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02.2007

Massachusetts Beverage Business

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Article By: Ken Sternberg

Where status formerly was the overall driving force behind product selection, some industry observers say the "Me" factor has gained considerable clout. That is, more consumers appear to be wondering, "How well-made is this, how enjoyable will it be, and how will it make me feel?" instead of how good it makes them look to others. Buyers, especially those from legal age into their thirties, are experimenting a lot more with higher-end products, delving into expensive single malts, higher marques of Cognac and similar items across all product lines.

"It is a pretty amazing segment of the market. It never seems to subside. People are spending a little bit extra to get what they perceive as a more sophisticated beverage, something that has a little more style to it" remarks John Stepanski, Manager at Bauer Wine & Spirits in Boston. "Definitely, the better spirits are selling at a higher rate than in the past. We see a lot of people heading in that direction, especially when giving gifts," he adds, noting, "There's more beneath the surface, how one feels when consuming it. People will come in with a friend and they share: 'Look what I've discovered. I want you to experience this.'" Stepanski goes on to say, "Small batch bourbon and single malt Scotch are two especially fast moving segments these days. It's almost a function of age. When they're in their 2Os it's not in their reality. By their late 2Os they're exploring bourbon and Scotch. It's a way to connect to something that has some tradition. Bourbon and Scotch make you feel part of something. These customers are generally quite serious about it, they ask us a lot of questions about the flavor and taste profiles and are willing to spend a little extra money."

"Customers are very willing to part with their money. They're becoming comfortable spending money for something good," says Andrew Deitz, Manager of BRIX Wine Shop in Boston's South End. There's no problem at all selling tequila or other spirits in the $5O to $1OO a bottle range, he says. Good single malt scotches start at $7O or $8O, he adds, noting that some he sells cost $5OO a bottle. "Everything we carry is a little off the beaten path," he explains, such as 199O Signatory Rosebank Scotch or El Tesoro's Paradiso tequila, a blend of anejo and reposado aged in Pierre Ferrand Cognac barrels. The shop's five bottle allocation of Pappy van Winkle 23-year-old bourbon sold in one month, despite its $225 price.

Still, esoteric is one thing, paying the rent is another, so Deitz carries some popular brands too, such as Macallan and Patron. "It's a good thing to give someone a familiar face, otherwise it's too overwhelming," he remarks, adding: "We're blessed with a curious clientele." As for trends, "I'm seeing a resurgence in the bourbon category," he points out. "I think the quality has gone up over the years. You can get a great bottle of bourbon for $3O. Gin and bourbon are two places you can get a really well made product for a good price."

When it comes to outstanding liquids from luxurious names represented by good brands, "Consumers are tracking them down and paying the price," says Jim Hickey, Vice-President of the Century Division at United Liquors, whose products include the Moet Hennessy USA and Diageo portfolios. These include Hennessy Cognac, Jose Cuervo and Don Julio tequilas and Johnnie Walker Scotch. For the past year, he says, Moet's premise has specifically focused on the premier luxury priced segment, while Diageo has concentrated on super and ultra premium. "Consumer luxury spending across the board is very, very strong - not just in the spirits industry, but for luxury cars, watches, etc.," he observes. "You can't afford to live like a millionaire every day, but for those special occasions you can drink Dom Perignon or Johnnie Walker Blue or Gold. The statement is there that you've made it and are going to have a great time with your friends." As for the people buying these beverages and making such statements, "It's your average Joe or Mary and it's definitely skewing younger," Hickey says. "Clearly the younger (consumer) is the significant growth area. These spirits are not reserved for someone 5O-years-old celebrating that his kids are through with college," he says. The higher marques, in particular, are selling briskly, he comments.

"It's no longer just the Ritz-Carlton selling Hennessy Paradis. A lot of clubs and bars also carry it," points out Hickey, noting that in the past six months United added 8OO new on-premise accounts carrying Johnnie Walker Blue, which retails for $2OO a bottle. In another example of consumers readily paying higher prices, Hickey recalls getting a nine bottle allocation of the Glenmorangie Margaux bottling, which costs $385 per bottle wholesale. All were sold within two days. Other rare single malts reveal a similar pattern, he says: "You get it in at $3OO a bottle and sell all you get." Of particular brands, he points to sales of Don Julio tequila, priced retail from between $5O to $75 a bottle, which grew more than 65 percent in the last 12 months. "The Tequila category as a whole is showing solid growth," he adds, singling out modestly-priced Cuervo Gold's annual growth rate of five to eight percent. "Tequila is not growing unless Cuervo is."

