BY MICHAEL SHERER

What’s hotter than the Yankees in August? Well, in case you haven’t been paying attention lately, all things Irish. In the past several years Ireland has risen above its bucolic image as a sleepy, rural island full of eccentric sheep farmers. History and heritage now co-mingle with a young, hip society on the cutting edge of technology and e-commerce, making Ireland Europe’s second-fastest growing economy and one if its top tourist destinations.

For centuries, the Irish have emigrated to countries around the world, looking for work, seeking their fortunes, and making their mark wherever they went. Now, the Irish are exporting pieces of their culture, reminding those who left of what they’ve missed and enthralling those who have never been. Gaelic pride and inventiveness have enabled the Irish to take old traditions and repackage them for new audiences. Irish music, becoming more popular in its own right, has been given new twists by groups like Afro-Celt Sound System. Riverdance and offspring troupes have given quaint Irish folk dancing mass appeal. Celtic art and jewelry are the latest in fashion accessories.

Perhaps nothing Irish has traveled as well as the center of Irish socializing, the public house. Irish pubs are springing up all over not only the U.S., but the world as well, safeguarding and promoting the Irish art of conversation. The mainstays of the pub — Irish whiskey, beer and cream — are gaining in popularity, and here, too, a little repackaging has garnered them new interest among a younger, hipper crowd.

WHISKEY A GO-GO

Whiskey is one of Ireland’s oldest social traditions. The art of fermenting wine and beer had been around for millennia, but medieval Irish monks added a new twist. Employing an alembic pot still, which the Moors had used previously to make perfume, the well traveled and well educated monks distilled alcohol from fermented barley malt. Called uisce beatha, or water of life for its ability to make the oft-tainted food of the day a bit more tolerable to the digestive system, the new beverage quickly found favor among invading tribes of Normans, Saxons and other itinerants who washed up on Irelands shores. Whiskey, beer and wine, in fact, were beverages of choice since safe sources of drinking water were hard to come by before the advent of modern sanitation and sewage and treatment facilities.

Irish whiskey distilling hits it zenith at the end of the 18th century. At the time, there were more than 200 distilleries in Ireland producing hundreds of whiskies. Prohibition in America, a trade war with England, and the favored status of Scotch whisky by American servicemen returning home from England after WW II put a crimp in Irish whiskey sales and exports. By the early 1960s, there were only five major distilleries left. The four distillers in the south joined forces as the Irish Distillers Group, with Belfast’s Bushmills finally following suit in 1972.

Distilling in Ireland, however, is experiencing a small renaissance. More brands are being introduced by both the major distilleries and Irelands small independents. And brands that have been around a while are seeing substantial growth. While brown goods categories in the US have generally suffered over the past two decades, high end spirits like single malt Scotches and single barrel bourbons have continued to do well. Irish whiskies also have fared well.

“Traditional blended Scotch and whiskey drinkers are looking for something different, and Irish whiskey offers something new, something unknown that they can discover,” said Jeff Agdern, brand manager for Jameson, imported by Austin, Nichols.

The category, driven by the major players Jameson and Bushmills, has continued to grow in high single digits or double digits in recent years. But even the smaller brands are benefiting from the interest in Irish whiskey for a number of reasons. First of all, Irish whiskey is more attuned to an American palate and perhaps less of an acquired taste than Scotch. Most Irish whiskey is triple distilled, making it very smooth to drink. It’s also distilled in pot stills rather than column stills over peat fires, which is what gives Scotch its characteristic smoky taste. Many brands are aged in sherry casks, giving them an even more rounded, mellow character, though rum and bourbon barrels also are used.

YOUTH APPEAL

Irish whiskey also is a spirit that is still being discovered. Drinkers who have experimented with single malt Scotch and small batch bourbons see Irish whiskey as another interesting, and somewhat exclusive, alternative. Distillers and importers themselves also are turning their attention to a younger audience.

“We developed a strategic position for the brands several years ago and have maintained consistent marketing efforts in line with that positioning,” said David Dorsey, vice president and brand general manager at Brown-Forman, importer of Bushmills. “Bushmills is an easy-to-drink, premium imported whiskey that appeals to the taste and image of younger drinkers.”

