Brindiamo Observer Series #1 - Distilled Spirits

INDUSTRYOBSERVER

SERIES

Distilled Spirits

Brindiamo Group • Industry Observer Series • Distilled Spiritswww.brindiamogroup.com

TABLE OF CONTENTS

1From Brindiamo Group:

An Introduction

3The Long View

7Here At Home

10Blazing Bright:

The Spirit Constellations

Whiskey • 10Gin • 12

Vodka • 14Rum • 16

Tequila • 18

21On the Horizon:2015 and Beyond

24Sources

Brindiamo Group • Industry Observer Series • Distilled Spirits 1 www.brindiamogroup.com

rindiamo Group is a consultancy firm dedicated exclusively to theglobal wine and spirits industry with offices in the USA and affiliaterepresentatives in Europe.

We are skilled advisors who have been in your shoes. Brindiamo Group’spartners and affiliates have owned and operated successful beveragecompanies, distributors and import companies (public and private) andplayed an instrumental role in the growth of the beverage industry.

Brindiamo Group’s seasoned professionals have well-establishedexpertise, including a deep understanding of the beverage industry,including distribution, import, agency, spirits, wine and beer. We havethe expertise, the resources, and the wealth of experience to successfullycomplete all types of industry transactions.

As we mine this multi-billion dollar industry ($70 billion in the U.S.alone) for useful data to share, it’s clear that everything is in a constantstate of flux. It might be best thought of as an organism; all partsinterconnected, each impacting the other and each with the potential toinfluence the whole. The result is an “advance or retreat” dynamic, withcompanies, both large and small trying to maintain at least the status quo,stick with what they do best, while simultaneously being pulled towardchange as global economic conditions evolve and as consumer behaviorsshift. And, most significantly, there is always pressure to keep pricesmanageable as costs inevitably rise year after year. The sheer wealth ofinformation available can be daunting, having to sift through seeminglycountless articles, survey and reports – both independent and govern-ment. Then it dawned on us, “why not assemble the best information wefind in one place?”

FROMBRINDIAMO

GROUP

An Introduction

B

Brindiamo Group • Industry Observer Series • Distilled Spirits 2www.brindiamogroup.com

Such an endeavor is a first for us. It’s our hope you’ll find it useful andbeneficial through the year.

Maybe it will even be an eye-opener. For instance, to say that thereare areas of the distilled spirits industry that are – not to be toodramatic about it – shrouded in a degree of mystery, would not bean exaggeration.

Take the oak barrel: a centuries old tradition for aging both wine andspirits. Today, oak barrels are manufactured all over the world. Of course,France and its famous forests get a lot of press, but Hungary, Spain, China,Germany and many other countries are serious contenders. And let’s notforget American oak. Articles mention shortages, but try to find actualstats – nothing. Try to find sales figures – apparently nonexistent,although we suspect that there may be such figures in reports publishedby services to which one has to pay subscription fees, then pay additionalfees for reports.

There are also murky areas in the industry, as evidenced in this quotefrom American Distilling Institute’s 2014 Distillers Resource guide, fromthe Rectifiers section: “Technically, not all the companies listed below arebottler/rectifiers. Some are simply brand owners that contract out bottlingto another company. There are often long corporate and contractual trailsthat an independent Bourbon takes, from distiller to bottler to brandowner/distributor, which makes it hard to identify who produces, bottlesand/or owns any given independent whiskey.”

After all the digging, collecting and checking, the facts were in. Through-out the process, Brindiamo Group’s team of researchers had one goal inmind: use our best intelligence gathering and organizational methods tobring our clients, partners and friends the most up-to-date and relevantdata, collected from reliable sources.


More than ever, the industry’s topechelon are taking an aggressive globalview, nurturing markets and attractingnew consumers in countries all over theworld. Teams are engaged to managespecific regions, enabling them torespond quickly to the needs andchanges in customer demand.

A UNIVERSAL TREND

TOWARD PREMIUMISATION

Every major spirits brand is looking tocapture more market share through theextremely popular (and currently prof-itable) practice of brand upscaling or“Premiumisation.” The strategy is asimple one: create a high-end productthat appeals to the consumers’ desire forluxury items, status, and sophistication.The premium product then, by asso-ciation, elevates the entire product line.The spirits marketplace is explodingwith premium products.

This practice of premiumisation hascatapulted whisky makers ahead of theirvodka counterparts in the two yearswith their flavored spirits. Vodkas haveresponded in kind, with some brands,such as Pinnacle, boasting over 40 flavors.

