For months, spirits companies have been courting and romancing the Swedish government with offers for its state-owned Vin & Spirit, the owner of Absolut vodka. French wine and spirits firm Pernod Ricard (PERP.PA) finished victorious over chief rivals Fortune Brands (FO) and Bacardi, buying the iconic vodka brand for a head-spinning $8.9 billion—about 25% above the high end of estimates made by securities analysts.
Whether Pernod overpaid won't be known for months, or years. But rest assured, the answer will be determined by the new owner's ability to shape the right marketing campaign. With vodka, there's little else involved.
In just a few decades, vodka has become the most popular spirit in the U.S. Whereas gin was the spirit of choice for a martini in the 1950s and 1960s, vodka replaced its English cousin in the 1970s and 1980s, and since. Not bad, considering the U.S. government defines the stuff as a "neutral spirit." It is a product made for advertising, as every vodka that comes down the pike is pretty much a blank canvas.
A Spirited Payoff
Lofty vodka valuations have been turning heads for the past five years. In 2004, Bacardi paid $2.2 billion for the seven-year-old Grey Goose, a brand that was conceived and introduced to the U.S. by Sidney Frank Importing as the first French vodka. More recently, Diageo (DEO) was in the hunt for Absolut, but it bowed out last year and instead agreed to pay $900 million for 50% of Dutch vodka brand Ketel One. Ketel One sells just 1.9 million cases a year, vs. Absolut's 10.9 million cases. First-year earnings from Ketel One for Diageo, some analysts predict, would only be about $45 million—meaning Diageo is banking on returns from vastly expanded distribution for the brand. That deal has not yet been approved by the U.S. government.
Diageo's interest in Ketel One speaks to the industry belief that the sales needle on vodka can be moved rapidly through clever marketing, increased spending on advertising, and beefed-up distribution. Diageo says Ketel One, which spent about $20 million in measured media last year, complements its Smirnoff premium vodka business and its Ciroc ultra-premium business. Ketel One has hardly any distribution outside the U.S. and Holland. Diageo will use its enormous clout with worldwide distributors to push Ketel One.
"You can't deny the brand power of Absolut, but considering the rapid growth of Grey Goose, neither can you ignore how fast a company can get a huge payoff in the spirits business through some clever marketing," says independent marketing consultant Dennis Keene. "And Ketel One already seems to have achieved that."
Market Underdog to Leader
Absolut came on the scene in the U.S. in 1980, but was actually created in Sweden in 1879. In 1979, Carillon Importers, the firm that introduced Absolut to the U.S., conducted consumer research and found the brand and product had a lot of liabilities to overcome. The name, for one, was seen as too gimmicky, and the thick bottle was ugly. Bartenders also found it harder to pour than traditional longneck bottles.
But then Carillon's chief, Michel Roux, and ad agency TBWA launched their first ad campaign for Absolut, highlighting all the liabilities in a way that sought to make it a counterculture brand. Absolut lucked into a tailwind of a boycott of Russian brands as a response to the Soviet Union's invasion of Afghanistan. The first ad for Absolut in the U.S. was a print ad featuring the iconic bottle with a halo above it. The headline: Absolut Perfection.
By 1991, Absolut was the U.S. market leader in the imported vodka category, with 3.7 million cases sold annually. "The ads created a personality that relied on the product's quality and style," says Teresa da Silva Lopes, author of Global Brands: The Evolution of Multinationals in Alcoholic Beverages.
Ad and Flavor Launch
In 2006, Absolut dropped the bottle campaign and launched a new ad effort themed "It's an Absolut World." The ads run in magazines, as well as on select cable TV channels. One "Absolut World" TV ad depicted police fending off pillow-wielding rioters. Print ads showed Times Square filled with priceless artwork and pregnant men. In Las Vegas, the campaign took on unique outdoor ad executions, such as wrapping the Luxor casino's pyramid with signs proclaiming "Welcome to Vegas. You are now in an Absolut World." In Germany, the theme was carried out with Porsche taxis.
The effort seemed to reenergize Absolut, whose growth had tailed off in the face of so many new vodka upstarts. Global case shipments for Absolut last year rose 9%.
The addition of flavors—Absolut has launched 16, including Absolut Citron and Absolut Kurant—has dramatically opened the vodka market to women as well as younger drinkers. And in 2004, seeing the growth in super-premium vodkas, Vin & Spirit launched the Level brand.
Unlike whiskies, vodka doesn't get aged, so the only restraint on production is the limits of the current stills. A company can always boost production by adding stills. And quality distinctions are subtle: Judging vodka is not at all like evaluating whiskies, tequilas, or rums. Unflavored vodka is not measured by character imparted by aging, oaking, or the like, but rather on purity. It is akin to evaluating bottled water. Indeed, it takes a keen palate to detect whether a vodka has been distilled from potatoes or grain. And those subtleties vanish when mixers are added, or even too many olives.
But as Absolut and the more recent upstarts have shown, the most important ingredients to a successful vodka is a heavy dose of clever marketing and packaging.