Trading up for premium spirits and wine is a trend that Richard Hurst, senior vice president of beverage alcohol for The Nielsen Co., Schaumburg, Ill., knows all about. Growth levels for wine and spirits were high in previous years because of consumer interest in premium beverages, Hurst says. Recently, though, the dramatic downtown in the economy has affected growth in certain wine and spirits categories, and specifically where that growth is coming from.
“What we have seen recently is a deterioration of both absolute price growth and price change itself,” Hurst says. “So not only is there a strong shift toward trading down, as well as lower-price segments out performing the higher-priced segments, but we also tracked specific pricing for individual brands that are kind of representative of the marketplace.”
Hurst says he has noticed significant discounting relative to previous pricing levels from the past couple of years.
“I think looking ahead, one of the concerns I would have on how soft pricing has been through the year is that it’s not sustainable,” Hurst adds. “We may see some significant price increases having to play through in the early part of this year.”
Brian Morgan, senior research analyst at Euromonitor International, Chicago, could not agree more. “We have seen that kind of thing in general in the past, but it definitely, I think, it almost reverses the trend that we were seeing the last three or four years,” Morgan says. “There was a trading up to more premium spirits, especially new things like bourbon and tequila that people were not as familiar with in the past, and once they got a little familiar, they would try to go for higher-quality stuff. That is still happening, but at a much reduced rate than what we saw in 2006, 2007, 2008 and now.
“There’s a pretty pronounced shift down to mid-tier priced and economy-priced brands, and especially, the biggest thing is people drink at home more vs. going out to bars and restaurants.”
Hurst also recognizes the trend of consumers purchasing spirits and wine in off-premise locations. “We continue to hear about people going out less,” he says.
Appealing to a younger demographic, specifically the Gen-Xers and Echo-Boomers, is very important and will grow only more important as manufacturers try to bring the premium appeal back.
“There are about 70 million or so in that group — 21 to 30 year-old drinkers — potentially of people who could drink alcohol. It’s a huge cohort of people. It will have a pretty significant influence on the market going forward, and it may be a factor in keeping the decline slow in these economic times,” Hurst says.
Keep the spirits up
The economy has affected multiple facets of the beverage industry, but each spirits category has its own dynamics and the numbers prove that. “I think categories as a whole are doing well,” Morgan says.
“I think mainstays like vodka, bourbon, tequila, things that have been growing quite consistently will continue to do so.” Vodka, the spirits category leader, continued to lead through 2008. According to Information Research Inc., Chicago, vodka earned $867 million, an increase of 4.8 percent in U.S. food and drug outlets during the 52 weeks ending Nov. 30, 2008. Smirnoff domestic vodka was the leader in spirits brands with $189 million, which is 22 percent of the overall spirit market share in those outlets.
Last year, Smirnoff Passion Fruit Vodka and Smirnoff No. 27 Triple Distilled Vodka were introduced. Absolut released Absolut 100 as well as a limited-edition vodka called Absolut Los Angeles.
“Vodka remains relatively solid, but the lower end of the market is doing better than it has done historically,” Hurst says.
In addition to vodka, whiskey and brown spirits sales are making a comeback, according to a 2008 Nielsen Co. report.
“We have seen a recovery of brown spirits consumption, specifically whiskey consumption,” Hurst says. “Other brown spirits, domestic brown spirits, North American brown spirits, whether it’s Bourbon or Canadian, have continued to do pretty well.”
According to the Nielsen report on whiskey and brown spirits sales, the brown resurgence is being led by Bourbons, Canadian Whiskey, Blended Whiskey and Irish Whiskey segments. Consumers spend more on brown spirits as the temperature drops during the Thanksgiving, Christmas and New Year holidays, the company says.
“Brown is back,” said Danny Brager, vice president of beverage alcohol at Nielsen, in a statement. “Consumers and bar managers tell us that brown’s ‘mixability’ and rich taste, along with increased consumer knowledge are contributing to the brown spirits comeback. It’s critical that retailers make sure their in-store promotional and merchandising efforts take advantage of whiskey’s winter seasonality.”
Some of the products introduced to the U.S market in 2008 under the brown spirits category include Castle Brand’s Clontarf Irish Whiskey, a limited-edition Jim Beam Operation Homefront Bourbon, Jack Daniel’s Green Label Quality Tennessee Whiskey and Tullamore Dew Irish Whiskey.