Gins are no exception, with botanicalinfusions, oak barrel aging, and theadditions of flavors from fruits, flowers,vegetables and smoked woods.

Whiskies are leading the pack with morerarified aging and flavoring processes,with what looks to be 2015’s mostpopular additive, honey.

Rum is on a slow, labored ascent. Planta-tion Rum founder, Alexander Gabrielsees rum as a spirit that is enjoying aperiod of being rediscovered, particularlyaged rum. “It’s not going to happenovernight… this is a category that willprogressively grow as quality increases.”

Tequila consumption has gained moreground in the last year. It, too, is toutingmore high-end product, moving awayfrom its down-and-dirty-do-a-shotimage into the realm of a refined drinkto be sipped and savored for all itflavor nuances.

Rabobank, in its 2015 report for thesecond quarter, echoes the global push byall serious brands toward premiumisation,confirming that this dynamic trend driv-ing revenue and margin growth isexpected to continue throughout 2015,with no foreseeable end in sight. It alsourged the big brands learn to adapt andrespond quickly to emerging trends, andmost importantly, abandon the reactiveposture that’s become their habitualstance and instead take the lead, becom-ing the trendsetters. Rabobank beverageanalyst, Elena Saputo, contends that toentice new consumers, “producers willhave to find new ways to capture their

THELONGVIEW


imagination. In order to stay relevant,they will have to innovate, introducingnew products and brands.” This is justas true in China, whose consumers aretrading down instead of up.

THE ART AND CRAFT OF “CRAFTING”There is an undeniable renaissance in themanufacture of countless “designer” or“small batch” spirits of all types. Theresulting products, it could be argued,approach a kind of high art. With uniqueand impressive packaging (everythingfrom bottle shape to label design) theycommand an impressively high pricepoint. Small distillers have increased fromabout 92 in 2010, to over 700 by the endof 2014. Touting esoteric names, andmade with rarified ingredients such asunusual combinations of botanicals,the spirits appeal to the connoisseurin all of us.

As more and more of these small localbrands surface, a heated debate hasmounted as to the precise definition of“craft” and “crafting.” No one seems tobe able pin it down succinctly enough toformulate any kind of standards orpractices for what qualifies as a “craft”product. Consequently, it’s an easy claimto make, with the burden of proof onthe “crafter.” One thing is sure; at itsbest, the crafting craze is hot on theheels of the “farm to table” movementthat is overtaking the food industry.Restaurants boast locally sourced cuisine– everything from the ingredients in theirsalads to the grass-fed beef from a farmless than twenty miles away. Consumersof all economic and educational stratahave shown they care deeply, not onlyabout what is being put into their food,but where it comes from and how it wasproduced. Their caring is demonstratedin the fact that they are willing to paymore for such items.


Is it any wonder that the makers of finespirits are following suit? For instance,when a vodka’s provenance reveals that itis quadruple distilled and infused notwith processed extracts (like the bigbrands) but with fire-roasted organicghost peppers, what heat-loving vodkaaficionado isn’t going to want to try it?It’s rarity and preciousness have taken ona collector’s item status with its vintage-

look frosted blue glass bottle and its batchand bottle number handwritten on abeautifully designed 1940s-style labelreminiscent of WPA poster art. Each in-gredient and its source is listed, rightdown to the name of the local mountainspring that supplies the water. And theguy holding that bottle, believeing everyword on it is probably thinking, “What-ever crafting is, this vodka must be it.”


HERE COME THE MILLENNIALS

The influence of the “millennials” isparticularly demonstrated in urbancenters like Los Angeles, San Francisco,Chicago, Austin, and of course, New YorkCity and its outlying boroughs. A recentforay into the Greenpoint region ofBrooklyn saw a group of five young menand women spend nearly one thousanddollars on a seven bottle assortment ofgins, vodkas and tequilas. The bottlesalone could have qualified as sculptures,the labels as fine art. Among the exoticspirits they purchased were a gin withelderflower, coriander, chamomile,cinnamon and blue ginger as well as theworld’s only vodka distilled from oats.

As the millennials acquire more aware-ness and income, young adults betweentwenty-five and thirty-five are always onthe lookout for something new and diff-erent. They are being taken increasinglymore seriously, as they now account for20% of people of legal drinking age.