Bushmills has been promoting a “Bush and Brew” shot-and-beer program in on-premise accounts, which will receive emphasis during the St. Patrick’s Day period.

Category leader Jameson has dramatically increased its media spending on the brand with an evolution of its “What’s The Rush?” campaign. New print ads appearing primarily in male-oriented magazines like GQ, Maxim, and Out, focus on “Rush Hour” in major international cities, showing relaxed Jameson drinkers in the midst of frenzied rush hour scenes. Instead of a traditional product message, the brand is trying to get through to a hard-to-reach target with a values message that suggests Jameson is a brand they can take time out with, along with friends and family.

At retail, Jameson will again offer its St. Patrick’s Day home party kit this year, a write-for offer that gets consumers all the hats, noise-makers and other accoutrements they need to throw a great St. Pat’s Day bash. A new floor rack display is being introduced that should give the brand even more visibility at retail.

All the attention Jameson is drawing to the brand is having a very positive rub on Jameson Gold, 1780 and especially the ultra-premium Midleton Very Rare, which was up 15% this past year.

Tullamore Dew, reintroduced in the US in 1994, also is experiencing good growth, although off a smaller base than its bigger cousins. The brand has hitched its fortunes to the sport of rugby, and the program has a lot of credibility with consumers. The brand is now the official sponsor of US Rugby, which fits well with its “Rough Country, Smooth Whiskey” campaign.

During the holidays, the brand ran a sweepstakes promotion both on- and off-premise giving consumers a chance to win a trip to Ireland on St. Patrick’s Day.

“Malt whiskeys and single-barrel bourbons have been experimented with,” said Joe Chrastina, field and marketing portfolio manager for Tullamore Dew at Allied-Domecq. “We’re going to cigar shows and pouring whiskey and getting a great response. Irish whiskey got a bad rap a long time ago, but consumers are discovering what a great product it is.”

Because of the interest in ultra-premium and unusual products, small Irish brands also are doing well. “The category continues to get attention because it grows year after year after year,” said Larry Kass, group marketing manager at Heaven Hill Distilleries. “More of the success now is going to the higher end.”

Two brands from independent Cooley Distillery are taking advantage of trends and pushing for greater visibility. Kilbeggan, a patent still blended whiskey, plays on its Irish heritage with a campaign that touts it as “100% Irish,” and suggests that it’s “Kilbeggan or nothing.” Because of a limited budget, the brand’s big push was during the holidays with a gift pack with hopes that awareness will carry the brand through the March period.

Tyrconnel, a pure pot still, single-malt whiskey, is being supported by a push to increase trade awareness. Its unique character makes it more of a hand-sell, so the brand focuses on trying to get reviewed and tasted by as many magazines and spirits writers as possible. “We hope people reprint the reviews and awards the brand has received for on-shelf p-o-s or waitstaff cards to help upsell or cross-sell the brand,” Kass said.

Due to the growing popularity of Irish whiskey, new brands have been introduced recently. Another of Cooley’s brands, Brennan’s, imported by Shaw-Ross International Importers, is now available in select markets nationwide. This year the brand hopes to expand its distribution. A new Irish whiskey, introduced last year, is Clontarf, produced by the Roaring Water Bay Spirits Co. which also introduced Boru Irish vodka. Named for the site where Brian Boru fought his last battle, Clontarf is a traditional blended Irish whiskey, imported by Better Beverage Co., New York. For its part, Boru, imported by Shaw- Ross, is offering a gift pack with two branded collins glasses, and special posters and case cards to help create floor and end-aisle displays with its Original, Citrus, Orange and Trinity Pack products.

Time was, a winery would set the price for a bottle of wine, the wholesaler used that price as a close guideline, and the retailer paid a price that was real-world reflection of what each wine was likely to sell for in that particular market. And retail prices rarely varied by more than a dollar or two either way.

