By Peter Evans
LONDON--Vodka is so 2012.
Sales of the colorless, odorless spirit have slowed
substantially in the U.S. and Western Europe in the past two years
after more than a decade of roaring growth.
Tired of lurid flavor extensions--from fluffed marshmallow to
menthol tobacco--and at the limit of what they are willing to pay
for upscale versions, drinkers are increasingly choosing bourbon or
tequila over vodka. That spells bad news for the world's biggest
distillers.
Vodka makes up a quarter of U.S. spirits sales by value, and the
slowdown is starting to eat into profits at liquor companies. North
American sales of Diageo PLC's Smirnoff brand declined 8% in the
six months ended December, contributing to an 18% slide in overall
profit. Pernod Ricard SA said late last year that its Absolut brand
is struggling in the U.S.
"Taste profiles have moved to appreciate whiskey more," said
Ivan Menezes, Diageo's chief executive, in an interview last week.
"It's a trend that's been building for a few years."
Experts say the attributes that first attracted consumers to
vodka now appear to be turning them off. Specifically, the
anonymity that means vodka can be mixed with almost anything to add
an alcoholic kick is becoming less appealing. Drinkers are instead
turning to whiskey for its perceived greater depth of flavor.
Attempts by marketers to plug that gap with flavor variants are
running out of steam: There are more than 600 flavors of vodka
available to U.S. consumers, but demand growth decelerated in 2014,
according to Bernstein research.
The biggest distillers have been hit the hardest by the shift in
taste. Sales of Smirnoff vodka flavors--a roster of more than 30
products, including root-beer float and whipped cream--are in
decline in the U.S. Pernod Ricard has admitted its "Oddka"
experiment--with flavors from salty caramel popcorn to fresh-cut
grass--has fallen flat.
Total U.S. vodka sales increased 1.9% in 2013, compared with
2.7% growth in the wider spirits industry, according to industry
body IWSR--the first time since 2000 that vodka has underperformed
the sector average. Analysts expect a similar result when 2014
figures are released.
Big liquor companies have seen their share of U.S. vodka sales
eroded by intense competition. Supermarkets charging low prices for
smaller brands have stolen customers from midmarket labels like
Smirnoff and Absolut. While sales of superpremium vodkas such as
Diageo's Ketel One and Cîroc have held up, the brand that kicked
off the superpremium trend in 1997, Bacardi Ltd.'s Grey Goose, has
suffered a sharp decline.
Russian vodka has also suffered from the slowdown. In 2013--the
latest available year--the amount of vodka imported from Russia
into the U.S. dropped 70% from the prior year, according to the
Distilled Spirits Council of the U.S. The most popular Russian
label--Stolichnaya Premium vodka, known as "Stoly"--fell out of the
top-five best-selling brands in 2013.
At the same time, an explosion of craft distillers is
encroaching on sales. Diageo says there have been more than 200 new
vodka brands launched in the U.S. in the past two years.
Part of the problem for vodka has been attracting younger
drinkers. Once seen as an exciting alternative to the brown spirits
favored by their parents, vodka is now viewed as too mainstream for
newly legal drinkers in the U.S., analysts say.
"We are seeing a generational shift away from vodka," said Jonny
Forsyth, global drinks analyst at research firm Mintel Group
Ltd.
Whiskey distillers have also seized their chance, releasing
lines aimed at younger drinkers such as Sazerac Co.'s Fireball
Cinnamon Whisky and Ballantine's Brasil, a
citrus-and-vanilla-flavored Scotch whisky made by Pernod Ricard.
Fireball, which in 2009 sold 50,000 nine-liter cases, now shifts
more than two million cases a year.
Vodka's identity crisis comes after a prolonged period of
success. For years, flavor extensions helped drive sales, while
bottles of triple-filtered vodka sold at $30 swelled the profits of
major distillers.
But vodka has hit a roadblock in its efforts to move upscale.
Unlike whiskey, it can't be aged, a key consideration for
distillers when setting price. Although there is plenty of
superpremium vodka available--Cîroc sells for $40 a
bottle--executives are skeptical drinkers will be willing to pay
much more for a clear, tasteless liquid.
"I don't think you'll see the emergence of the real high end,"
said Diageo's Mr. Menezes.
Write to Peter Evans at peter.evans@wsj.com
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