How Does Repositioning Help A Firm? : The Past, Present, And Future Of The Spirit Industry

Transcription

1 How Does Repositioning Help A Firm? : The Past, Present, And Future Of The Spirit Industry Rober A. Dow, Cott Beverage Inc. Sungwoo Jung, Columbus State University Yonpae Park, Savannah State University INTRODUCTION Scotch whisky is experiencing record sales. Statistics show (as illustrated in Appendix 1) that Scotch whisky export sales topped $5.2 billion in This was over 11% growth when compared to sales recorded in In fact, the industry has recorded at least 3% year-over-year growth in seven of the last nine years. It is safe to say that Scotch whiskies, which have been on the export market for over one hundred and fifty years, are more valuable today than ever before. In order to accommodate the ever-growing, international demand for Scotch whisky, many firms involved in the distillation of the beverage are investing large amounts of capital to expand production capabilities. Over a recent eighteen month time period (February 2007 August 2008), nearly $1 billion of capital investment was spent within the industry. This significant investment was used to improve or expand distilling capabilities, modernize bottling facilities, and provide additional warehousing space. Diageo plc, whose brands account for approximately 40% of the Scotch whisky sold today, recently invested approximately $300 million within the industry. As part of Diageo s total investment in the industry, Scotland saw the first new distillery built in the last thirty years at Roseisle (located in the Speyside region). In addition to the new distillery, Diageo expanded current distillation and bottling facilities. Another key player within the Scotch whisky industry, Bacardi and Co. Ltd, recently invested roughly $250 million. Bacardi, who sells Dewar s White Label (a well known Blended Scotch whisky), also expects to use its expanded capabilities to accommodate growing demand. While the expansion of distilling, bottling, and warehousing capabilities by the major Scotch producing firms has been large in terms of monetary amounts, even small producers, such as Kilchoman distillery located on the island of Islay, have recently invested in additional production capabilities. Overall, the industry is in the best state that it has ever been in, and while the newly produced whisky matures, it is looking to grow over the next decade. MARKETING STRATEGY: PRODUCT Any marketing discussion that focuses on the product aspect of the Scotch whisky industry first must define what constitutes Scotch whisky. Although the Scotch whisky industry is composed of many brands (in the thousands), there are a few things that are consistent across the board. In addition, there are a few factors that cause much of the differentiation (at least, in terms of product composition) between the different brands in existence today. By definition, Scotch whisky must be made in Scotland. There are premium spirits called whisky or whiskey from a variety of countries (the U.S., Canada, Ireland, and India to name a few), but none of these whiskies, by law, can be called Scotch whisky. Although most of the on-premise Scotch whisky brands available are still Blended whiskies, it is not uncommon to encounter an upper-end, high-priced restaurant or bar

2 that has a Single Malt whisky selection with as many entrants as the Blended whisky category. Frequently, Single Malt whiskies are higher priced than their Blended whisky counterparts which helps with their more exclusive positioning. Off-premise inventory (in the United States) is often still tilted towards Blended whiskies, but a large retailer or a retailer in a more affluent area will often have a Single Malt whisky selection that is comparable to the Blended whisky selection in terms of brands available. In other mature markets closer to Scotland in terms of distance, such as France and Spain, it is not uncommon for the Single Malt whisky selection to actually be larger than the Blended whisky category in a wide variety of off-premise retailers. In developing markets, such as China, India, and Venezuela, Single Malt whisky brands are not yet growing at a rate similar in percentage terms with the higher volume Blended whisky category. However, it must be noted that the Single Malt whisky selection historically has not been as advanced in these countries. In spite of tremendous growth within the Single Malt whisky category, in many of the geographic markets around the world, Blended whiskies are still the mainstay of the market. Sales of Johnnie Walker Black and other leading Blended whiskies in places such as China and Latin America are currently thriving. According to Diageo plc s June 2007 June 2008 financial report, the Johnnie Walker brand grew net sales by 12%. A great deal of this growth occurred in markets that, up until recently, had very few consumers that could regularly afford Scotch whisky. Due to the general price difference that exists between the Blended whiskies (which on average are less expensive) and the Single Malt whiskies, it is conceivable that many of the developing markets around the globe will be somewhat limited in the selection and consumption of the Single Malt category. It is quite possible that the international growth will continue in terms of percentage. However, it is also quite possible that a subtle shift towards non-blended whiskies may begin to steadily emerge in the developing markets. At the same time, it is possible that mature markets will begin to see a slow decline in Blended whisky sales and a continued increase in Single Malt sales. One big element that could affect whether this would happen is the global economy. For instance, countries that are experiencing economic growth (such as China) have new buyers that previously could not afford the traditional Blended whiskies. Therefore, the Blended whisky category continues to grow, as it has over the last few years, in this environment. This growing economy is also turning former members of the middle class into new members of the upper class. As newly entrenched members of the upper class, Single Malt whisky then becomes more easily obtainable and fashionable. This occurrence then causes the Single Malt category to grow, not only in terms of sales, but also in terms of product alternatives. Therefore, future growth in both the Blended whisky and Single Malt whisky categories should happen provided these markets do not experience massive economic slowdowns. Mature markets (such as the U.S., France, Spain, and the United Kingdom) may see growth, but it more than likely will be through a different route. Blended whiskies have been available in the mature markets for generations. Today, their sales are experiencing very little growth. Although the overall Single Malt category has grown very well throughout the first decade of the 21st century, future growth in mature markets may not come from the established Single Malt products (such as Glenfiddich 12 year old or The Glenlivet 12 year old).