The U.S. is seeing continued volumegrowth, however, the rate of that growthis slowing. Despite the slowdown, thepopular trend of premiumisation is onthe rise, particularly with whiskey.

The pressure to keep prices competitiveis proving to be a double-edged sword.Upwards trends in the sales of premiumand “super premium” single maltsscotches as well as high-end vodkas are akey factor in keeping average prices onthe rise. With such practices under-standably more expensive in every areafrom production to promotion, theconundrum is: how is it possible tokeep costs down?

Add to that the fact that spirits are amongthe most heavily taxed products on themarket. Retail sales for domestic spiritshit $70 billion, with $20 billion of that ingenerated taxes. The constant threat oftax hikes looms large over the entire in-dustry as municipalities move to increaseState Hospitality Taxes. To the relief ofproducers, eleven major tax threats weredefeated in eleven states in the last year.

2014 showed volume growth up 2.2%and revenue growth up 4.0% from 2013.Over half the spirit segment volumegrowth went to flavored whiskies, stealingmarket share from imported flavoredvodkas which suffered a corresponding5% decline in sales.

Last year also saw California, Maine,Idaho, Mississippi and Ohio join rankswith forty-one other states that haverelaxed their laws and now allow someform of spirits tastings. This has givenrise to an explosion, on the local level,of one of the most effective and trend-worthy practices that the wine industryhas enjoyed for many years: the tasting.Now, stores can offer their walk-ins thechance to taste a selection of spirits fromany category.

With a little investment of time, productand planning, such tastings become a

HEREAT

HOME


mini-event. The most common tastingsare free, with participants being allowedto taste up to half a dozen featuredvarieties of whatever the seller prepares.The possibilities are endless: showcaseonly one type of spirit like gin, or, offera progression from one spirit type toanother. The stores that put real thoughtinto their tastings, and who create anatmosphere of open friendliness with apersonable “host” to guide customers,find themselves rewarded with an en-hanced revenue stream. The opportunityto upsell customers on product isoptimized; they are more likely to trysomething new, having been offered amemorable experience tasting free ofcharge. They’re primed for purchasingand may walk out with considerablymore product than they would havewithout the event.

The tasting trend in spirits stores standsin stark contrast to the grocery industry.Although it’s not unusual to see a selec-tion of wines and beers in supermarkets,only twenty-seven out of all fifty statesallow for the sale of spirits. A holdover ofthe 18th amendment to the Constitutionintroduced in 1919 (also known as Prohi-bition), state laws are a smorgasbord of

confusing, and even absurd stipulations.Take Colorado – spirits sales are permit-ted in grocery stores only if the establish-ments is licensed as a drug store. InPennsylvania, where all spirits are soldexclusively by state-run stores, grocerystores may only sell alcohol by the glass,provided the store has a separate opera-tion as a restaurant with its own entrance.

Source: Distilled Spirits Council

Huffington Post


Finally, social media is buzzing, with allproducers trending to facebook andtwitter to maintain a presence andattract more “friends.” It’s working.Barcardi boasts 8,102,328 likes. JimBeam – 2,356,846. Evan WilliamsKentucky Bourbon, with its 230,749“likes” may have a long way to go tocatch up, but with country music’ssinger/composer, Kip Moore starring intheir videos on youtube, they are steadilygarnering fans. The social media arena isfar too extensive to go into here. Butproducers are being urged to exercisecaution. Since it’s virtually impossible tolimit who views a facebook page, thedangerous appeal of spirits to underageteens is of genuine concern.

The laws, the tax battles and the necessityof acquiescing to ever-evolving trends andthe “next big thing” surrounding the spir-its industry are never going to go away.Accordingly, producers must continuallyacknowledge the increased awareness ofUS consumers. A National RestaurantAssociation study shows that 46% ofconsumers are growing in sophisticationand adopting more adventurous tastes.With more refined taste comes theappreciation of quality and the willingnessto demonstrate that appreciation throughpurchasing power and that, for the timebeing, is precisely what the spirits in-dustry must both tap into and nurture.


Whiskey

They are flavors no one usually associateswith whiskey: cinnamon, cherry, honey,vanilla, blackberry, salted caramel andpeach. And, we suppose it had to happensooner or later: pumpkin spice. Dylansaid, “don’t criticize what you can’tunderstand,” so, maybe a little under-standing is in order since Sons ofLiberty’s winter release Pumpkin Spicetook Best in Category at last year’s WorldWhiskey Awards. Still, most of theseflavor experiments have been dubbed“starter whiskies,” aimed squarely at theyouth market. It’s easy to picture gettogethers in college dorms, frat partiesand celebrations that once fortified thepunch with peppermint schnapps andother “candy” flavors seeing these newwhiskies as a sophisticated step up.