But that was at a time before the wholesale market shrank into a few large megacompanies, each with a portfolio that offered a number of major wine houses, each competing for a share of the same retail shelf space that today has become so much more precious, the two-and-a-half inches of real estate worth possessing.

Over time, discounting became a way of life in American wine, and then other market forces took hold and created a patchwork quilt of pricing that was partly based on regional considerations (what was happening in each individual marketplace, or general population base); the general tone of the economy (was it booming or busting?); the supply of wine and demand for it, and the willingness of retailers to help with promotions.

Programming dollars were a factor here — how much wineries and wholesalers were willing to spend on promotion and the degree to which discounting would be encouraged, or discouraged.

The marketplace worked in an orderly way for a long while. Some adventuresome retailers, rather than discount specific items, took smaller margins across the board. And a few (including some supermarket chains) offered multiple-bottle buyers an even deeper deal. “Buy six bottles and take another 10% off!”

Coupon discounts, both mail-in and at-the-register, became popular, and coupon promotions (“Get $2 off when you buy this chardonnay and a pound of fresh seafood”) all grew in importance. Bottle-neckers that contained recipes also were created to move wine.

Then along came Costco.

Along Came Costco

Founded in 1978 in San Diego as Price Club by a man named Sol Price, the operation began carrying wine almost immediately, and priced most of it at about 12% over cost. The effect was initially not staggering in the San Diego market, mainly since Price Club had but one store, and it wasn’t until 1981 that a second was built. Moreover, the annual $25 fee to become a member seemed (at the time) to be a huge stumbling block to the success of the chain.

But the real change in the marketplace came when Costco Wholesale, based in Kirkland, WA, and structured similarly to Price Club, created the first major competition in the budding “discount warehouse” marketing concept to Price Club. And although initially it was not wildly successful in wine sales, it and a later entrant, Wal-Mart’s Sam’s Club, soon established a new concept for wine sales: a smaller inventory and low prices based on thin margins.

Since Costco acquired Price Club exactly 10 years ago, the chain has grown to 390 stores with annual sales of about $40 billion.

Post-merger, wine became more important to the chain’s overall sales. In 2002, it was estimated that Costco sold some $583 million in wine. (Still, that represented only 1.5% of the company’s gross sales.)

One would think that Costco has made it by selling downscale wine, but increasingly over the years the chain has prospered by taking advantage of high-image wines that are made in larger quantities than the marketplace will absorb at their full suggested retail prices.

Attesting to the upscale nature of Costco’s product line is its current ranking as the world’s largest seller of Dom Perignon. Costco’s price of $79.99 compares with a national suggested retail of $120. (You might think that DP, as it’s called, is an allocated wine, but even though the company won’t disclose how much Dom Perignon is made, estimates are that it is in the multi-hundred-thousand case range.)

It is true that Costco is not a “full-service” wine store since in any one store at a given time there are rarely more than 100 different wines, occasionally a few more. But what Costco has done with its buying power and its strategy of taking such a low margin (averaging around 6% to 10%) is to radically disrupt the pricing structure for wine in many metropolitan markets.

And it all starts these days with the head wine buyer for Costco, David Andrews, who is not only a true wine lover, but a man blessed with a sophisticated palate. I have judged with him at major wine competitions and can vouch for his market savvy and acute tasting ability.

Andrews, 40, rarely gives interviews about his strategy, but he appears to appreciate the importance of “impact” brands, and typically carries wines from Opus One, BV Private Reserve, Francis Ford Coppola, Far Niente, Joseph Phelps, Heitz, Caymus and even an array of classified growth Bordeaux. What you rarely see here are high-end Burgundies, esoteric Italian wine or German wines.

If there is a criticism of Costco, it is simply that customers can almost never find a Costco salesperson who knows something about wine. But Andrews, who has been with Costco for 15 years, seems bent on changing that as well. He is training key managers around the chain, even sending some overseas to learn about European wines on site.