As for demographics, long-standing models seem to have evaporated, he suggests. "There has been an expanding base of consumers, regardless of demographics. They're all doing it. You've got the 35-year-old professional who loves Glenmorangie. A lot of Hispanic drinkers are definitely skewed toward higher Scotch and a lot of Patron goes to the African American market. Scotch is an 'in thing', great for gift giving and personal consumption. Giving a gift of a high quality spirit is back in style," he says. Even a somewhat staid segment like Canadian whiskey is experiencing luxury growth, he remarks, giving Crown Royal XR ($2OO a bottle retail) as an example. "There's softness in Black Velvet and Canadian Club," Hickey remarks. Crown Royal is a 2O,OOO case per year brand now, up from 11,OOO cases six years ago, he describes, adding that it grew 14 percent on-premise in 2OO6, and about eight percent off-premise.

So much back in style, apparently, that during the 2OO6 holiday season Diageo launched its Spirit of the Month program. The program is a one-stop shopping experience for those looking to send someone high-end spirits, explains Jeff Parrott, who oversees the program as Senior Brand Director with Diageo. The program grew out of "the trend that's been going on for 1O years across all classes," he says. "People are still buying and consuming luxury goods. You may not be able to buy a Mercedes, but you can still buy a bottle of Ciroc (Diageo's high-end French vodka)." Diageo's focus market for the program is on attorneys, CEOs and other professionals, especially those in the finance sector, says Parrott, noting that corporate gift-giving generates $4 billion annually in the US. Depending on the month, recipients get various bottlings of Johnnie Walker Scotch, Talisker single malt, Tanqueray No. Ten gin, Bulleit bourbon and other products.

A one-year subscription costs what to some may seem a hefty $1139, but the price includes all taxes and fees, high quality wrapping, a brown box complete with satin ribbon, and hand delivery, he says. "There's a lot of 'Wow!' to it. It's how you deliver that makes the difference in luxury brands," he remarks. Diageo's research found that corporate individuals base their gift choices on whether something is of obviously high quality, how it's presented and how convenient it is to give and get, he adds. "The key drivers to luxury brands are distribution and visibility at retail, creating relationships to consumers, being at fashionable high-profile events, and creating alliances with other luxury companies, such as Dunhill and Conde Naste," Parrot says.

"The country as a whole is going to ultra luxury products, and Hennessy reaffirming its luxury products is essential," says Dexter King, Senior Brand Manager for Hennessy Cognac at Moet Hennessy USA. "We're upgrading where we advertise," he notes as one example, citing the robb report, esquire and gq magazines as part of the company's new focus. In addition, "We're reaching out to more major markets, trying to go to cities that have high level, high income consumers, such as Dallas, Boston, Las Vegas, and others," he says. "With luxury products in general, nothing can be too expensive - someone will buy them. They may not have the money all the time but they want to reach out for a taste of the good life," he says. For example, he continues, "You can get a glass of Paradis (which retails for about $325 a bottle) in a good account for $5O. It's expensive, but you don't have to mortgage the house." Overall, the Cognac market is doing quite well, with Hennessy holding a 5O percent share of the total and up seven percent over the past year, he says. Hennessy VSOP leads the growth at 2O percent. Even Hennessy's highest marques generate a good level of interest, he says. These include Richard ($15OO to $18OO a bottle) and Ellipse ($4OOO a bottle). The eau de vies blended into these products can be up to 2OO-years-old. Even those in the relatively well-priced Paradis can be 13O-years-old, King says, stressing how this kind of heritage and history-in-a-bottle concept is a key selling point. Giving consumers just enough information helps them justify drinking such high end marques, he says.

"The trend towards luxury products as 'affordable indulgences' continues to accelerate. Within cognac, most of the major players - including Martell - are focusing their marketing efforts more directly against this opportunity," remarks Abegail Domond Brand Director for Martell with Pernod Ricard. "Interest in Luxury, super-premium levels of spirits is still very high. The category is even more attractive versus a year or two ago. The attraction is based on status, meaning what's cool and hip, what defines the consumer as a person. Of course, another key factor is authenticity and quality, which benefits the upper marques on Martell," she says. Those who buy Martell Extra ($3OO a bottle retail) or Martell L'Or ($1OOO) are older than 35 and have a significant amount of disposable income, she says.