With the major brands scrambling to at-tach themselves to celebrities, unlikelypartnerships are being forged. For thefirst time in 220 years, Beam has attacheditself to a star and unveiled the “MakeHistory” promotion with popular actress,Mila Kunis. Sure enough, there she is inthe Beam cellars, dressed in black andwearing work gloves while telling us theBeam family has always done things “theirown way.” As she speaks, she swings awooden mallet, securely tapping the bungin place on a 53-gallon barrel. You can

almost smell the sweet char as she takesa branding iron from a roiling forge andburns her own name into the barrel head.She informs us that Beam ages its whiskeytwice as long as required by law. Rollingher barrel out on its shelf so we can seeher brand, and with a wry tough galsmile, she tells us, “So, in four long years,I’ll be back for this one.” It’s short,moody, evocative and definitely makesyou want to taste that whiskey. And unlikemost brands that are clearly aiming totarget men, this Beam commercial hasleveled its sights on men and womenalike. With other new products like Sin-gle Barrel, Kentucky Fire and SignatureCraft, Beam is hoping to leave the restof the pack behind.

But other brands are racing to the finishline as well. It’s hard to tell who’s liningup behind who – the sponsors behind thebrands, or the brands behind the spon-sors. There are heavily publicized bassfishing events, championship bull riding,bartender competitions, tailgating tours.Even the world’s most famous mouse hasraised a glass of Evans Williams’s whiskeyas part of “The Disney Experience ofBourbon Tours.”

BLAZING BRIGHT:THE SPIRIT

CONSTELLATIONS


Rabobank’s second quarter report for2015 confirms the strength of Americanwhiskies, Irish Whiskies and single MaltScotches. So far, the single malts areenjoying an 11.2% growth spurt, withcountries like Taiwan and India as bene-ficiaries. Bourbon and Tennessee whiskeyexports topped $1.56 billion by the endof last year, yet warnings against “stag-nation” for the rest of the industry arebeing taken seriously. In order to turnthings around, Scotch producers are

urged to create new products with morepersuasive and imaginative campaigns tohook consumers, especially the youngerones who have not traditionally beenscotch drinkers.

Consumer fascination with whiskies, bothat home and abroad have made it theundisputed industry leader, passing allother spirits. Euromonitor, tracking 2014domestic whiskey sales tracked a 7.4%increase, with exports hitting a record$1.02 billion. 2015 may well be whisky’sbiggest year yet.


Gin

With its age-old ethereal juniper aroma,purists may think gin is and always will bethe most distinctive of spirits, best leftalone. It’s place in “cocktail culture” issecure, as literature on the classic ginmartini abounds. But the demand in themarketplace and competition from theother spirits relentlessly forces distillers

to push the envelope, experiment andreinvent. Flavored gins are hot on theheals of whiskies, vodkas and rums.

The latest report issued by the Inter-national Wine and Spirit Records showsglobal volumes of gin in an overall down-turn even as premium and the so-called“super premium” brands show growth,although the premiums account for onlya little over 20% of sales worldwide. Theother 80% struggle to regain their strength.


Surprisingly, the Philippines is in firstplace, comprising over 40% of theworld’s gin market. Spain is the biggestEU gin market, third in the world, andhere as with (it seems) everywhere else,domestic brands slip while super premi-ums continue to climb.

The U.S. is still a formidable produceras well as being the biggest importer ofgins from the UK (although many UK-label gins are produced here). Countrieslike Russia, China, India (where someWestern countries actually have their ginsproduced) and South America arebecoming increasingly gin-conscious.

2014 saw gin distilleries popping up allover the U.S. Gin matured and aged inoak casks is making an appearance, as aremore and more flavors from florals, fruitsand exotic herbs. Such products are beingtouted as gins to value for their individualflavor profiles. They are to be savoredfor their ability to stand on their own,without a mixer.

Consumer interest is fueling a movementaway from generic extracts and additivesand more toward local botanicals thatimbue the gin with its own identity,becoming synonymous with its placeof origin.