3 Over the last few years, a transformation has begun to occur in the Single Malt category. The category has seen whiskies that would be classified as High End Premium or Super Premium begin to become more of a mainstay both in the offpremise and on-premise markets. These whiskies are often higher priced due to longer aging periods or specialized casks used in aging. For instance, one used to find Glenmorangie Single Malt whisky widely available only as a 12 year old Single Malt Scotch. However, today six different expressions the term used to describe Scotch whisky brand extensions are in existence. These include: the Lasanta (extra aging in Spanish Oloroso Sherry casks), the Quinta Ruban (extra aging in Port casks), the Nectar D Or (extra aging in Sauternes Wine casks), the Original, 18 year old, and 25 old. The Glenmorangie brand is not alone in this growth of the product line. Many of the brands that compete in the Single Malt whisky category have taken a similar approach concerning expressions. The Single Malt whisky expressions, which are creating new ways to differentiate from competitors, are driving revenue growth in mature markets. This trend is expected to continue and even progress as: Blended whiskies begin to utilize similar methods of differentiation to rejuvenate declining or well established brands (such as Blended whiskies like Dewar s and Chivas Regal adding expressions based on time of maturation aging) and wealthy consumers in developing markets begin to encounter and covet new Single Malt whisky expressions. As the complexities of expressions have grown, product packaging has evolved and supported the overall image of the sophisticated, well-defined, Single Malt whisky. Single Malt expressions are often found in attractive bottles with numerous product attributes listed on the label or on the accompanying box provided to house the bottle. Information that would be useful to a Single Malt enthusiast, such as years of maturation, cask types used in aging the product, product s region of origin, and aroma and flavor descriptors, are usually incorporated in the packaging. This advancement in packaging should continue as the high end premium and super premium categories of Single Malt whisky begin to become more common in developing markets. In addition, luxurious packaging, such as crystal decanters and wooden boxes, will become more of a mainstay and a common way of showcasing a brand in what over time may become a crowded field. For the high end and super premium categories of Single Malt whisky, their time has come and it should last over the coming years. The various expressions are multiplying in terms of what is being offered. Once upon a time, Single Malt whisky was generally defined strictly by time of maturation. Now, and in the future as well, time of maturation is no longer going to be the only determining criterion to a regular or frequent consumer of Single Malt whisky. Both novice consumers and hard-core connoisseurs will demand more from the product. Offerings will have to creatively demonstrate not only the time of maturation (such as a 12 year, 15 year, or 25 year), but also their region of origin (such as Speyside, Highlands, Islay, Skye, Jura, or Western Coast), and the type of casks utilized in maturation (such as former Sherry, Port, and Rum casks). The labeling and packaging used for the Single Malt whisky brands will assist in guiding the potential consumers as they sort through this expanding category. Additionally, many firms will continue a fairly recent development of providing tasting notes and diagrams to assist the consumer. It is becoming more common for a Single