Pursuing a Dual Strategy

The high-end wines seem more important to Costco at the present. When Beaulieu had problems late last year with its 1998 BV Private Reserve Cabernet Sauvignon (a slight moldy problem in the aroma), the wine was seen at Costco not for its suggested retail price of $100, but at $38.99. (Clearly, this was done with the cooperation of the winery.) The discounts on Mondavi’s Reserve Cabernet haven’t been as deep, but the wine is often seen at 30% less than suggested retail, and is usually offered for the lowest price in the country.

At the lower price points, Costco often carries wines that are not exactly household names, but which have a staggering impact. Take, for example, the year-ago offering of Cavit Pinot Grigio. At a time when Santa Margherita Pinot Grigio sales (in the $18 to $20 per bottle range) were escalating, the Cavit was selling for $8.99 per magnum. It isn’t clear how much of the wine Costco sold nationally, but import figures show that Cavit grew from a virtually nonexistent brand in the U.S. in 2000 to 1.9 million cases in 2002, according to the Adams Handbook Advance 2003.

Such a dual strategy, high-end wines at deep discounts as well as lower-end wines that are part of “hot” niches, works like a charm, even though it is employed with a limited number of wines. I have seen some consumers with three or four bottles of Second-Growth Bordeaux as well as a case of Ravenswood Vintners Blend Zinfandel ($6.99) in the same shopping basket.

This strategy has done a lot to change retailers’ buying patterns nationally. For one thing, it has forced wine shop owners to alter their buying strategies when they know that a particular item is going to be carried by Costco. Such an item is a risky buy at a nearby wine shop because the shop owner knows that those potential case buyers who are also “shoppers” will be aware of pricing differences and are unlikely to buy a case at the shop. Not when Costco has the same item for $4 a bottle less, which works out to a $48 savings by the case.

Moreover, some retailers actually buy their Dom Perignon from Costco and then re-sell it for a slightly higher price, just to make sure they don’t lose sales to Costco. The rationale is simple: Costco’s price is lower than the wholesale price when bought in smaller quantities. (In many states, such a strategy is actually illegal, but some retailers say they have to employ it to remain competitive.)

Responding With Staff and Selection

In response to Costco’s lower pricing, the more sophisticated wine shops around the country have found Costco’s main weakness — lack of a knowledgeable staff — and have focused on it. Costco has almost no one on the floor of its stores who can answer a simple question about one of its wines.

By contrast, says Dan Manning at Haskell’s in Minnesota, “What we’ve tried to do is build on service and our broad selection.” He said his staff is extremely knowledgeable about almost every wine in stock, and is eager to help consumers who have queries.

Costco’s successful dual strategy incorporates high-end wines at deep discounts with various other wines at bargain prices.

He added, “We’re aware of the Costco’s and the Sam’s Clubs and the other deep discounters, but we don’t react to what they’re doing because we have our own agenda and we’re sticking to it.”

He said Haskell’s reinforces the service aspect of its business without compromising its margins.

The Dom Perignon example is compelling. Manning pointed out that by offering the wine at $99.99, he knows the wine is, at Haskell’s, $20 a bottle more than Costco. But the typical DP buyer wants only one bottle for a special occasion, and may want a few bottles of a well-priced Cru Bourgeois Bordeaux, a dessert wine, and perhaps a Chianti — wines not available at Costco.

He said Costco may not carry any of those items, and even if they did, would have no one to explain the wine to a customer seeking advice. (Moreover, who wants to wait at Costco’s seemingly interminable check-out lines?)

So, the Dom Perignon may cost a bit more at Haskell’s, but Manning suggests that the slightly higher price is more than made up in the guarantee of better wines and values acquired from a knowledgeable staff.

Creating a Large Selection

Chip Cassidy of Crown Wine and Spirits in Florida says that because Costco only carries at most some 200 brands, his huge selection is his big draw. He said Costco and other discount warehouse operations typically “go after whatever is getting a lot of attention in the marketplace.”

It’s true, he said, that occasionally Costco impacts Crown more directly than at other times. “For example, around Christmas they sell Dom Perignon for 8% above their cost, and [all retail shops] pay the same price for it, and that kind of hurts. They sell it below all of us.

“So we simply make it up with service.”

