July 20 (Bloomberg) -- When flavored vodkas emerged as Skyy Spirits’ second-biggest moneymaker, Chief Executive Officer Gerry Ruvo made a surprise decision: He killed off the business.
Ruvo, acting against the guidance of his chief financial officer, didn’t like how consumers would confuse Skyy’s flavored vodkas with the scads of competitors, such as Absolut. So two years ago, he switched instead to making infused vodka, aiming to impart a more natural taste by steeping the liquor in fruits rather than using syrup.
“People were telling us our flavors were just like everyone else’s, and that didn’t ring in our ears well,” Ruvo said. “It would have been easy for us to just keep producing another flavor every year.”
The gamble paid off: The new category now has double the sales of the discontinued line, Ruvo said. Even so, he’ll need to take more risks to maintain growth at the San Francisco company. Skyy, which also sells Cabo Wabo tequila, Wild Turkey whiskey and Glenrothes scotch, is still shaking off the recession and faces mounting competition from brands like Smirnoff and Grey Goose.
While alcohol consumption didn’t drop during the economic slump, customers drank more at home -- rather than at restaurants and bars. That hurt sales to distributors because they didn’t stock as many bottles. The market for premium vodka also has gotten more competitive on prices, Bob Kunze-Concewitz, the CEO of Skyy’s parent company, Davide Campari-Milano SpA.
Vodka sold at U.S. supermarkets, gas stations and other retailers -- excluding Wal-Mart Stores Inc. -- grew 5.7 percent to $1.08 billion in the 12-month period through mid-June, according to SymphonyIRI Group, a Chicago-based research firm. Total spirits generated $3.58 billion, up 2.5 percent.
A 750-milliliter bottle of Skyy sells for about $16 in the U.S., putting it in the same range as Diageo Plc’s Smirnoff or Pernod Ricard SA’s Absolut. Vodka can range in price from $70 for a 750-milliliter bottle of Chopin to less than $10 for brands like Gordon’s and Seagram’s.
To get ahead of rivals, Skyy regularly invites so-called mixologists to its office to experiment with liquors. They use the company’s entire lineup of beverages to concoct new drinks and share ideas. The company, which has about 70 employees in San Francisco, is looking especially at whiskey as a source of innovation and growth.
While some suggestions haven’t worked out -- tobacco bitters, bacon-flavored vodka -- a few of the drink ideas have taken off at bars. That includes Blood and Sand, a drink combining Glenrothes scotch with orange juice, sweet vermouth and cherry brandy, Ruvo said.
“It’s brought Scotch whisky to a female consumer we didn’t have before,” he said. Three years ago, these customers would have ordered a Cosmopolitan, Ruvo said.
To handle a surge in whiskey drinking, Skyy is expanding its facility in Kentucky to double production.
These days, the liquor industry has to react much more quickly to trends, said David Ozgo, chief economist at the Distilled Spirits Council in Washington. Whether it’s pomegranate cocktails or Tiki drinks, consumer preferences can spread quickly over websites and social networks.
“In today’s environment, trends move across the country at the speed of light,” Ozgo said. “If it’s in San Francisco this month, you can guarantee it’s going to be in Des Moines next month.”
Skyy is the No. 3 vodka brand in the U.S., behind Smirnoff and Absolut, according to SymphonyIRI. Aside from the infused lineup, Skyy’s flagship vodka hasn’t kept up with the growth of some rivals. Its sales were down 1.7 percent in the past year at U.S. retailers, while Smirnoff, Grey Goose and Ketel One all jumped about 5 percent. Absolut was down less than 1 percent.
Skyy got its start 18 years ago, when local inventor and entrepreneur Maurice Kanbar sought to develop a hangover-free drink. His innovation: a four-column distillation process that used different temperatures to extract impurities, followed by a triple filtration.
Impurities in spirits can contribute to hangovers, so removing them through filtration is one way to lessen the pain. The company also put the vodka in a blue bottle, helping it stand out from rivals. Skyy expanded its lineup in 1999, when it won sole U.S. distribution rights to Cutty Sark Scotch whisky. Deals to offer Campari’s aperitif and Glenrothes followed that year.
Skyy was acquired by Campari in 2002, giving it more access to European markets, as well as new brands to sell in the U.S. Skyy is now the biggest brand for Campari, a 150-year-old company based in Milan. It accounts for 13 percent of total sales, Kunze-Concewitz said in March.
Skyy now offers a range of liquors to U.S. drinkers, though none of the other brands has reached the “super-star” status of its vodka, said David Fleming, editor of Impact, a trade publication.
“They’ve really branched out very impressively and picked up a lot of little jewels,” he said. “On the negative side, we really haven’t seen any of them reach critical mass or take off to the point that Skyy has done.”
Skyy first released its infused vodkas in 2008, offering five flavors: citrus, cherry, grape, raspberry and passion fruit. Pineapple and ginger followed. The infusion business helped boost Skyy sales about 18 percent last quarter, Campari reported in May. They face competition from a still-growing range of flavored vodkas, from Absolut’s Berri Acai to Stolichnaya’s White Pomegranik.
No Ivory Tower
Skyy Spirits makes more of an effort than rivals to reach out to local bartenders, said Josh Harris, who runs a cocktail-consulting firm called Bon Vivants with partner Scott Baird.
“They understand that people like us and our contemporaries are in the trenches every day,” Harris said. “So they don’t sit in their ivory tower and try to think what the next big thing is -- they come and ask us.”
A lot of other companies don’t do that, Baird said. “They send out their marketing teams, and pay consultants to go out there and figure out what the next trend is, and the guys at Skyy will just call us.”
Ruvo doesn’t stop his fact-finding missions when he’s off the clock. During a recent night out at Rickhouse, a bar in San Francisco’s financial district, he scoped out what customers were drinking. He sipped Russell’s Reserve, a whiskey sold by Skyy, before joining his wife for dinner.
“It’s my 36th wedding anniversary, but I will still interrogate the bartender at the restaurant about what’s new,” Ruvo said.
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