How do local, niche categories find global success?

Heritage and provenance play a vital role in the development of beverage categories, but they offer no guarantee of achieving global success without the support and investment of multinational drinks companies.

 

While the origins and unique characteristics of a category tap into current trends around authenticity, craft and choosing local, and offer consumers a level of reassurance about the quality of the product they are buying, this will only translate into worldwide renown if major brand owners buy into the potential of the category in question, and back it with long-term investment.

For instance, the size and value of the Cognac category continues to dwarf that of its close cousin Armagnac. Historically, Cognac rose to prominence because of its proximity to and easy communication with the key sea ports of La Rochelle and Bordeaux via the Charente river, while the region’s relatively flat terrain offered ample scope for vineyard expansion.

Armagnac, however, enjoyed none of these natural advantages. In turn, this meant that overseas investment poured into Cognac as the nascent category developed, particularly from northern Europe and including incomers such as Hennessy, Martell, Hardy, Larsen and Bache-Gabrielsen. Armagnac, in the relatively remote ‘deep France’ of Gascony, was a less attractive location in which to settle.

These historical factors laid the foundations for the shape of the respective industries in the 21st century, points out IWSR research director Jose Luis Hermoso. “Logistics are less of an issue today, but Cognac has stolen the story for decades,” he says. “For the multinationals, it is less risky to invest in a category that is already globally acclaimed.”

Once a category benefits from the investment and distribution strength of multinationals, this tends to boost its status even further. “If you look at the last couple of decades, Cognac has showed very solid growth, accelerating in the last five years, while Armagnac’s performance has been much more subdued, thanks to declining consumption in France,” says Hermoso. IWSR data shows that between 2014 and 2019, global Cognac volumes grew 31%, while Armagnac declined by 9%.

However, smaller categories that are rich in provenance and heritage can still play upon their craft and local credentials in selected markets and at particular price points. “In certain categories, the craft trend has diluted the importance of ‘the zone of production’, because people like to explore a different take on a particular product, especially if it has a strong regional identity,” observes IWSR senior market analyst Richard Corbett.

“Local craft gins are flourishing in the Nordic markets, and there are successful whiskies from a number of countries now, such as England, Sweden and Taiwan. People will pay a premium for these, but there is a price ceiling, and the really high-end products generally have to come from the ‘motherland’ to justify the price,” reflects Corbett.

Corbett also cites the example of English sparkling wine, which is now competing, in terms of price and claimed quality, with Champagne – an aspiration supported by the similarities in climate and soil, and the wines’ critical reception. Some Champagne houses, such as Taittinger and Pommery, have invested in English vineyards but, despite strong growth, there is no sign that sales will seriously erode Champagne’s market share in the short to medium term.

A similar dynamic can be observed in Mexico with the relationship between Tequila and mezcal. Multinationals including Diageo, Pernod Ricard, Bacardi and Campari have entered the mezcal category in recent years, lured by its stellar growth trajectory in the US market – IWSR data shows that mezcal volumes in the US increased almost 200% between 2014 and 2019. But their investments remain relatively limited, and for good reasons, says Hermoso.

He cites the fragile security situation in Mexico, alongside the fact that the land producing mezcal is owned by local communities, so cannot be bought and planted by outside investors, as barriers to a deeper involvement in the category from global players.

“Mezcal is a hot, up-and-coming category in the US, offering what some consumers perceive to be a trendier and more craft-oriented alternative to tequila. Ultimately, it is a nice portfolio complement for brand owners,” Hermoso argues. “In a market where trends can be accelerated by adoption from the on-trade, it is important to cater to key niche categories.”

Perhaps the best example of a small category being transformed into a global force by a combination of a strong identity and the support of a multinational operator is Irish whiskey. It had been in the doldrums for decades when Pernod Ricard acquired Irish Distillers Ltd in 1988, but its nurturing of Jameson turned that brand into a global powerhouse and sparked a renaissance for the entire category. There used to be just a few Irish distilleries in operation until recently, where global attention to the category spurred a flurry of new investments, and there are now more than 30 Irish distilleries producing Irish whiskey.

Although smaller, niche categories can build a local, and even global, presence on their own, an investment by a multinational operator can accelerate the scale and distribution of brands while increasing consumer awareness. Many global operators now have incubator subsidiaries as well – such as Diageo-backed Distill Ventures – which aim to identify promising companies and categories at an early stage before scaling them up and taking them to the next level.

This model allows brand owners to avoid having to spend large sums to acquire businesses at a later stage, when their sales will have reached a much higher level. It also saves them from having to create a global brand or category from scratch, as Hermoso observes: “Multinationals, which largely decide what we drink today and what we will drink tomorrow, would prefer to jump early onto a moving train – investing in a growing brand or category – rather than building the train themselves.”

 

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Why will beer prove resilient in the aftermath of Covid-19?
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How is alcohol legislation changing in the wake of the ecommerce boom?

 

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