4 Malt expression to have sensory descriptors listed on the box of whisky. Single Malts have a wide range of these descriptors. Much like the terminology used in wine tasting, it is not uncommon for a Single Malt expression to be evaluated in terms of its color, palate, nose, and finish. The provision of sensory descriptors is primarily for Single Malt connoisseurs. However, as the practice of providing these tasting notes becomes more widespread, the sensory characteristics of a particular Single Malt whisky will become more of a point of differentiation for the various brand expressions within the category. In fact, it is expected that Single Malt consumers will begin to make more first time or once-only purchases based on desired product attributes in the future. Therefore, the use of tasting notes is sure to become crucial in the quest for Single Malt whisky market share as it continues steady, global growth. MARKETING STRATEGY: PRICING Examination of the premium spirits industry as a whole could lead an observer to make a fairly accurate statement concerning Scotch whisky relative to its competitors: generally speaking, it is more expensive. Scotch whisky on average, in the U.S. market, tends to be more expensive than Rum, Vodka, Tequila, or other Whiskies (notably Canadian or Bourbon). This general perception has served to reinforce the stereotype about Scotch being somewhat of a rich man s drink. While this perception, and the reality that forms the basis for this perception, may work against Scotch in taking away market share from other premium spirits, it definitely works in the favor of Scotch in terms of price ceilings and product positioning. MARKETING STRATEGY: PLACEMENT For Scotch whisky, placement focuses on two broad categories that relate to where the drink is consumed: on-premise and off-premise. On-premise refers to whisky that is consumed at the location that it is purchased. On-premise locations would include restaurants, nightclubs, bars, and entertainment venues. Off-premise refers to whisky that is purchased at one location, but the consumption will take place elsewhere. Typical offpremise locations are package stores, grocers, specialized spirits markets, and on-line spirits retailers. Total Scotch whisky sales are derived from a combination of these onpremise and off-premise locations. Due to the importance of both of these categories, firms that sell Scotch whisky are constantly attempting to gain access to the outlets that are suitable for their particular brands. While it must be said that the selling price (on a per ounce basis) of a premium spirit is noticeably higher in the on-premise environment, the higher margins do not represent what the premium spirit firms realize from the sale. The on-premise accounts typically receive pricing for premium spirits from the distributors that is comparable to off-premise accounts. Therefore, the higher margins earned from on-premise sales generally only benefit the on-premise account. With off-premise accounts being the primary point of sale in mature markets, why exactly would a firm that sells Scotch whisky brands be so concerned with marketing efforts in the on-premise category? As was earlier stated, the on-premise locations are often where a consumer may actually be introduced to a particular product. Therefore, firms involved with Scotch whisky brands want to make sure that their products match

5 up with the demographic groups frequenting a particular on-premise account. For example, a firm that has a large Single Malt whisky portfolio with many super premium level brand expressions (such as Macallan) is going to use considerable efforts to seek out and have selections on display at exclusive, five-star restaurants. Not only would the average clientele at these exclusive restaurants match the demographic profile of the typical Macallan consumer (which could lead to repeat purchases by customers familiar with the brand), the five-star restaurant also provides a fitting atmosphere where the product can be sampled for the first time by a potential repeat customer in the presence of onlookers (potential future customers). Due to Scotch whisky being manufactured in only one country, but yet available in over two hundred national markets, the distribution network could be considered highly advanced. However, this network has been defined and refined over a period of several decades. Improvements in technology have greatly impacted the area of supply chain management. These technological breakthroughs have allowed better inventory control, production forecasting, and pricing transparency. Today, both on-premise and off-premise retailers have a much greater opportunity to interact with distributors and wholesalers to effectively monitor stock levels of all premium spirits. Therefore, Scotch whisky today benefits from an easier system of being in the right place at the right time. One example of placement decisions a firm involved in the Scotch whisky industry may encounter would revolve around the Blended whisky sold in the United States. Blended Scotch whisky sales in the United States are showing very little growth. From , the Blended category grew by only 1.2%. While this relatively stagnant growth pattern has a multitude of contributing factors, firms involved in the industry would be wise to examine the placement aspect of the marketing mix. For instance, a firm should ask are my Blended whisky brands maximizing the potential channels? or are the existing locations sufficient to drive desired sales?. It is highly likely that much of today s conversations pertaining to the placement of Blended whiskies in the U.S. market focus on the key off-premise retailers. However, in the future, it is expected that a greater emphasis will be placed on Blended brands (much like the Single Malt brands) and the exposure they are receiving at on-premise accounts. Distribution to key on-premise accounts can assist in rejuvenating a stagnant brand by making it look hip again. If the on-premise perception improves, future off-premise sales should increase due to repeat customers purchasing in larger quantities. Another key topic when considering future product placement concerns the growth of key developing markets. While some developing countries are among the largest consumers of Scotch whisky in the world (Venezuela, South Africa, and China), one large, developing economy, India, is notably absent. This absence is not because Indians do not drink whisky. In fact, Indians are the largest consumers of whisky in the world (over 70 million cases were consumed in 2006). However, only 1% of total whisky sales in India came from Scotch whisky. Historically, India has had very high tariffs placed on imported whisky. This handicap, in combination with a thriving, local whisky industry, has made it difficult for Scotch whisky to achieve record success in this market. However, recent tariff reductions, an economy that is among the world s fastest growing, and the sheer size of the Indian middle-class (approximately 80 million), should allow firms involved in selling Scotch whisky to see better returns all the way from Delhi to

