Absolut PandemoniumJulia Flynn and Laura Zinn
If you think brands are dead, consider the events of Oct. 12 in the liquor business. First, Seagram Co. announced that it had acquired the right to distribute Absolut, the ultrahip Swedish vodka, in the U.S. and overseas. Estimated price to Seagram: $1.25 billion. Over at Grand Metropolitan PLC, whose International Distillers & Vintners Ltd. division has been distributing Absolut for the past 13 years, the response was swift and furious. A spokeswoman for IDV says it is contemplating suing Vin & Sprit, Sweden's state liquor company, which exports Absolut.
Meanwhile, at Guinness PLC's United Distillers unit, managing director Crispin Davis abruptly resigned. The industry buzz: Davis, a former Procter & Gamble marketer, had been slashing prices in tough markets to meet profit targets, clashing with Guinness Chairman Anthony Greener's determination to protect the company's exclusive brands and the premium prices they command.
CASE LAW. The industry's Big Three don't agree on much, but as the fierce battle for Absolut and the repudiation of discounting show, they share an unshakable faith in the big, pricey brand. Sure, value-conscious consumers are abandoning premium-priced lines of tobacco, food, and household products. But the spirits companies continue to get a disproportionate chunk of profits from a handful of high-end labels (chart). United Distillers, for example, makes $63 a case on deluxe brands such as Johnnie Walker Black Label scotch, seven times its profit on a standard scotch such as VAT 69, says John Spicer, an analyst at S. G. Warburg in London. And no wonder IDV will be sorry to see Absolut go next year: It will make $60 million in pretax profits on the brand in 1993.
But wait a minute. Doesn't the liquor business bear some uncomfortable similarities to the tobacco industry, where the brand meltdown began? Like tobacco, liquor faces mounting health concerns, regulation, legislation, and taxation. Like tobacco, distillers made up for declining consumption by raising prices on top brands in the 1980s--in liquor's case, by as much as 19% a year. And, like tobacco, the soaring premium prices created an opening for cheap brands and private labels, which have lately been picking up market share. When that happened in cigarettes, Philip Morris Cos. ultimately decided to slash the price of its flagship brand, wiping out billions in industry profits and market value. Can Marlboro Friday be far behind in the booze business? Point out those parallels to liquor industry chieftains, and they won't exactly raise a glass in your honor. "Comparison of our industry with tobacco is erroneous, misleading, and wrong," says Edgar Bronfman Jr., president of Seagram. "It's a completely different situation," insists Guinness' Greener.
Far from bracing for a pricing Armageddon, the big distillers plan to continue to raise prices, though at a much slower pace than in the 1980s. With drinking declining in the U.S. and other big markets, sales growth will come only through price increases. That's why the industry's marketing strategy has been to persuade consumers to trade up to higher-priced brands. In campaigns such as "Live a Cutty Above," the implicit message has been "Drink less, but drink better."
Until now, the strategy seemed to be working. Profits of the big liquor companies have grown by an average of 15% each year since 1988, even though worldwide case sales dropped 5%. "Premium brands captured a larger share of a shrinking market," says Stephan Tywoniak at KPMG Management Consulting in London. In Great Britain, premium brands controlled 48% of the market in 1991, up from 36% in 1985. In the U.S., premium brands rose 1%-2% in 1992, while overall liquor sales were essentially flat, says Frank Walters, director of research at M. Shanken Communications, an alcoholic beverage trade publisher. But there are ominous signs, too. In Britain, for example, private label spirits accounted for 27% of the retail market in 1992, up from 23% a year earlier. In the U.S., "premium brands are going to have a tough time in the 1990s," says Walters. "There's a lot of private-label brands out there, especially in vodka." Meanwhile, Martin Romm, an analyst at First Boston, recently revised his earnings estimate for Seagram's Spirits & Wine Group from a 4%-5% gain to flat this year. Profits at United Distillers will drop 3.7%, says Warburg's Spicer. And though he predicts that earnings at IDV will jump 11%, that's mostly because of exchange rates.
HIGHER SPIRITS. So far, most of the squeeze has been on middle- and lower-tier brands. That's why Seagram and Grand Met have been bailing out of the low end and Guinness has poured money into premium brands. Seagram, for example, sold off seven lower-end labels, including Lord Calvert Canadian Whiskey and Wolfschmidt Vodka, to Jim Beam Brands, a division of American Brands, for $373 million two years ago. That has allowed it to concentrate on Chivas Regal and its other top brands. Guinness, in turn, poured much of its ad budget during the late 1980s into reversing the volume slide of its three big brands--Johnnie Walker Red, Johnnie Walker Black, and Dewar's. And Grand Met paid $1.2 billion in late 1987 to acquire Heublein Inc., which gave it Smirnoff, now the world's No. 2 spirits brand, after Bacardi rum.
But discounting at the lower end now prevents these owners of premium brands from hiking prices much faster than inflation. To shore up their pricing power, distillers say they will keep investing in brand-building. They remain convinced that they can persuade drinkers that what's in the bottle is worth the price. Guinness' Greener believes that premium brands will stay strong because consumers attach personal values to their choice of drink. However, that argument was once made in tobacco, too: Cigarette companies figured--wrongly--that smokers wouldn't abandon Marlboro and Winston for generics and discounted cigarettes because they identified so strongly with their brands.
And in yet another parallel to tobacco, the big spirits companies increasingly are hunting for growth in emerging markets in Eastern Europe and the Far East. With the top 100 brands accounting for less than 7% of the spirits consumed worldwide, the industry figures there's plenty of room for expansion. Demand is rising for prestigious Western brands in China and the former Soviet bloc, where health concerns are still muted and advertising restrictions few. On Oct. 21, United Distillers announced a joint venture in China with the French liquor and luxury-goods group LVMH. It has already recruited a sales staff of 50 and plans to triple its work force by 1994.
The cachet of big brands overseas may also be the real reason for the 12-month scramble for Absolut. True, Seagram needed a premium vodka to fill a gap in its portfolio--though it won't comment on how the deal is being financed and calls the $1.25 billion estimate "crazy." More important, Seagram saw an opportunity to expand Absolut worldwide, since more than 75% of the brand's sales are now in the U.S. Bronfman predicts that the proportion of sales from outside the U.S. will double within five years.
And consider Grand Met's designs on the Russian market. Roughly 64 million cases of vodka were sold in the West last year. Include Russia, and the market almost quadruples, to 224 million cases. "All of a sudden, the world market is much larger than it has been traditionally defined," says Paul Curtiss, IDV's president of international marketing. With an eye on such staggering prospects, Grand Met's IDV set up an office in Moscow earlier this year. It is now selling 650,000 cases of American-made Smirnoff to Russians--at about $8 a half-liter bottle, 25% more than in New York.
Talk about carrying coals to Newcastle. But maybe that's a sign that this is one industry that has a shot at keeping its brands alive. After all, the folks who can sell premium-priced American vodka to Russians must know something about marketing.
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