Vodka

With an illustrious history, this clearspirit has survived the centuries, popularsince it was first produced in Russiaaround the end of the ninth century.Derived from the Russian word, “voda,”meaning water, it was even known has“hot wine,” for its extraordinary warmingqualities. In 1716, distillery ownershipbecame the exclusive right of the nobility.Today, Vodka accounts for nearly onequarter of all distilled spirit sales, andcontinues to show annual growth, mostlyin the premium category.

Pernod Ricard’s report on Absolut Vodkaasserts that vodka, “characteristically hasno definitive taste,” which makes bothtaste and quality “important selling pointsto the marketers.” Vodka connoisseurswould argue that even in its unadulteratedstate it does indeed have subtle flavordistinctions depending upon what grainis distilled.

In addition, the wild popularity offlavored vodkas is hardly new. From themid 1700‘s to the end of the century,flavored or “aromatised” vodkas flour-ished. Vodka producers in the sixteenthcentury catered to the discerning tasteswith flavors like absinthe, acorn, anisette,birch, calamus root, calendula, cherry,chicory, dill, ginger hazelnut, horseradish,juniper, lemon, mastic, mint, mountainash, oak, pepper, peppermint, raspberry,sage, sorrel, wort and even water melon.

Although imported vodkas tended todominate in recent years, data fromNABCA for the year 2014 showeddomestic growth of 2.7%, while theimports made a much poorer showingat 0.4%. Chief among the domesticvodka juggernauts are Tito’s Handmade(which hit the 1 million case mark in2013 and showed approximately 80%growth in 2014) and New Amsterdam.Their impressive showing of 240,000case growth is even more impressiveconsidering that total domestic casegrowth was less than 200,000.

Currently, there are three primarychallenges for vodka producers. First,vodka is considered to be a mature in-dustry, meaning that it’s typically hittingan older demographic. All brands areattempting to offset that by coming upwith innovations that appeal to a youngerconsumer. Secondly, vodka tends toengender brand loyalty. As a result,consumers are reluctant to experiment,particularly outside of their brand.

The third and final challenge is that thereis too much competition. With the prolif-eration of so many vodka brands, each isnow jockeying to differentiate itself. In arace to become known in the marketplaceas the highest quality, the best flavored/non-flavored, the super-/ultra-premium,the top domestic/imported, the topaward winner, etc., the race has becomemore of an all-out struggle to survive.


Thus far, success seems to be contingentupon fragmenting the market, with noend in sight. Quoting again from PernodRicard, “defining new niche segments,like health and energy-based vodkas,creates segments where these weaknessesin coverage can be minimized.”

Regardless of its status as a “mature”industry, it’s clear that in the comingyears, vodka producers will be innovatingcontinually to acquire greater marketshare and attract younger consumers.


RumWhile all distilled spirits have age-oldpedigrees, the origins of rum are unclearto this day. It’s believed that rum’s ances-tors were fermented beverages fromChina and India. It was some of thesespirits, derived from the juice of the sugarcane, that Marco Polo sampled in the14th century, calling it “a very good winemade from sugar.”

Not until the 17th century was itdiscovered that sugar cane byproductssuch as molasses could be fermented andlater distilled. True rum seems to havebeen born at that time in the Caribbean,probably on the island of Barbados.After wresting control of Jamaica In1655, England saw fit to ration out rumto it sailors. In Australia, rum tran-scended being a beverage to drink andbecame a form of currency. As its valueas a commodity increased, it also becamethe province of smugglers and privateers(a factor in Hollywood and pop culturehaving made it the hands-down drink ofchoice among pirates).

As if that were not murky enough for his-tory, the word “rum” is still being de-bated over. Does it come from a Britishslang term meaning “the best?” Howabout from the Latin word “saccharum?”In 1651, the term “rumbullion” showsup. There are “rumboozle” and “rumfis-tan,” popular drinks from 17th centuryBritain, or “roemer,” a Dutch wordmeaning a drinking glass.

One thing is clear. It’s been around avery long time and it’s here to stay –and once again, “premiumisation” is thewatchword. This all pervasive trend willbe a key factor in the rum industry. The

IWSR report Global Market Review ofRum – Forecasts to 2015 reveal the pre-mium market rum to be underdevelopedin comparison to its vodka and whiskeycounterparts, although that is changingfairly quickly. The outlook is optimistic.