6 Mumbai. This anticipated growth will drive the industry to more closely examine the key points of product distribution and consumption patterns within India over the coming years. Through proper understanding of the retailers, the distribution network, and the desired on-premise accounts, the Indian market, in the future, could easily grow to become one of the largest sources of revenue for the Scotch whisky industry. The growth in commerce done on the Internet should also assist the Scotch whisky industry with sales. This place provides not only a marketplace for purchasing transactions, but also an easy way to educate and inform potential customers about the various Scotch whisky brands. While legal restrictions prohibit the sale of alcohol on the Internet in some markets, it is expected that future sales growth may come partly from online shoppers. The expanded use of Internet consumption will be particularly useful to Single Malt brands that may have limited distribution channels or that are not as well known as their larger competitors. Online whisky merchants, attempting to increase brand awareness, have the ability to provide in-depth product information to would-be consumers and seasoned, Single Malt connoisseurs alike. In addition to becoming more familiar with obscure, not-easily-available brands through Internet purchasing, these connoisseurs will also be able to categorize their purchases as exclusive or not even available on the shelves. In the hopes of capturing a younger, hipper target market, Scotch whisky firms will continue the trend in mature markets of increasing the placement of its products in the sophisticated on-premise environment. The brands served at on-premise locations will vary based on the clientele that frequent the establishment. However, those in charge of growing the Scotch whisky category with younger purchasers will utilize the high end and super premium selections available in their portfolios. Due to this approach, it will be more likely in the coming years for a trendy, upscale bar or nightclub (particularly in a concentrated, urban environment) to have a Single Malt selection that is much more advanced in terms of available expressions than what is the norm today. MARKETING STRATEGY: PROMOTION For Scotch whisky in the past, there was not much middle ground. Promotional efforts from earlier decades, in spite of their possible intentions, often only reinforced this status. While the approach to promoting the various Scotch brands ensured that the primarily targeted consumers could afford the products, it did little to invite new demographic groups to switch their allegiances from other premium spirits available on the market. In a sense, Scotch whisky seemed content with the number of drinkers and the admission that it may not be the product for all. While this style of promotion may have pleased the end user who either liked the product, or liked differentiating himself from the purchasers of Rum, Vodka, or Canadian whiskey, it did not bode well for a spirit that would eventually have its core consumers literally die off in a matter of time. Today, Scotch whisky is enjoying record success. It is selling in over two hundred geographic markets in the world. One can argue that the product has finally received its due for the quality and consistency that it offers. However, it can be just as easily (and more reasonably) argued that the success that Scotch whisky is enjoying today is a byproduct of the promotional efforts that the industry began embarking on just a scant few years ago. Industry consolidation over time, with mega-firms such as Diageo plc, Bacardi Ltd, and Pernod Ricard, taking on the leading roles in marketing the various whisky