With 24 stores, Cassidy said, Crown’s buying power “enables us to buy on a grand scale, as good as they buy, and we have a niche.”

Three major aspects of Crown capture your eye on first glance: the fact that patrons can get a glass of a featured wine to try while shopping, that gourmet foods are a key component of the wine-food experience, and that Cassidy is a great wine educator — he teaches at a local college. Thus, he infuses knowledge into his staff, a key feature of the chain’s value to consumers.

“Most people perceive us as individual stores, not part of a chain,” he said.

I asked him if Costco’s low prices aren’t a constant diversion. His reply: “If you worry about what the other guy is selling it for, you’re gonna drive yourself nuts.”

In fact, it was deep discounting that put Crown into financial straits, and led to the hiring of Cassidy in 1985 to bail the company out. Rather than discount, he focused on information, high-quality wines at fair prices, and service.

“Before I arrived, we were discounting everything, and paying the staff on commissions. The dollar was more important than our friendship with our customers,” Cassidy said.

“The [Robert] Parker geeks, let ’em chase it. We want to get wines that are affordable to everybody, and give good, sound advice. There was a lot of hype for the 2000 Bordeaux. Well, we didn’t buy much, because they were generally too overpriced.”

Instead, he said, he found dozens of better values and used Crown’s status as the sixth largest privately owned chain in the country to buy low and pass the discounts along to consumers. “Most of these are wines that no one has heard of before,” and, more importantly, wines he said Costco wouldn’t likely buy because of their obscurity.

Another area of skill, he says, is in specialty items like German Riesling, now hot as a $2 pistol because of the great 2001 and 2002 vintages.

“The market abandoned German wines when chardonnay became popular 20 years ago,” said Cassidy, “but I never did. Right now I have hundreds of cases of German wine on the water. And we are educating our consumers to understand them. They’re such great values.”

Wilfred Wong, head buyer for the California-based Beverages, and More! chain, said he is clearly aware of Costco’s impact on all wine businesses.

“All retailers, if involved in a pretty good-sized business, should be aware of what other retailers are doing,” he said, “and what Costco does can affect your buying.”

“We try to be very competitive on the top items, but where we really do well is with many of our own private brands.”

Wong pointed out that California now has a huge surplus of fine wine, and many high-end wine companies are willing to make “private label” blends that actually carry the name of the winery. However, such a wine would be a “one-off,” a wine that would not be carried by any other wine store.

For example, a winery called Chateau XYZ might make a Sonoma County chardonnay that sells for $20 a bottle as part of its regular lineup. But it might be willing to bottle a Carneros chardonnay that Beverages, and More!, and only that chain, could sell for $15.

Wong gave an example. He and two colleagues went to France two years ago looking for specialty products. At one large winery in Chateauneuf-du-Pape, “we tasted various blends that the house put together for us,” he said. “We asked for a little more Grenache in one of them, and they made the wine for us, and we could sell it for $13.99.”

That wine, 2000 Les Grands Serres Chateauneuf-du-Pape, sold so well that the buyer for a competing wine shop called Wong and asked who the wholesaler was so he could get the same wine.

Manning of Haskell’s prefers his staff-education approach to serving customers, and uses the Dom Perignon example as to why.

“A lot of people don’t want to go into Costco for DP,” he said. “They want to talk to somebody, they want the story. The loyalty of our customers is unbelievable. Sure, some people will only go to a Costco, but there is a certain part of all wine markets where the consumer will shop only at fine wine stores.”

Another feature of such fine wine shops is futures. Some wine buyers would rather buy such wines ahead of time at a guaranteed lower price than wait for the vagaries of the market to set prices on landed wines.

“We’ve been selling futures since 1970,” said Manning, and now with eight stores (including a franchise operation in Naples, FL), the chain is stronger than it has ever been, despite the impact of Costco.

The bottom line is simple: in cities where Costco exists, the rest of the retail market has to be that much more savvy about its stock, service and pricing. This can only enhance the overall wine knowledge of the entire wine-buying community. *

A Question of QUALITY

Consumers who buy wine at deep discounts, from discount warehouses and other deep discounters, may end up buying poorer quality wine, according to one wine marketing executive who ought to know.