There are certainly plenty of varieties:dark rums from Jamaica, Haiti andMartinique. Flavored rums range frombanana, citrus, coconut, mango, limeand even starfruit. Gold or amber rumsattain distinctive color and strong flavorfrom being barrel-aged, often in refur-bished bourbon whiskey barrels. Thereare light rums from Brazil or PuertoRico. There are over-proofed rums ashigh as 150 or 160 proof. Spiced rumsrun the flavor gamut from cinnamon torosemary to pepper.

As might be expected, by year end of2014, America’s rum market leaderswere the well known Captain Morgan’s,capturing 34% of the market, Barcardineck and neck with 33%, and a far lessdaunting showing by Malibu with 8%.


The remaining 25% was spread acrossall other brands.

But it’s the premium and super-premiumrums on which producers are pinningtheir hopes. These are more in the cate-gory of fine scotches, to be sipped andsavored rather than mixed. Money isbeing poured into the marketing of suchproducts with event sponsorships, tele-vision advertising and magazine ads soextensive that they read more like books.

Expect 2015 to be the year that high endrums explode onto the scene. Pulling out

all the stops, in June, Heaven Hill Brandswill release their long-anticipated 94 proof,Admiral Nelson’s Black Patch Rum.

Of course, industry key players, Bacardi,Diageo and Pernod Ricard are also on-board, jockeying for position in whatthey see as an ever-burgeoning market.However, according to the RumFestglobal rum ambassador, Ian Burrell, Asiais at the forefront of the premium boom,creating wider global awareness. He alsowarns that such a trend may result inbrands cutting corners and making un-substantiated claims about their products.


TEQUILA

What other distilled spirit comes fromone place in the world and one placeonly? Tequila can only be tequila if it isproduced in any of Mexico’s five states:Jalisco, Guanajuato, Michoacán, Nayaritand Tamaulipas. The greatest demandfor Tequila is exports, which nowaccounts for almost 80% of the totalproduction. The past five years haveseen an average annual export growthrate of 4.5%.

Since the 1980s, this native Mexicanspirit has been slowly but surely cominginto its own. Back then, its reputationwas marred by reports of its abrasive fla-vor and its low-end prices. It also had tofight its stereotyped image of a beveragethat is only imbibed as a shot requiring apreliminary dose of salt, accompanied bya flavor so intense that it has to be chasedwith biting into a lemon or lime to “neu-tralize” it. But times have changed.

Rap artist turned record producer turnedactor turned entrepreneur, Sean “Diddy”Combs and industry leader, Diageo,cemented a partnership last year to takeover DeLeón Tequila. The descriptionof its bottle alone reads more like thatof a top of the line car: “Displayed in astunning bespoke bottle made fromhighest-quality fragrance-grade glass andboldly tattooed with the distinguishingmark of DeLeón, each expression inthe ultra-premium and luxury collectionsis strikingly defined.” Combs even wentso far as to give competitor Patron ahighly controversial funeral which onlyincreased visibility and fueled the public’sfavorable perceptions.

Ocho Tequila founder, Jesse Estes hasconfirmed that producers are hopping onthe bandwagon to “market their productsincreasingly using ‘craft’ productionprocesses and being ‘small batch’ or‘handmade’.” In keeping with the rest ofthe spirit industry’s lining up behind thistrend. In 2014 5% of the growth fortequila was powered by the most expen-sive brands with the steepest price tags.

Tequila is climbing the steps higher andhigher to upscale. Esquire is touting“Everything you’ve Wanted to Know AboutTequila But Were Afraid to Ask.” Web sitesabound with ratings – Business Insider’sTop Ten, Mens Journal’s 18 Best, theHuffington Post’s 13 Things You NeverKnew About Tequila, and even Fox Newsis extolling the virtues of the drink andtouting the Five Ways to CelebrateNational Tequila Day (it’s July 24th).

Despite such promising developments,tequila may be headed for a major crisis.Blue agave, the plant tequila is derivedfrom, is facing a predicted 40% drop incrop yield over the next three years.Past shortages resulted in a 500% priceincrease between the year 2011 and2013. Experts now foresee a potential100% price increase by 2018. Add tothis the devaluation of the Mexican pesoand rising inflation; independent growers– the growers that the smaller distilleriesdo business with, are suffering fromlower profits.


One of the agave crop’s saviors is theadvent industrial agriculture, the mass“contract farming” of blue agave. It is anoption – at least for the larger distilleriesthat can afford it, and many been doingit for years. It is the small to mid-sizeddistilleries that will be in trouble; somemay have to shut down, others maybe snapped up by their larger counter-parts through leasing, renting oroutright acquisition.