7 brands, has made large pools of advertising and promotional money available for the task of growing their Scotch offerings. In addition to the funds (Diageo plc, for instance, spent approximately $1.1 billion in total marketing activities from July December 2007), the leaders in the industry bring capabilities, unmatched marketing research skills, and global advertising knowledge. While the products offered by the players within the Scotch whisky industry are, in fact, high quality and consistently produced, the promotional abilities offered by the major firms have definitely changed the rules of the game for Scotch whisky, not only for today s climate, but also in the foreseeable future. Additionally, sales promotions (often around specific holidays and advertising campaigns) benefiting the consumer are continuing to be utilized. The buying public, even on an item that would be considered to some a status-oriented purchase, does enjoy a better price. In order to facilitate the consumer sales promotions, often whisky producing firms within the industry will also engage in trade promotions. Consumerdirected, price-oriented sales promotions are primarily taking place in the off-premise category (with the exception of the universal happy hour price reduction which is still utilized by on-premise providers). Further fueling this trend is the emergence of the Big Box package or liquor store. The presence of these Wal-Mart-esque retailers, much like the presence of larger on-premise crowds during happy hour, has proven that price elasticity does exist in the premium spirit industry. Smaller, independent retailers have had to adjust prices downward in order to be competitive. The lowering of prices (and margins) on a Scotch whisky cannot be done without at least attempting to promote the change. Therefore, it makes sense to use the sales promotion, whether a large or small retailer, in conjunction with high purchase holidays (such as Father s Day or Christmas) or with television or local print media advertising campaigns. Continued, and more concise use of the off-premise sales promotion is to be expected in the foreseeable future, especially if the economic conditions in the mature, large volume markets (such as the US, France, and Spain) continue to deteriorate. It is realistic to expect retailers in the future to draw on their relationships with the Scotch whisky producing firms to maximize any national advertising campaigns. In fact, in order to maximize sales promotional efforts, the retailers will be made more and more aware of any and all other promotional tools utilized to grow a brand in a given market. An example of this kind of synergy would be Pernod Ricard working with distributors on trade promotions (which would trickle down to consumers through retailers and their sales promotions) for Chivas Regal (one of Pernod Ricard s Blended Scotch brands), having a strong well concentrated six week ad campaign (which also points the viewer to the Chivas Regal website) leading up to Christmas, offering a trip to Scotland contest (both at its website and in November-December print advertising) and using personal sales people at key distribution points to drive home the message at the local level. This approach, called in some marketing circles by the name of The 360º Approach will prevent the Bacardi s and Diageo s of the world from missing opportunities and will assist the retailers in joining local efforts with national (or even global) campaigns. Sponsorships are, and will continue to be, utilized as firms within the industry attempt to more precisely target new or high-potential markets. For instance, firms may choose to sponsor up-and-coming elements of culture that resonate with the desired consumer segments. Art or jazz festivals, independent musicians, and new entertainment venues may all end up recipients of promotional dollars. Today, Diageo uses its Johnnie Walker

8 brand to sponsor a Formula One racecar driven by Kimi Raikkonen of McLaren Racing. Although, these sponsorships can be extremely pricey (Diageo s deal with McLaren Racing costs roughly $28 million per year), if the desired demographic groups are paying attention, it should be considered money well spent. Firms within the industry will also look to financially reward key influencers (such as national or local celebrities) that are charged with promoting the products. Such key influencers may be bar or nightclub owners (to increase on-premise sales in a specific market) or simply well-connected, socially-driven people who are respected in their market (which could lead to both on and off-premise consumption pattern changing amongst the key influencers sphere of influence ) This approach has been used in the past and should be a good way to help illustrate lifestyle choices to consumers in the future. One of the more recent developments in the field of marketing is the use of guerilla marketing campaigns. The use of these unorthodox, get-exposure-by-any-meansnecessary methods have gained in acceptance over the last few years. Discussions with anonymous sources in the Scotch whisky industry have revealed that firms involved with the marketing and sales of Scotch whisky have begun to engage in the use of guerilla marketing efforts. Paid spokespeople representing the Scotch brands have shown up at various social events (with people from the desired demographic groups in attendance) in high population centers in order to generate excitement about the brand. Although it is difficult to calculate an exact return on investment when using guerilla marketing techniques, it is highly likely that the use of this tactic will increase in the foreseeable future.