Category Focus: Wine and spirits consumers trade down for value
“The major trend, and I think where everyone in the industry has had to change their thinking and how we approach the category, is that we’ve gone from trading up to trading down,” says Danny Brager, vice president, beverage alcohol, at The Nielsen Co., Schaumburg, Ill. “[Consumers are] looking at what they’re paying and what they’re getting in return for what they’re paying. It doesn’t mean they’re always gravitating to the cheapest thing.”
The numbers paint a lopsided picture on each end of the spirits spectrum. Ultra-premium priced spirits were flat during the 52 weeks ending Jan. 9, according to Nielsen data for U.S. food, drug, convenience, liquor and other select channels. Value-priced spirits had the largest gain as sales rose by 2.7 percent, Nielsen says.
For wine, the story is largely the same. Sales of wine priced more than $20 a bottle fell by 3.7 percent in the 52 weeks ending Jan. 9 in the same channels, while sales of wine costing $3 to $5.99 increased by 8.7 percent, Nielsen data show.
Consumers’ propensity to trade down during the recession reverses an industry-wide trend of moving up to high-end luxury wine and spirits, says Sarah Theodore, global drinks analyst at Mintel Food and Drink, Chicago.
“For a long time, it was the more expensive the brand, the more people seemed to want to buy it, and I think that that’s kind of come to an end,” she says. “I think that premium is still going to do well, and premium certainly will rebound from the recession, but that trend toward evermore expensive premium products, I just don’t think we’re going to see that the way we did for several years. The brands that actually are doing quite well are value brands and those mid-priced brands.”
Not long ago, high-end spirits saw growth of up to 14 percent a year, Brager says, but that has slowed to about 1 percent this year. Brager doesn’t expect the numbers to get much better in 2010 as unemployment continues to hover around double digits.
“When your 401k is half of what it was, and you’re sitting on a house that may be upside down and all those kinds of things … consumers aren’t rushing out,” he says.
For consumers, Brager says “value is king,” and that does not necessarily translate to “cheap.” Mid-priced spirits saw sales increase by about 1.2 percent in the last year, he says. Private label wine is growing at a 30 percent clip over last year, well over the category as a whole, Brager adds.
As a result, established wine and spirits companies that are positioned in multiple pricing categories and channels stand the best chance of turning profit in 2010 as consumers continue to trade within the segments, Brager says.
“If you look within the wine and spirits category, there’s so much choice that you don’t have to trade away,” he says. “If you want to save a little bit of money on wine it’s not like you have to shift into beer. You can just spend $5 less and just buy a less expensive bottle of wine.”
Spirits categories are growing, but not as fast as they once were. For the 52 weeks ending Jan. 24, vodka grew by 4.5 percent, rum increased by about 1 percent and North American whiskey rose by 1.2 percent in U.S. food and drug stores, according to SymphonyIRI Group Inc., Chicago. The spirits industry as a whole grew by 1.6 percent during the same time period and in the same channels, SymphonyIRI reports.
Spirits drinkers also are trading down to value-priced drinks over high-end beverages. In 2009, gross revenue for super premium and high-end premium spirits fell 4.1 percent and 2.1 percent respectively, reports the Distilled Spirits Council of the United States, Washington, D.C. The organization also reports that gross revenue for value-priced spirits increased by 5.1 percent in 2009.
Easily marketable products like flavored vodka, which Nielsen projects grew by nearly 10 percent in 2009, have helped to sustain growth in the category, Brager says. Not all of the flavors have a long shelf life, but he says that companies have simulated a billboard effect for their brands by surrounding standard products with several different flavors.
“It is a consumer paradise and a marketer’s paradise in terms of thinking of a flavor and putting it in a bottle,” Brager says. “There is everything from cucumber to root beer to pomegranate to there’s a bacon vodka out there. Flavors are certainly one of the hottest things we include in the spirits category.”
Flavored vodka appeals to younger demographics, Mintel’s Theodore says. Twenty-one to 35-year-olds tend to drink more flavored spirits than their older counterparts, she says.
Some of the largest spirits companies have created flavored vodkas in the last year. In March, Diageo released Cîroc, vodka infused with natural coconut and tropical flavors. Pernod Ricard launched Absolut Boston, a limited edition black tea and elderflower flavored vodka in Nov. 2009.
Irish whiskey had the largest jump among the spirits categories that SymphonyIRI tracks, up 19.8 percent for the year ending Jan. 24 in U.S. food and drug stores, the research firm reports. But Irish whiskey also comes from the second smallest base, grossing less than $26 million during that time period, compared to average sales of more than $264 million among all 11 categories.
Jameson Irish Whiskey, which is owned by Pernod Ricard, helped bolster the category by putting a lot of marketing behind Irish whiskey, Brager says. “They’ve made it kind of cool on premise; then people go to the store and try to find it,” he says. “They’ve done it pretty well.”
Instead of boosting revenue with a slew of new products, spirits companies are working on the marketing end to be more precise in who they target, Brager says.
Mintel’s Global New Products databse has recorded fewer new beverages across the board, Theodore says.