He’s from E&J Gallo, one of the world’s savviest of wine companies.

Mike Novy, Gallo’s sales director for Western Europe, recently held a meeting with wine retailers and said, among other things, that the discounting of wine, which has been a way of life for many large companies, has forced many companies to reduce the quality of such wines so profit margins can stay high.

“As an industry, we are taking the easy way, relying on price promotions,” said Novy, according to reports out of London. “But it is not good value; it is sucking the oxygen out of the category.”

Novy’s remarks came as Gallo showed glimpses of how the large family-run beverage company views finer wine.

One report out of Europe said, “Gallo has been viewed with some suspicion in the past by the press and the trade, who have been skeptical of its motives within an industry that, in principle at least, values more open teamwork than Gallo was willing to enter into — a legacy of its size and lack of transparency.”

But Novy seemed ahead of the curve when he predicted that the deterioration of quality as discounts mount is a dangerous game.

One European commentator said Novy’s remarks “amounted to a genuine call to arms for the industry to stand united against pricing pressure. The words also carried weight because of Gallo’s refusal hitherto to air any of its laundry, dirty or otherwise, in the public domain.”

Novy said the passion of some companies to sell wine “on deal” has led others to use that strategy for almost every bottle in their lines.

“There is a great temptation for the consumer to buy wine at half price, but it is not good for value. . . [Wineries] have had to change their wine formulation because they can’t afford to keep selling their wine at discount prices.”

Meanwhile, in early June, Costco Wholesale Corp. said its quarterly profit climbed 18% based partly on the lure of high-end imported wine.

Net income was reported as $153.8 million, or 33 cents a share, up from $130.4 million, or 28 cents, a year earlier. Sales in the three months ended May 11 — the company’s fiscal third quarter — increased 11% to $9.34 billion, Costco said.

Costco, the largest U.S. warehouse-club store chain, charges shoppers an annual membership fee of $45 and earns most of its profits from that source.

The key to wine sales were First Growth Bordeaux wines from the good (but not great) 1998 and 1999 vintages. Costco was selling them for under $100 a bottle. Most such wines were selling for $150 and more just weeks before at non- discount retailers.

Once the wines hit Costco shelves, the wines sold out within a few hours, even though customers were limited to two or three bottles, according to a company spokesman.

HOLD*

The 2003 Adams Growth Brand Award winners in the wine and spirits categories appeared in March/April 2003 Beverage Dynamics. Soon after, we took the opportunity to present the actual plaques to the winning companies during the WSWA (Wine & Spirits Wholesalers of America) Annual Convention and Exposition in Orlando. (All but one of the following photos were taken there.) With wine and spirits suppliers huddling with their wholesalers to cement plans for the coming year, the meeting turned out to be an ideal venue to celebrate “victory” by the industry’s fastest-growing and best-selling wine and spirits brands. Coverage of the Growth Brand winners in the beer categories is scheduled for the September/October 2003 Beverage Dynamics.

No matter how you measure it, when it comes to the consumption of adult beverages there’s no doubt that in this country beer is king. Yet, even though Americans consumed more than 2.8 billion cases of beer last year, there are a significant number of adult consumers who just don’t care for it. They like most aspects of the beer lifestyle — portability, single-serve packages, consistency of quality and flavor and brand image identification. But they belong to a generation that grew up on sweetly flavored soft drinks and fruit juices and they just don’t like the taste of beer. For them, flavored malt beverages — whether hard lemonades, the latest spirits brand-inspired concoctions or some other variation on the theme — are an ideal choice.

The orange-flavored Bacardi Silver O3, also launched this year, extends the Bacardi Silver brand.