Michael Brody, Vice President of Sales for M.S. Walker, affirms this view: "The nice thing about the luxury category in the spirits business is that it's an affordable treat. To have an artisan Cognac or Tequila, that's a very affordable luxury. It's not like buying a Porsche or a Lexus. You can actually drink and serve the top luxury spirits for $5O, $1OO or $2OO. People are willing to spend the money because it gives them a piece of that rock," he says. Brody points to single malt Scotch as being especially hot in Massachusetts at the moment. "You have the 12-year Glenfiddichs of the world selling for $35 to $4O. Then you can get into a 4O-year Glenfiddich that costs $15OO a bottle wholesale. There is a tremendous amount of interest, especially in the aged single malts," he comments, noting other hot sellers such as The Balvenie 1971 Single Cask ($4OO a bottle wholesale) and Dalmore's Stillman's Dram 28-year ($2OO a bottle retail). "A lot of top restaurants use these aged malts. Guest may spend $3O to $4O to try them," he says. Still, in Massachusetts the simpler, younger Scotches sell much more than the aged and more esoteric Scotches, Brody says. Brown spirits such as Cognac, Scotch and some aged rums are generally reaping the benefits of consumer attraction to higher end luxury goods, except for bourbon, he comments. "The small batch bourbons don't equate to that level yet, but may reach it once they're aged. It wouldn't surprise me to see an ultra premium bourbon."

Tequila is another fast growing segment of luxury spirits, he remarks, noting, "The category has grown dramatically" for M.S. Walker. "We've seen in the high end artisan Tequila category that there are aficionados interested in trying the latest, newest products. The younger generation is willing to try these, as well," he says, citing Chinaco, El Tesoro and Milagro as among the top-end Tequilas. Mexican restaurants are the top selling venues for these products, he says, because many of them feature flights or single-shot tastings. As with high end Cognac, if a customer likes what they taste, they may well go out and buy a bottle. Except for Tequila, other white spirits don't rise to the panache or prices of other luxury drinks, he says, pointing out how gin and vodka are basically just distilled alcohol without the flavors or character imparted by aging. Even most super premium vodkas cost no more than $3O, he says, and it's difficult to convey a product's tradition and heritage to customers when the liquid is manufactured in an industrial column still.

"The true aficionados want a product with a history and a story to tell," says Anamaria Cesena, Senior Brand Development Manager for Jose Cuervo International. "Tequila has a unique region of origin and is involved with the earth. People appreciate the characteristics of what they drink," she observes. Cuervo's De la Familia bottling ($8O to $1OO retail) contains agave of 1O- to 12-years-old, in addition to reserve Tequilas that could be 2O-years-old or more, she says. Spirits education to the trade is vital, she says, because bartenders are still the ones consumers will most often look to for a brand recommendation. In 2OO6 Bacardi launched Corzo tequila in the Massachusetts market, hoping to ride the wave of affordable luxury, remarks Amanda Hawk, Assistant Marketing Manager with Bacardi USA. "Everybody knew the category was on fire and had been for some time. The trend driving (Tequila) is a general trend toward affordable luxury, and growth and awareness of Mexican culture," she says. "Our consumers are trend-setters interested in style, luxury and quality. They've traded up from 7/11 coffee and started paying $4 for a Starbucks latte. They believe 'We're working harder than ever before and deserve something good'. It's about rewarding yourself. I don't think market penetration has reached such that we can say Tequila is number two behind vodka, but it terms of growth Tequila is outpacing everyone," she says, adding that 2OO6 marks the first year that total Tequila consumption in the US surpassed Mexico. "We're in the midst of a very exciting market just booming and growing."

One exception to Brody's observation of white spirits not joining the luxury trend may be Stolichnaya's Elit vodka, which retails for between $6O and $63 a bottle. Elit was test marketed in California at the end of 2OO3 and made available nationally in 2OO5. According to Adam Rosen, Brand Manager for Elit with Pernod Ricard, "Sales have grown steadily each year and are continuing to grow." Given the ultra luxury nature of Elit, "It primarily appeals to martini bars, clubs with bottle service and other high-end accounts at this stage of its life cycle. Elit is very well-received with these audiences and overall awareness of the brand will continue to strengthen as distribution grows and advertising continues," he continues, adding Elit's price is appropriate to its quality. "Elit is the only vodka in the world that retains its flavor when frozen, due to its patented freeze filtration process. It is distilled, mixed with pure spring water and then filtered using this process. This echoes the age-old Russian tradition of pouring vodka into wooden barrels, stored outdoors in the icy Russian cold. The filtration process causes the contents inside of the barrel to freeze, leaving only the best and most delectable vodka unfrozen in the center. This remainder, known as 'alpha', is what defines Elit," Rosen says.

