The UK spirits industry is one of the most important in Europe and the world overall, partly due to the strength of Scotch whisky, but that most traditional of British spirits is coming under increasing pressure from vodka.
A new report from market analysts Datamonitor shows that vodka's popularity has grown immensely, thanks to a fashionable profile and receptive audience amongst younger drinkers, but warns vodka makers not to get complacent - previously popular 'Latin spirits' such as tequila are now seeing sales decline.
The UK spirits market is one of the biggest in Europe: it was worth £7.2 billion (€10.4bn) measured at retail values in 2002, although this was down on 1997, when it stood at £7.5 billion. The biggest falls occurred in 1998 and 2002 - and both were heavily based on falling whisky sales.
However, the market is expected to return to growth this year - and to keep gaining in value year-on-year through to 2007, when it is expected to reach £8.0 billion. In volume terms, the spirits market fell to 226.8 million litres in 2002 from 231.5 million litres in 1997. Again, it is forecast to return to growth this year, hitting 252.0 million litres by 2007.
The UK whisky sector is the leading sector of the spirits market, accounting for over 40 per cent of total sales value at £2.9 billion. Its success has been built on the strength of the Scotch whisky industry, which employs nearly 70,000 people and encompasses a vast array of producers, distilleries and brands.
But despite the dominance of the Scotch market, sales have declined since 1997, especially in the blended whisky segment. This section of the market, as the mass-marketed, low-priced segment, has faced not only increasing competition from white spirits and rum, but has also been more susceptible to the impact of weakened consumer confidence and changing spending patterns.
"Premium priced drinks - like single malt Scotch or Cognac - are better equipped to ride out economic fluctuations," said Datamonitor's John Band, the author of the report. "Their richer drinkers are less likely to react to mainstream consumer spending trends."
As consumers trade up to premium brands, single malt Scotch's strong sales growth looks set to continue going forward. Datamonitor also expects that domestic blended Scotch sales will begin to grow again this year. However, the market for US-style whiskey and bourbon has been shrinking, with this trend set to continue.
White spirits capitalise on Scotch decline
As whisky has declined, sales of white spirits - in particular vodka - have increased, rising from £1.55 billion to £1.73 billion between 1997 and 2002. Vodka has become eminently marketable, benefiting from a fashionable profile amongst younger drinkers. People aged 18-24 are the largest vodka drinking age group in the UK, consistently around 40 per cent, with the 35-45 group coming next with about 25 per cent.
The success of RTD premixes such as Smirnoff Ice has undoubtedly helped fuel some of this growth, with the parent brands ironically benefiting from the spin offs rather than the other way round. But the rising popularity of themed vodka bars, which have tapped into the younger audience and furthered the perception of the spirit as a fashionable beverage, have also boosted sales. Such bars offer a considerable variety of vodka-types and flavours, encouraging experimentation.
"Vodka is perceived as a better party drink than whisky, because it is well-suited to making mixed drinks and cocktails - in contrast, many Scotch lovers would be horrified at the idea of mixing whisky and cola. Whisky-based cocktails are an acquired taste, and whisky-based alcopops have been notably unsuccessful," said Band.
The other major white spirit, gin, has seen fortunes closer to those of whisky than of vodka: its market remains consistently dominated by older female drinkers. Sales revenues continue to grow from the segment, suggesting a growth in popularity amongst more senior and female drinkers, whilst also hinting at the growth of the over-50s consumer base.
However, attempts to make gin trendy among young consumers have been doomed to failure: just this week, Diageo axed its gin-based alcopop Gordon's Edge. "Gin's 'uncoolness' among young people in the UK was a key reason that Edge never took off," said Band. "There is plenty of money to be made from gin, but the profitable groups are older consumers and export markets. Already, 70 per cent of UK-produced gin is exported."
Spain and the US, for example, are vibrant gin markets, and much of the innovation in the gin segment has been targeted at these countries.
Latin spirits depressed
The UK's tequila market peaked in 1999 at £84.4 million, and has been falling ever since, settling at £79.1 million in 2002. Its popularity has waned following a period of heavy marketing and an initial rise in the popularity and availability of Mexican food in the UK: once the initial euphoria had worn off, tequila found it hard to establish a lasting presence, according to Datamonitor. The market is expected to decline again this year, and stabilise around the £75 million region.
Nor has the other major Latin spirit, rum, seen great overall success - although one brand in particular has done rather well out of it. In 2002, the UK's rum sector was valued at £406.7 million, down on £422.9 million in 1997. Most of the decline has been in the dark rum segment, due to the same trend that has impacted vodka and whiskey: strong marketing, association with cocktails and premixed alcopops has made white rum trendy; the lack of these factors has made dark rum unfashionable.
"Budget and niche brands aside, the UK rum market is almost a story of one company," said Band. "With huge marketing muscle, plus the UK's second-biggest alcopop brand (Bacardi Breezer) to lend extra mindshare, Bacardi utterly dominates British rum.
"Diageo may have the power to take Bacardi on with its recently acquired Captain Morgan dark rum brand, but will it be able to (or even want to) turn this declining market around single-handedly? Particularly after the company's Captain Morgan-based alcopop flopped in the US, the answer may well be that it doesn't."
For further details of Datamonitor's report, The European Spirits Market to 2007, and others, click here.