The bloom is definitely off the rose,especially when the Tequila RegulatoryCouncil of Mexico itself has announced

that eight out of ten tequilas being soldare fake. That is, 80% of current brandsare apocryphal, knock-offs, or piratedbrands. Sales of these pretenders isexcess of $500 million and climbing.So far, over 400 pirated brands have beenidentified, most of them being producedoutside Mexico. They meet neither thequality standards nor the purity of truetequila. In fact, the council warns againstconsumption of such adulterated prod-uct, citing harmful effects such as“headache, vertigo and even blackoutsthrough respiratory arrest.”


Needless to say, the incredible irony isthat Tequila is coming into its own asnever before. There is a boom, both inawareness and demand, for high-quality,genuine tequila. Global demand isincreasing. New flavors, better product,celebrity spokespeople, more visibilitythrough youtube and social media have allgot tequila on an unprecedented upwardtrajectory just as a massive agave short-ages threaten to hobble its production.

That said, 100% authentic tequila isdestined to keep flowing freely. It’sunlikely that consumers will noticeanything different about their favoritetequilas – except the price.


hat’s next? We’ve seen that the entire industry functions very like an or-ganism, as an elaborate and complex system of interconnected businesses.Even the slightest change or innovation in one can impact everything.This is particularly true for that part of the organism which is nature.Wood shortages, agave shortages, water shortages, weather conditions,crop yields, so many of these are out of our control. But this intricate,multi-billion dollar network involved in getting the product from thegrain fields to the shelves in stores – none of it is going to disappear. Inthe face of shortages, controversies and economic downturns, the spiritsindustry will do what it has always done: adapt.

Regarding trends, one thing is always true: a trend makes its entrance, itbuilds, it peaks, then dissolves as another one takes it place. Consider thevocabulary of the trend of premiumisation. Brands have already labeledproducts as “premium,” “super premium,” and “ultra premium.”“Mega” might be the only one left. We believe that the terms “crafting”and “premiumisation,” while unquestionably tied to some of the morerefined processes for producing superior spirits – are more in line withthe marketing than the creating. Spirit Industry leaders, and they enjoyriding the crest of the premiumisation and crafting wave, would do wellto anticipate the ebbing of that wave by getting their agencies and PRteams to focus on bringing about the “next big thing” while the currentones continue to peak.

In the final analysis, it’s not the trends that count. Without a quality prod-uct, sales fall. Profits: every spirits producer wants them; it’s only natural– it’s big business. But it’s the consumers who express themselves throughtheir purchases. They are the final arbiters of which brands sell and whichones turn the biggest profit.

W

ONTHE

HORIZON

2015 and Beyond


For the duration of 2015 and certainly into the next couple of years orso, we’re going to see more of the following:

From Farm-to-TableConsumers of all ages are demonstrating their preferences for all thingslocal. Membership shares in organic farm co-ops are replacing super-markets as the place to get fresh fruit and vegetables. Restaurants that lo-cally source there foods are wildly popular. And because at this point intime consumers are gravitating toward more flavorful products and to-ward producers that are sourcing local ingredients and have connectionswith their communities, craft distilleries are following their lead.

Brand ActivismThe spirits industry is going to be doing more and more to demonstratethat it has a social and environmental conscience. Barcardi is touting sus-tainable business practices with its “Good Spirited – Building a Sustain-able Future” campaign. We’ve seen that the barrel industry is now a majorforce in reforestation and controlled harvesting.

Bombay Sapphire at Laverstoke Mill was the first and only distillery inthe world to be “outstanding” certified by BREEAM, the world's leadingdesign and assessment method for sustainable buildings. Bombay Sap-phire’s distillery has a low carbon and renewable energy strategy thatearned it scores of over 90% in the Water, Materials and Waste sectionsand 100% in the Energy and Management sections.

Initiatives that show consumers that the spirits producers have alignedthemselves with reducing harmful impact on the environment may wellbe the next huge trend.

Consumer EngagementSpirits brands are creating ever more powerful presences online thoughtheir websites and social media. Actively involving your target audienceon the web and on smart phones is the goal. Videos games like air hockey,football trivia, slot machines are still popular, although the spirits industryis facing mounting pressure to curtail such games due to their appeal tounderage children. But with the advent of a self-regulation initiative takenon by the Distilled Spirits Council, consumers can expect to find morethings geared toward adults: an App that can be used to determined ifyour alcohol consumption has exceeded the legal limit. Another App willgive the consumer info such as the caloric content of the beverage they’redrinking. Brands have also come out with trivia/educational Apps forwhiskey.

