The mixed fortunes of vodka

Despite the global vodka market declining, the US market looks promising

2018 was another year of decline for the global vodka market, with the IWSR reporting a decline of -2.6%. The drop was an improvement on the steep losses recorded in 2017 and the value of the market did record a small increase, but the contraction was the fifth annual fall in succession.

 

The category’s woes can be traced to the old-world vodka heartlands of the CIS and in particular to the spiritual home of the vodka category, Russia. Although it continues to fall, Russia’s share of the global vodka market is still nearly four in every 10 litres consumed globally. Inevitably, if the Russian vodka market sneezes, then the global vodka market catches a cold.

The IWSR’s senior analyst for the region, Ivan Kolarov, identifies two main factors behind the vodka downturn in Russia: price rises and the broadening of consumer beverage alcohol choice. In five years, the IWSR’s figures show that the average price of vodka in Russia has ballooned by more than 60%. It is no wonder then that vodka sales are down by more than a quarter in the same period.

Kolarov accredits tougher controls on illegal sales and the state-regulated minimum retail price with the inflationary pressures. In mid-2018 the latest phase of the alcohol monitoring system, known as EGAIS, was introduced, which helped strengthen further the powers to curb the grey spirits market in Russia. Kolarov believes that the real game changer was the decision to allow the local authorities, who are charged with the job of enforcement, to keep the lion’s share of the alcohol generated excise revenue. This incentivised them to crackdown on rogue players and in recent times an estimated 500 factories, churning out untaxed low-priced vodka, have been shut down.

Drinkers are increasingly being coerced into shopping for their vodka in the conventional channels which are also subjected to the state-regulated minimum retail prices.

According to Kolarov, “nobody in the organised trade segment will now risk selling untaxed or illegal spirits of any sort”. Drinkers are increasingly being coerced into shopping for their vodka in the conventional channels which are also subjected to the state-regulated minimum retail prices. In these stores a half-litre bottle of vodka must be sold for RUB215 ($3.40) or more or the retailer may face losing their licence.

The price rises in the category have helped shape the direction of the alcoholic drinks market, but so too has the surge in beverage choice that the modern Russian consumer is now faced with. “Before the fall of the Iron Curtain, apart from vodka, the only other spirits available in any quantity was Cognac chiefly from the brandy producing regions of Georgia and Armenia. Now that there is such a huge amount of choice it is only natural that vodka share would contract.”

The numbers reinforce the point. Vodka sales may have fallen sharply last year in Russia, but the overall alcoholic drinks market remained flat. In the same way that wine sales are falling in the wine stronghold of France, vodka sales in Russia are dropping as younger drinkers look to experiment with less traditional alcoholic refreshment. Whisky sales were in double-digit growth last year, for example.

Even longstanding vodka producers are now diversifying to meet evolving consumer tastes. Many are now importing whisky, and some are even starting local whisky production. Wine importing from Europe is also becoming widespread and Kolarov knows of around half a dozen Russian companies who now own vineyards in France and Spain.

While Kolarov does not believe that there will be any reversal in the downward trend anytime soon, some positives have emerged from the changing trading environment. He cites federal authority checks that have robustly analysed and rated vodkas and found that even modestly priced vodkas now deliver a top-rated and clean product. The upsurge in product quality has been a key feature of the market as sales have fallen back.

The bottle may be half empty in the world’s biggest market, Russia, but in the US, the most vodka valuable market, the bottle is half full. In what might be considered the heart of the new age vodka world, sales increased in 2018, despite vigorous competition from mixed drinks, which grew by 15%, and tequila, which clocked up a rise of more than 7%. Growth in both categories will have been fortified by migrating vodka drinkers.

Vodka’s popularity as a base for cocktails has enabled it to ride the wave of the cocktail boom.

Vodka demand in the US is benefiting from the escalating interest in craft cocktails due to its clean and clear properties, as well as ease-of-mixability. The Moscow Mule, for instance, is still trending. Vodka’s popularity as a base for cocktails has enabled it to ride the wave of the cocktail boom.

Vodka in the US is demonstrating its versatility, which has given it the flexibility to make it more and more relevant to the Millennial consumer. This is illustrated by the number of products that have adopted ‘natural’ flavours and a more simplistic and natural story to their marketing. Organic vodkas, for instance, have begun to gain traction. These are likely to be new product drivers that will be exported in the years ahead, with positive results.

The IWSR’s research director for North America Adam Rogers believes that “the vodka category is able to maintain its growth through this ability to respond rapidly to capture current trends”. He points to when it was real fruit juice and vodka that was in vogue and drove growth several years ago. He says that “today it is the rise in low-calorie vodka-and-soda cocktails and the use of botanicals” that is pushing up sales.

This progressive product development was exemplified last year by Diageo’s low-ABV Ketel One Botanical range. The product was positioned to capitalise on the trend towards natural flavours, low ABV and reduced calorie content. It hit the right note, selling nearly 300,000 nine-litre cases.

What will be a challenge for vodka suppliers in the US will be to reinstate the tendency towards premiumisation. Tito’s vodka’s standard price point contributed to its fabulous success and rather than hold their ground, the higher-positioned vodka brands responded by lowering prices. In the last five years the average price of vodka has dropped by -3%, while the overall average price of spirits has gained 8%. Encouragingly, average vodka prices edged upwards in 2018.

In the last five years the average price of vodka has dropped by -3%, while the overall average price of spirits has gained 8%.

Capitalising on the premiumisation trend will always prove more difficult, not just because the taste differences are often more subtle in traditional vodkas than rival spirits, but because the audience is often younger and does not have the disposable income of older drinkers. However, the young age of consumers will also work in the category’s favour because they are more likely to embrace some of the new innovations.

With the rest of the world now more likely to take their innovation cues from the US and not the CIS and Russia, the new wave of innovation that is generating interest in the US, will benefit other markets in the years ahead. It may even awaken the Chinese market where vodka remains niche at best.


Take a look at the IWSR Global Database and Country Reports for more in-depth information regarding the vodka market.

For enquiries, please email enquiries@theiwsr.com or call us on +44 (0)20 7689 6841.

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