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SPECIAL REPORT: Global spirits market drivers

Emerging markets are proving to be key growth drivers of international spirits categories such as blended Scotch and Cognac. This growth stems from rising disposable incomes in these markets. In India, for example, according to Euromonitor International research, the number of households with an income of US$45,000 and above in purchasing power parity (PPP) terms rose from 4.8 million in 2006 to 10.8 million in 2011, and is set to rise to 28.9 million by 2016. Spirits volumes in India are expected to grow from 2.2 billion to 3.6 billion litres over 2011-2016.

The vast majority of volumes in emerging markets have been and will continue to be accounted for by local spirits. In the past, international producers were discouraged from entering these categories because of a lack of profitability.

Hence, many international companies had felt it better to focus on their core markets and when they did focus on emerging markets they did so with their more profitable international brands. This was particularly the case when their more premium core markets of North America and Western Europe were performing strongly and consistently, unlike a number of emerging markets, especially after the Asian financial crash.

Today, however, the benefits of moving into local spirits categories have become more apparent. While the number of consumers who can afford international spirits is set to grow rapidly, there will still be many more who will not be able to, in the short term at least.

Offering products which are affordable in these markets now will provide an opportunity for consumers to then trade up to international brands when their financial situation improves.

There will also be the benefit of trading up not just from local to international spirits but also within local spirits categories, from entry level to more premium products, thus offering greater profitability than even five years ago. In 2011, Pernod Ricard's fastest growing Indian whisky brand was its premium Blender's Pride with growth of 23%, according to Euromonitor.

These products can also offer routes to markets that currently have not been tapped into by international spirits brands. In Brazil, Diageo's acquisition of Ypióca and its cachaça portfolio will give it greater access to on-trade establishments where cachaça is strong but categories such as blended Scotch are weak.

Entry into local emerging market spirits categories, however, will be limited and focused on specific economies, such as the major growth markets of India, Brazil and China. The number of target countries could expand as and when the business environment in countries such as the Philippines becomes more conducive to international spirits.

Although the overall forecast global volume growth rates for the white spirits category look subdued at best, the potential of the luxury segment within white spirits continues. Premiumisation and the explosion in micro-distillers with a premium and luxury positioning will provide opportunities for value growth.

It is expected that the US, a market that has traditionally been one of the pioneers in the premiumisation trend, will lead the way. But while vodka has been the focus for luxury developments in the US, English gin is now taking a lead, primarily on the back of the wave of micro-distilleries. On the other hand, and acknowledging that luxury spending is not heavily impacted by mild to moderate recessionary pressures, such developments are reliant on the US and global economies staying on the road to recovery. Luxury sales will reinforce the upper echelons of the vodka category in Russia, at least while commodity and oil prices continue supporting the lavish lifestyles of the country’s nouveaux rich.

Added value, small batch, limited releases and special editions are becoming the tools for overcoming volume growth limitations but, according to a Euromonitor report, flavour sophistication is stepping into bubble territory in vodka and its use should, therefore, be moderated. However, conversely, gin should begin embracing it. And while vodka should continue shifting its focus away from its Eastern European bastion, both English and Dutch gins should begin expanding their limited geographic footprint.

3 June 2013 - Felicity Murray