to explore more innovative designs.

Kauffman’s eye-catching bottle (Is it a bird? Is it a flower?) is a USP in itself, but it comes at a price, with the original mould for the one-litre bottle costing well over US$100.

Meanwhile, it took The Brand Distillery 18 months to find someone able to turn its sinuously curving design into reality. “One company said they would have to hand-blow every bottle,” recalls commercial director Nick Kirkpatrick. “Quite apart from the cost involved, we worked out that if sales reached 1m bottles a year, it would take them seven years to make one year’s stock!”

For Neil Mathieson, managing director of Kauffman importer Eaux de Vie, the distinctively-packaged Russian vodka ticks all the boxes associated with the likes of single malt Scotch or small-batch Bourbon. “It follows the same trends – it’s small-batch, single distillery, single vintage,” he explains. “What we don’t have is age because there’s no point in ageing vodka.”
Others are turning the tables on vodka’s traditional associations with purity and neutrality by making taste central to their brand message. David Flockhart, managing director of Fluid Brands, importer of Oval vodka from Austria, believes this is a subtle process.

“Taste differences are minimal, but I think smoothness is key,” he argues. “Rough equals poor quality, and it’s important that that smoothness is done in a natural way during distillation, rather than with the addition of glycerine or sugar.”

Does provenance have a place?
Nick Kirkpatrick, commercial director of The Brand Distillery, owner of U’luvka, agrees: “The taste is very important because certainly in the US and over here in the top bars, they’ll be using these vodkas for Martinis,” he says.

Then there’s provenance. We all know where Macallan comes from – its source could hardly be clearer and more fixed to one spot on the globe – but in an era where Smirnoff (perceived by most consumers as Russian) is produced in Scotland, can vodka have heritage or provenance value?

Opinions vary wildly here. John Jeffrey, UK brand director of Croatia’s Akvinta, argues that provenance is “not very significant”, as it only matters to certain consumers; and Flockhart agrees. But Mathieson argues that Polish and Russian vodkas have a true heritage card to play.

“Vodkas have flavour profiles – wheat, potato, rye (as in Belvedere),” says Alex Field of Belvedere Vodka. “They also have provenance – Polish, as in Belvedere; Russia; Iceland; and even New Zealand these days. I would argue there is still some way to go in educating the consumer in terms of provenance – but the trade see flavour profile and provenance as being a very important factor when choosing their vodka. They will often want to go to the country where it is made, discover the different production methods, and compare the flavour profiles to other vodkas.”

That’s a view echoed by Matthew Du Cann, UK brand director of Kazakhstan’s Snow Queen, who believes the continuing education process of the trade and, through them, the consumer, is crucial.

“We and all of the big brands have in the last couple of years been educating people, training people and also doing tastings – something that never really happened before,” he says. “For some reason, if people ask for a straight vodka in this country, they’re treated almost as an alcoholic.

“But if you’re going to spend £27 a bottle, you really want to know where it comes from, that it’s got heritage and authenticity. People these days want to know how their brand was made and where it comes from.”

Larging it

Magnums and even jeroboams of vodka are an increasingly common sight in some of the top clubs and nightspots of London’s West End – but do these accomplish anything beyond cementing vodka’s bling reputation for putting style above substance?

Clearly, by their very magnitude of these bottles helps brand visibility, with Akvinta’s John Jeffrey hailing them as “great pieces of POS”, while Belvedere’s Alex Field says the clubs “love them”.

“It’s presence really,” points out Snow Queen brand director Matthew Du Cann. “Because of the minimum spend in some clubs like Movida or Tramp these days, people are buying bigger bottles of Champagne. So we literally responded to demand in the first six months of being on the market.”

Or, as Jeffrey puts it: “Consumers love to share a bottle with their friends, as well as expressing their style and wealth. If they can buy magnums of Cristal at £1,000 a bottle, why not a magnum of super-premium vodka?”

Which brings us to pricing. As Mathieson explains, deciding where to pitch your brand in terms of pricing is a delicate business. “There is a ceiling there, but I don’t know that that ceiling does anything other than change the volumes,” he says. “The value to price ratio increases or decreases depending on the price. We don’t expect volume, so we’re not disappointed if we don’t get it. And the value is dictated by the guy who buys it at the end.”

Relative pricing
Jeffrey, meanwhile, defends vodka brand owners from accusations of greed in setting their prices, arguing that this is mostly dictated by fixed costs in the price chain: cost of goods, transport, storage, secondary distribution, plus margins for all those in the distribution chain. “This is all so expensive, I think greed is the last thing on your mind!” he says.

The less definite element in pricing is governed as much as anything, says Field, by the buzz surrounding the brand: where it’s seen, who drinks it, media presence. And once the category pioneers, such as Belvedere and Grey Goose, find their market level, others define themselves in relation to that. “What we decided was that we wanted to be [priced] just above Grey Goose and Belvedere in terms of price bracket, especially as our vodka is more expensive to produce,” says Kirkpatrick of U’luvka.

So you’ve got your brand, your USP of taste, provenance, heritage and/or packaging and your desired price-point. But one potential problem remains: quite simply, is there room in the market for you?

Market saturation
Again, a huge variation of opinions here from the brand owners, although many believe 2008 will be a key year for the segment in the UK. “The market is increasing for us – double-figure increases over the past three years,” says Mathieson. “But by the end of this year, the market will probably be quite crowded. I do believe that over the long term, products will come in and die off – it’s quite cyclical.”

“There will be a shake-out during 2008, that’s for sure,” agrees Oval’s Flockhart. “But the ones who will win will be the obvious suspects who do invest heavily and are owned by the big companies. Beyond that, it’s a question of credibility.”
On the other hand, Akvinta’s Jeffrey is optimistic, arguing that it is “very early days” for luxury vodka in the UK, and that despite the tough competition, the potential is “huge”.

Indeed, there is evidence to suggest that the premium category – where new entrants like Russian Standard are challenging established players like Absolut – is the real cut-throat sector at the end of 2007.

Du Cann sees bars reducing their numbers of mid-range vodka brands, but increasing the super-premiums, although he too thinks the luxury end is nearing saturation. But Kirkpatrick believes the hard work and investment by big brands is opening up the market for the less well-known names.

“The super-premium market is growing thanks to Grey Goose and Belvedere putting quite a lot of money into the market,” he says. “More people are drinking better-quality vodka than ever before, especially as they start drinking Martinis and want a better vodka in it.”

Watch our video on VODKA TRENDS… the key issues for 2008