According to IRI, tequila is another category that increased its sales during the 52 weeks ending Nov. 30. Tequila earned $227.1 million in U.S. food and drug outlets, up nearly 5 percent from the prior year.
Jose Cuervo Tequila earned $84.7 million through food and drug outlets, which is down slightly from the prior year, according to IRI. Although Jose Cuervo decreased its sales by a small margin, the brand made IRI’s best-selling spirits list, coming in at No. 6.
Other tequila brands introduced in 2008 include Trago Ultra-Premium Tequila, Sauza White Tequila and Blue Agave Tequila, and Tanteo Tequila, which is a relatively new concept in flavored tequila, and is available in Jalepeno, Tropical and Chocolate varieties.
Rum fared well in 2008, earning $396.3 million, which is up 2 percent, according to IRI. Bacardi Rum and Captain Morgan Rum earned $150.8 million and $123.7 million, respectively, taking the No. 2 and No. 3 spots for the top growth spirits. The rum category expanded last year with the addition of Captain Morgan 100 Proof Spiced Rum.
Nothing to wine about
Wine continues to experience similar trends as the spirits industry. Consumers are trading down high-priced import bottles to lower-priced domestic brands.
“The higher-end of wines started to turn off really a few months ago, and we saw the relentless premiumization of wines slowing down,” Hurst says. “Now it’s showing significant declines at [price points] above $20 a bottle level and relatively significant growth below $6 a bottle. Consumers gravitate toward the Pinot Grigio much more than the Cabernets and the Chardonnays.”
According to IRI, domestic table wine increased its sales by 6 percent, earning $4.1 billion in U.S. food and drug outlets during the 52 weeks ending Nov. 30. Imported table wine earned $1.2 billion in those outlets and timeframe.
Yellow Tail, an Australian wine, ranked No. 1, according to IRI. The brand grew 2 percent during the year ending Nov. 30, 2008, with $184 million in sales.
“There is a lot of shifting going on within the categories,” Morgan says. “What we’re seeing in wine, in particular, is still a growth in sales, but the growth is coming from very different sources than perhaps what was happening a year ago. People are definitely getting cheaper and looking for cheaper brands.
“I don’t think the trends we have seen will reverse. I think there will be a little less emphasis on the higher end, more exotic brands and a little gravitation toward the brands that people already know, and certainly on price.”
Sutter Home and Franzia wines took the No. 2 and No. 3 sales spots, respectively in 2008, through IRI’s measured outlets. Sutter Home earned $173 million and Franzia earned $165.5 million in U.S. food and drug outlets, an increase in dollar sales for both brands during the year ended Nov. 30.
Woodbridge Wines by Robert Mondavi captured the No. 4 spot, earning $155.4 million. Sales for Woodbridge Wines are up 5.3 percent, according to IRI.
Trends affecting wine are driven in some part by younger consumers who purchase a greater amount of lower-priced wines than higher-priced wines, Hurst says.
“There is quite a bit happening at the younger end of the market,” he says. “I think it’s because of the variety wine offers and the opportunity to seek out new tastes and experiment with new ways of drinking. I think that will continue to be very influential.”
Better times
Like other recessions in the past, in due time, this one will get better. The future forecast for wine and spirits does not look bad, but to keep up with trends, manufacturers and retailers should keep some important concepts in mind, Morgan says.
“Appealing to a younger demographic, the Gen-Y demographic, is very important and will only grow more important as they try to pull them back to a place where premium is the main appeal,” he says.
With wine, brands that have more whimsical labels and smaller sizes in multi-packs for convenience, will add to potential growth, Morgan adds.
“Wine consumption shifted from the traditional role it had with meals to something that is a little more casual,” he says. “A lot of glass is being replaced by plastic. It’s a way to reduce costs and it’s also more attractive to people that want to be more on-the-go, especially younger consumers.”
In terms of spirits, manufacturers will have to pay close attention to the desires of younger drinkers, Hurst says.
Flavor extensions for the spirit market, specifically in vodka and white rum, will continue in new products. Staying on top of flavor trends and creating timely launches will become important as flavors become more exotic, according to Euromonitor’s report, “Spirits in the United States.”
While wine might be able to pull consumers back up to a premium level, Morgan says it may be more difficult for spirits.
“I think we’ll have to stay close and see what happens,” he says. “I don’t think people will rush back to the on-premise generally. I don’t think you’ll see a recovery of premiumization. I think people will be very careful, spend maybe the same budgets, but spend it on lower-priced brands and more of them. It obviously depends a lot on how long we stay in this economic downturn.”