Healthy SpiritsFor years, the wine industry has released many low-calorie, sulfite free,and organic wines, Riding their coattails, spirits producers are already at-


tempting to appeal to the health-conscious consumer with their own or-ganic whiskies, gins, rums, tequilas and vodkas. Look for campaignsgeared toward boosting awareness of these products.

Celebrity EndorsementsGetting a celebrity behind a brand is one of the oldest marketing tacticsof all time. In the 1760s, Josiah Wedgwood, founder of Wedgwood pot-tery and china, nay have been the first. Even author Mark Twain himselfendorsed two brands of cigars and Mark Twain Flour.

The results of a study, published in the Journal of Advertising researchathlete endorsements products will, on average, see a boost of 0.25% instock value, but even more impressive is that product sales will increaseby an average for 4%.

Today, the staggering amounts of money being paid for these endorse-ments is unprecedented, a measure of the spirit industry’s confidenceand certainty that attaching someone famous to its brand will steer con-sumer preferences and thereby increase sales.

FROM BRINDIAMO GROUP

To Our Clients, Partners and Friends,

If this, the first in our Observer Series has opened your eyes a little wider,made you aware of something you didn’t know before, or, given you someinformation that will help you in your own endeavors, then it has doneits job. Please fell free to cotact us with any questions. We would welcomeassisting you with your next strategic move. Please feel free to contact themanaging partners at the emails and numbers below:

Jef [email protected]

Roy [email protected]


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Buckley, Hilary. 8 TOP SPIRITS PRE-DICTIONS FOR 2015. www.uncorks.biz

Bunte, Brady. 2015 Shortage of Agave.

Celebrity Endorsement Through the Ages.http://ibscdc.org

Conlon, Christopher T., Raoy, Nirupama, S. The Price of Liquoris Too Damn High: Alcohol Taxation andMarket Structure. February, 2015.

Conrad , Marissa. Modern Distillery AgeJanuary 30,2105. Volume 6 Number 4.

Consejo Regulador del Tequila (CRT),tequila regulatory council, 2014(www.crt.org.mx/EstadisticasCRTweb)

Cooper, Ben. Reasearch in Focus- RumSector Reaping the Premiumisation Divi-dend. March, 2011.http://www.just-drinks.com

SOURCESCounterfeit Alcohol - Coming Soon to aGlass Near You? April, 2015.http://www.globallegalpost.com

Clicking with Kids: Alcohol Marketingand Youth on the Internet. Johns Hop-kins Bloomberg School of Public Health.http://www.camy.org

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Five Facts About Jack Daniel’s Whiskey.www.flask.com

Genoways, Ted. The Tequila Curse.http://www.bloomberg.com

Hopkins, Amy. TOP 10 SPIRITSTRENDS 2015. January, 2015.www.spiritsbusiness.com

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SOURCESIan Chadwick Forum, 2012.www.ianchadwick.com

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Llodrá, David. THE WINEMAKER’SGUIDE TO BARREL EVALUATION:Methodology that Links Chemical andSensory Analysis, plus Experimental De-sign. World Cooperagewww.worldcooperage.com

Malandrakis, Spiros. Gin’s GrowthThrough Premiumisation: HumbleOrigins and a Noble Future.http://blog.euromonitor.com

Mayes, Steven. The Chemistry Of UsingWooden Oak Barrels To Age Spirits. July,2013. http://redheadoakbarrels.com

Message in a Bottle: Craft Spirits andStock Bottles 2013.springdesingpartners.com

Musonera, Dr. Etienne.Hemley, Dr. David. Analysis of GlobalMarketing Strategies in Distilled SpiritsIndustry: Absolut Vodka

Nagarajan, S. Agave supply crisis and mit-igation strategies for tequila distillers –Agave price expected to rise by more than100 percent by 2018.bevindustry.com

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Patton, Janet. Bourbon Sales Up 7.4 Per-cent in 2014; Exports Hit Record $1.02Billion. Lexington Herald-Leader. Febru-ary 3, 2015. http://www.kentucky.com

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SOURCEScontinued from previous page

Top Ten Global Consumer Trends for2015. www.thespiritsbusiness.com

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Brindiamo Observer Series #1 - Distilled Spirits

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