“I think there’s a lot of activity – some tactical, some strategic – around ‘How do I do well, knowing that consumers are paying a lot more attention to what they’re getting for what they’re paying,’” Brager says.
The most pronounced change in marketing strategy has been in the shift to digital advertising, he says, to attract consumers who are spending more time online. He says spirits companies are cutting television budgets. Brager points to Diageo PLC, London, as a prime example of a large beverage company marketing itself online through the social networking Web site Facebook.
“They’re shifting a substantial proportion of their budget away from certain activities into digital,” he says.
Companies also are focusing increasingly on specific demographics, even creating brands that target niche markets, according to a Dec. 2009 report by Euromonitor International, Chicago. For example, vodka products with caffeine and taurine target young club goers and Margaritas, mojitos and caipirinha are positioned to appeal to Hispanic consumers.
Rather than create new products, Brager says companies have increasingly turned to extending current lines. Extending a line has the advantage of providing consumers with something different from a brand that they already trust, he says.
“They’re reacting to consumers, and consumers are less able to afford risk in general, so their kind of want or need or desire for experimentation have taken a backseat to their realities today,” Brager says. “Before you plunk down $25 on a new product that you have no experience with, you’ve got to think about it.”
Wine is a tale of two demographics: baby boomers privy to wine’s heart-healthy reputation and twenty-somethings who have come of drinking age at a time when wine is more affordable, Mintel’s Theodore says.
“[Baby boomers] are the group with the most disposable income, even right now,” she says. “Younger consumers, those 21- to 35-year-olds, I guess, are really kind of the trendsetters.”
Table wine sales increased by 3 percent for the 52 weeks ending Jan. 9, according to Nielsen data for U.S. food, drug, convenience, liquor and other select channels, and much of the growth was in the price categories near the bottom. Wine sales in the $3 to $5.99 price range, which account for more than a quarter of the industry, grew by 8.7 percent, Nielsen says. Sales for wine that costs more than $20 fell by 3.7 percent, Nielsen data show.
But the trading down trend in wine is one with which winemakers had familiarity before the recession began. Winemakers were developing brands that are more accessible to the average consumer before the economic downturn to try to make wine less of a special occasion drink and more of an everyday beverage, Theodore says.
The recession’s effect on wine was felt in fine dining restaurants, where wine is most commonly served, Euromonitor’s report says. Volume sales of wine on premise fell in 2008 and 2009 after steady growth between 2004 and 2007, but the organization expects the industry to rebound in 2011 as the U.S. economy recovers, according to the report.
To stay competitive, Brager says higher-priced wines have resorted to discounting, especially during the holiday season when wine is in higher demand. But because of their steady sales increases, value-priced winemakers have been able to raise prices, he says.
As value-priced wine has become more popular, boxed wine also has gained a stronger following in the marketplace, especially among the younger demographic, Brager says.
“That segment has been growing at double-digit rates for a couple of years now,” he says. “Consumers, a large portion of them, probably associate boxed wines with something that’s cheaper and not as high quality. Some of the premium boxed wines, the varietal based, have been growing and attracting new entries into it.”
Younger consumers are more receptive to packaging innovations in wine, Theodore says, noting that Mintel has tracked an increase in the number of wines using PET bottles and larger volume packaging as well.
Euromonitor reports that plastic screw caps also are becoming more popular with younger consumers because they allow wines to be resealed with greater ease than with a cork.
Sales of wine from large-volume producing countries like Australia and Italy were down during the year, Nielsen reports. Australian wine fell 6.2 percent and Italian wine was down 3.7 percent during the time period. Each country has market share of nearly 9 percent, the data show.
Other countries not known for their wine production emerged in the year with substantial increases in sales. Argentine wine sales rose 41.5 percent, and New Zealand wine sales increased by 14.9 percent, though both come from a small base, according to Nielsen. Brager says that Argentine wine was helped by the popularity of Malbec, which winemakers there are touting to consumers as a hot value. New Zealand, however, focuses more on premium products, including a lot of Sauvignon Blanc, Brager says.
In 2010, wine and spirits companies will have to identify and pursue their target demographics while finding a way to move away from discounting as a method to spur volume sales, Brager says.
The questions that he says many companies are asking themselves right now are: “How are we going to build brands? How do we build something that’s more sustainable? How are we going to create loyalty where people aren’t jumping off my brand just because the next guy is a dollar cheaper?”
“You just can’t market to this sort of mass consumer,” Brager continues. “You need to break it down into all the different pieces.”
He predicts that companies will focus more on consumers’ lifestyles, what they’re watching and where they’re shopping to find the best way to target new customers. That includes more digital marketing campaigns.
“I think they desperately would like to figure out how to retain consumer loyalty without having to resort to price because I think they realize that’s a short-term activity and you can’t keep chasing that,” Brager says.
The rebound for premium wine and spirits likely will be slow because of the poor state of the economy and consumer spending, analysts say.
“We might have technically come to the end of the recession, but I don’t think consumer confidence has rebounded entirely, so it might take a little while before they start moving back to those more expensive products,” Theodore says. “I think that it’s going to take a little while for consumer confidence to come back and for people to feel comfortable spending money again.” BI
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