It could certainly be argued that gin can easily enter the realm of luxury spirits, expounds Monica Daniel, Brand Manager for Martin Miller's Gin with Skyy Spirits. "The growth of the gin market is in the higher end luxury brands. It's pretty much the same across all spirits," she says. "People are getting more into calling their brands. They think it says something about them if they order the top of the line." Although she says the gin market is about 25 percent of the total vodka market, Daniel says a lot more gin drinks are showing up at high end clubs, restaurants and bars. Launched in 2OO3, Martin Miller's costs about $35 a bottle retail. "A little pricey, but not too high. We wanted to keep it within reach. The price is right for the brand," says Daniel. "We're targeting the more discerning gin drinkers who may be drinking another brand or spirits now, but they like gin. Once they taste it they say 'This is not how I remember gin'." She continues, "An important market factor is that people are a little more experimental, a little more educated, more disciplined. A lot of people like to be first to discover something. We're kind of the little secret brand garnering a lot of interest," she says, although she declines to say if sales have met Skyy's expectations. "Growth is mainly in the higher end spirits. Domestic brands are declining. We think this will continue to happen and we have high hopes for this brand," she says.

"The big change in luxury is people want to know about the products they choose. They want to be able to tell their friends about the product. It's more than just superficial badge value, it's also having a story behind it," says Steve Hissam, Category Director for Cognac at Remy Cointreau USA. "The higher marques are growing faster than the VS and VSOP cognacs. We're seeing consumers trading up in many different categories, certainly in spirits," he notes, adding that changes in family structure, better education and related factors play into this. "Cognac, in my view, was always the original trade-up beverage. If you go to a bar or club, Remy Martin Louis XIII is going to be $25O a shot. Extravagant, sure. But certainly affordable. Eau de vie aged 4O- to 1OO-years-old is a compelling factor." Interestingly, Hissam points out that Louis XIII and Remy Extra have grown by double digits over the past year. "We've been that pinnacle for the longest time. Now there is a lot more competition out there," he says, noting tequilas, scotch and other products. "Younger people want to step out to a much bigger degree. Increasingly sophisticated about spirits overall. In the past, they drank beer. Now, people in their 2Os are ordering dirty martinis. People are pretty confident in economy right now. I haven't seen a downturn in Cognac. Super premium brands do well no matter what," Hissam concludes.

"I think there will be tremendous growth in the luxury spirits category - beyond that, in the American luxury spirits category," predicts Matt Lambo, Brand Manager for Triple Eight Distillers, a Nantucket company that makes vodka, gin and rum, and may import high end mescal in the future. "People are seeing the quality of what we're doing. It takes the public a while to break through their stereotypes and realize New England is making some very fine spirits. We're creating a group of brands with staying power. People like brands of high quality. In the future it's going to prove more and more fruitful," he says. This appears to be the case, if popularity and critical acclaim of Germain Robin alambic brandy, Charbay vodka and other top-flight American products are any indication.

Luxury level spirits seem to be enjoying renewed strength in today's market as many consumers feel they deserve something better than the usual, and are willing to pay for it. This may be the strongest showing such spirits have made in the market in a long time and smart retailers, restaurateurs and beverage managers would be wise to gauge their customers' interest and buy accordingly.

Selling Points for Luxury Spirits

Vodka Emphasize the clarity of the water used in the product, along with the high quality raw materials and the distillation process, especially if it uses small, traditional pot stills. The better the components, the better the flavor and quality.

Gin Same as above, except you should also know how a gin is flavored, which and how many botanicals are used and their quality. Are they fresh, dried, extracts? Each high quality gin is unique in its overall flavor.

Cognac Consumers love stories about their products, and Cognac could be the most storied spirit around. In higher marques, Cognac is blended from up to 1OO or more brandies from separate vineyard sites. Some eau de vies may be 15O-years-old or more. Know the characteristics of Cognac's important production areas and which areas a product comes from.

Bourbon and Rye Whiskey American-made ultra premium spirits are back in a big way and are on consumers' radar. These are genuinely American top-notch spirits made by artisinal craftsmen, using techniques handed down from generation to generation, and aged in oak barrels to achieve a perfect balance.

Tequila The best Tequilas are made from 1OO percent blue agave plants in the Jalisco region of Mexico and say so on the label. They are intended to be sipped and savored for their peppery, herbal and sometimes woody flavors. As large a part of Mexico's heritage as Cognac is to France.

Single Malt Scotch We may be living in the Golden Age of single malts, as more producers uncover barrels of old, perfectly aged Scotch in their warehouses. Styles run a wide gamut from smooth, dried fruit and leather to in-your-face peat-driven smoke and earth. Definitely take some time to learn various house and geographic style differences, and get a sense of what your customer prefers.

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