Upscale labels driving vodka, tequila growth

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Vodka and tequila, two spirits at opposite ends of the product lifecycle, are captivating America's seeming insatiable quest to sample different brands, sip the latest cocktail, and trade up.

The willingness of Americans to pay more for spirits has allowed the industry to record higher dollar growth than beer for the third consecutive year. Americans last year spent $34.1 billion on spirits, up 4.8%, compared with $56.8 billion on beer, up 1.3%, according to the annual distilled spirits study by industry publication Impact.

As the country's 10th largest category, tequila grew 12.3% in volume last year, considerably higher than the industry's 2.4% volume uptick. That growth, however, is imperiled by the shortage of Mexican blue agave that is leading to higher prices and fewer low-cost brands.

Experts anticipate demand for tequila, led by the Latinization of America as well as this country's love affair with Mexican cuisine, could substantially exceed supply within the next four years.


The agave shortage, compounded by fungal disease a few years ago and black-market profiteering in increasingly scarce agave plants stolen from cultivators, is slowly filtering to consumers. The two biggest brands already have discontinued cheaper lines: The market's leading tequila, Jose Cuervo, shelved Matador; Sauza, second among tequilas in the U.S., dropped Giro.

"It's too expensive for producers to come out with a cheap brand because you lose money," says Carlos Arana, managing director of Jose Cuervo International.

Tequila, most often served as shots and in margaritas, is benefiting from America's willingness to pay higher prices for different tastes. Prices already have jumped 15% to 30% in some states this year.

"When something is in very, very short supply and suddenly found by consumers, prices are going to go way up," says Tom Pirko, president of the beverage consultancy Bevmark. "We're really staring down a chute of massive shortages just as demand is rising."

Industry estimates suggest that by 2004, U.S. demand could exceed supply by about 1.5 million cases, about 20% of today's total case depletions, Mr. Arana says, noting nobody foresaw the recent growth in tequila (Jose Cuervo grew 8.3% in '99) and planted additional agave, which takes eight to 10 years to mature. Even so, Jose Cuervo has just launched a global campaign, "Viva Cuervo;" it skews to a slightly older age demo of 25-plus.


Heavy on the supply side is vodka, long the country's largest spirits category with 25% of market. "Vodka's well into a maturing category," Mr. Pirko says.

The imports are the success story. The top five imported vodkas rose a collective 19% last year, double their increase in the prior year, and compared to only 2% growth for all vodkas, according to Impact. One contributing factor is the continued cachet of the martini.

"Whether or not people actually drinking martinis, the physical stature of the glass signifies they've arrived," says John Vidal, brand general manager of Finlandia Vodka at Brown-Forman Corp.


One industry observer says the category remains robust because of heavy marketing dollars from Absolut, the most advertised spirit.

Absolut, long distributed by Seagram Spirits & Wine Group, spent $32.2 million in measured media last year, according to Competitive Media Reporting. Absolut equates being hip, fashionable and desirable with drinking Absolut.

Big changes are in store for this market leader, though. The wine and spirits units at Seagram Co. are being spun off as the rest of the company is bought by Vivendi. Eager suitors have surfaced for the alcohol unit, including Allied Domecq and a joint venture between Diageo's United Distillers & Vintners and France's Pernod Ricard. Absolut's Swedish-based parent, Vin and Sprit, may influence who gets the prize. It and Allied Domecq this month were reportedly considering a joint bid for the Seagram's business.

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