GROCERY: Beverage Alcohol Report: Proof positive

Following a long period of decline in the 80s and early 90s, spirits consumption has been on the rise for nine consecutive years, and grocers have been increasingly getting in on the fun. In 2005, sales showed strong growth across all channels. According to ACNielsen, dollar sales of spirits within food/drug/mass chain stores (excluding Wal-Mart) were up 6.1 percent from the previous year.

In the grocery channel specifically, spirits dollar sales were up 8.3 percent for the 52 weeks ending Jan. 14, 2006, while volume sales for the same period showed a 5 percent increase. These improvements are reflections of the continuing trading up, or "premiumization" occurring within the beverage alcohol category. This is the highest level of growth the spirits segment has seen in 20 years.

Why the turnaround? Historically spirits have been subject to a number of restrictions, both regulatory and self-imposed, including limited consumer access, compared with beer and wine. Recently, however, additional retailers and entire channels have newly entered the beverage alcohol market and are putting more emphasis against the sale of beverage alcohol (such as Cost Plus, Linens 'n Things, Target, Trader Joe's, Wal-Mart, Whole Foods, the club channel, and even the dollar channel), thereby creating more consumer buying opportunities. Additionally, some states have eased restrictions on the sale of beverage alcohol in the grocery channel, and expanded shopping hours for such products to include Sundays.

As seen on TV

Another factor contributing to spirits' growth is enhanced marketing activity. For more than four decades, spirits manufacturers upheld a self-imposed ban on television advertising out of respect for social concerns surrounding the consumption of hard liquor. While a focus on responsible drinking remains, spirits manufacturers have pushed to level the playing field in the marketing ether, especially with beer.

Many would argue that the resulting aggressive marketing activities are more creative and appealing than beer marketers' efforts were in prior years. Though a flattening of advertising spend suggests that this media barrage might have reached saturation point, the category continues to reap the benefits of having returned to the world of mass marketing after such a long absence.

Despite these positive developments affecting the category, grocers face two major challenges with regard to spirits: their relatively low household penetration and their long purchase cycle.

In 2004 and 2005 barely 28 percent of households purchased distilled spirits in the off-premise world, while during the same period, more than 40 percent of homes were purchasing beer. Beer's penetration, however, was down a bit from 41.3 percent in 2004, due at least in part to some consumers' shifting from beer purchases over to wine and spirits. Table wine penetration, at almost 30 percent, was unchanged from 2004. Thus, while beer and wine are still purchased by more households, it's clear that spirits are aggressively competing for "share of throat."

Last year consumers drank 5.7 million more cases of spirits than they did the prior year -- nearly 1 million of which were purchased in the food channel alone. Plainly stated, those who actively capitalize on the growing success of spirits are experiencing higher sales. In grocery the average total shopping bill jumps to $52.31 from $26.60 when consumers put spirits into their shopping carts, according to ACNielsen's Homescan consumer panel, which comprises households who record all UPC-coded purchases on in-home scanners. This speaks to the power of the spirits category as a contributor to a large supermarket shopping basket.

Premium mindset

Across all categories of beverage alcohol, consumers are "upscaling," or buying more expensive products in increasing numbers. In the spirits segment it's the premium-priced segments that are the driving force behind the category's gains, outperforming the category as a whole.

Where's the proof? During the 52-week period ending Feb. 11, 2006, ultrapremium rum and tequila sold in food/drug/liquor channels saw increases in dollar sales of 60.4 percent and 49.5 percent, respectively, making them the category's fastest-growing segments. Across spirits the ultrapremium segment increased dollar share of the category by 0.9 percent, while the premium and superpremium segments reported gains of 0.3 percent and 0.6 percent, respectively. With a share point valued at around $58 million, these are significant shifts.

Tellingly, the value segment decreased its share by 1.8 percent.

There are two theories on what's behind the consistent trading up. The first is that consumers want to make a statement with their choice of alcoholic beverages, and premium liquor is one way to communicate success with the additional outlay representing an "affordable" luxury, much like the Starbucks syndrome. The second theory is that many have adopted a "less is more" mindset, in some cases doubtless for budgetary reasons, and in others as a response to increased law enforcement efforts against drunk driving.

Whatever their reasons for cutting back on the total volume of drinks they consume, many people want to be sure that when they do enjoy a beverage, it's made with what they consider to be the best product. To capitalize on this trend, retailers need to pay attention to the space given over to premium spirits in their liquor departments.

Including cordials and proprietary liqueurs, flavored spirits -- led by rum and vodka -- now contribute close to a quarter (23 percent) of all category dollars. In 2005 the industry introduced 102 new flavored spirits items, up from 82 new flavored items in 2004, and accounting for approximately half of year-to-year dollar gains.

These products have a slightly different, and to marketers, quite appealing, demographic base: younger legal-drinking-age, higher-income.

The explosion of flavors affords growth opportunities, but may not last forever, as the flavor field is getting crowded. Flavored spirits, which command premium prices in most segments, should remain on grocers' radar; flavored vodka, for example, delivers $4 more revenue per equivalent 750-milliliter bottle than its unflavored counterpart.

Flavor interest aligns well with some of the things that make spirits so appealing: their versatility and capacity for creativity and personalization. These are characteristics that are gaining recognition across a wide range of demographics.

Beer's key audience, 21- to 34-year-olds, has been increasingly experimenting with wine and spirits, and smart grocers have responded to drive purchases. An example: positioning relevant no-alcoholic beverages (think Red Bull energy drink, often consumed with vodka) in the spirits aisle.

Consumers in the 50-plus age bracket are also indicating a desire to step "outside the bottle" and try new concoctions, often replacing their regular half-gallon purchase with two 750-milliliter bottles for the same price. When shoppers in this demographic purchase spirits, many reach for an untried product to accompany their signature liquor purchase.

On-premise outlets (restaurants, bars, etc.) are also doing their part to appeal to drinking-age consumers. The allure of dining out helps introduce people to signature drinks and cocktails made with ingredients they may not have ordinarily thought to combine. Ideally, this newfound awareness translates to purchases in the grocery channel for entertaining at home, or simply to recreate those special experiences enjoyed out of the home. Effective retailers jog their consumers' memory by conveniently displaying helpful product pairings.

Reaching out

The spirits category has also done an admirable job of extending existing brand franchises. Perhaps the most notable example is Smirnoff Ice, which helped to blur the lines between spirits and beer. The product's low alcohol content, single-serve bottle, and mass marketing push not only created new usage occasions, but also had a halo effect on the parent brand.

Another example of effective category blurring is Starbucks Coffee Liqueur, made in collaboration with Beam Global Spirits and Wines. The liqueur -- sold in restaurants, bars, and liquor stores, but not in coffeehouses -- has effectively drawn in a whole new group of consumers loyal to the Starbucks brand who may not otherwise have purchased spirits.

Spirits manufacturers are also considering some important palates -- those of ethnic minorities. Hispanic consumers, along with other minorities such as Asians and African-Americans, have had a notable impact on spirits' growth, especially at the high end, with their affinity for matured premium spirits such as brandies, cognacs, scotches, and aged tequila. In one response, Diageo recently launched Dulseda, the first superpremium liqueur specifically targeted at Hispanics, inspired by that consumer group's affection for dulce de leche.

Attention to spirits' packaging has also been influential in driving trial. The spectacular growth of superpremium vodkas has undoubtedly been driven as much by the high-quality packaging as by the marketing and the attributes of the product itself.

Beer and wine have traditionally enjoyed the greatest visibility in the grocery channel. However, supermarket operators should pay extra attention to how they use their space as consumers continue to vote for spirits. Beverage alcohol is being sold across more channels than ever before. Given all of these encroachments, grocers have to be even shrewder in their marketing of beverage alcohol products to compete effectively. To prevent emerging retailers from further stealing share, tuned-in grocers will showcase their premium and flavored spirits, and the various mixers and cordials that create those tasty spirits-based concoctions, as well as category-blurring newcomers.

Richard Hurst is s.v.p. beverage alcohol for ACNielsen. The ACNielsen beverage alcohol team will bring you new insights and marketing ideas every quarter in Progressive Grocer.
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