As most retailers can attest, there has been a tremendous amount of activity in the malternative business in the last year and a half as Smirnoff Ice and Mike’s Hard Lemonade continued on their growth track, and rollouts of a wide array of products with both familiar and newly coined names continued. According to first quarter data from IRI InfoScan Reviews, the category is still going strong. In a presentation to an audience of retailers, supermarket executives and beverage industry representatives at the recent FMI Show in Chicago, IRI vice president, analytic product management Valerie Skala, noted that malternatives are currently the most exciting and explosive category in beverage retailing. Based on recent supermarket sales data she pointed to Smirnoff Ice, Bacardi Silver and Skyy Blue as brands to watch. In her talk she also noted the importance of introducing new brands to stimulate category growth.

What many malternative beverages offer is the best of both worlds — something new that is instantly familiar.

Creating The Market

When attempting to assess the continued viability of the malternative business, perhaps it would be helpful to look at a couple of earlier trends that had the industry all atwitter.

Smirnoff Ice Triple Black debuted earlier this year as a premium line extension to the successful Smirnoff Ice.

At the time wine coolers exploded onto the scene in the mid-1980s there was, as periodically occurs, a tremendous surplus of inexpensive California wine available, which helped this low-priced mix of wine, fruit juices and flavorings become an overnight sensation. In 1987, the category’s peak year, Americans consumed more than 53 million 9-liter cases and wine coolers claimed a 22% share of the total wine market. The cooler business had gotten so big, so fast that numerous experts put forth the theory that finally the industry had found the products that were going to turn America into a real “wine drinking” nation. But 10 years later, in 1997, there were only three brands to speak of and the category had dropped to a mere 5.5 million cases and a 2.65% share of wine consumption. By the end of last year, volume had fallen as low as 1.4 million cases and a 0.6% share of the total wine market.

In the mid-1990s the new excitement was all about microbrews and specialty beers. As everyone and his uncle tried to jump aboard that bandwagon, a number of good brands overextended themselves and a lot of investors lost money. But there were lessons to be learned from both experiences and they may help answer some of the current questions about malternatives.

Skyy Blue remains one of the popular brands in the flavored malt space.

The lesson from wine coolers seems to be that those who get into the game early in a big way and make the most noise (Bartles & Jaymes and Seagram’s) are likely to reap the benefits of any future the category may have. From the micro/craft beer experience, we’ve learned that the American consumer shows little evidence of sticker shock when asked to pay top dollar for a product with perceived attributes (quality, brand name, image) that make a higher price worth it.

But like with any overnight success, there was much trial and error on the way. The first flavored malt beverage to make any kind of impact on the scene was Zima, which Coors unveiled in 1993. (This was around the same time that Miller test marketed a clear beer that seemed to have potential but couldn’t find an audience.) Zima, which was initially backed with a huge multi-media ad campaign, peaked the year after its introduction when it hit 16 million cases. Volume dropped as low as 5.8 million in 1997, climbed back to 8.4 million cases in 2000 before beginning to slide back down to 5.2 million last year.

The next innovation in flavored malt beverages came with the influx of hard lemonades. Hooper’s Hooch, a brand big in Australia, hit U.S. shores in 1996 and was followed by a wave of similar brands. The big winner in that segment has undoubtedly been Mike’s Hard Lemonade, a brand which according to Adams Beverage Group research has moved from 1.1 million cases in 1999 to 11.5 million in 2002. Mike’s, which has used both print and television campaigns to establish a strong identity, has continued to grow on an annual basis while all the other brands (Hooper’s Hooch, Two Dogs, Doc Otis, Rick’s Spiked Lemonade and Jed’s Hard Lemonade) were down last year.

The Brand Wave

The thing that really launched the new wave of flavored malt beverages and set them apart from earlier attempts, was the citrus-based flavor profile combined with an already recognized name and a greatly increased level of sophistication. Whereas hard lemonade has a down home folksy connotation, names like Smirnoff Ice, Bacardi Silver and Skyy Blue came with years of well-established brand imagery.

Recently introduced Seagram’s Smooth, in Citrus and Red (a mixed berry blend with cranberry notes), is said to be less sweet than other top-selling flavored malt beverages.

Coming out of the box first, and leaving the industry gasping for breath, was Smirnoff Ice. The product finished last year at 22.5 million 2.25 gallon cases. And while that number is small relative to the major domestic beers, it puts Smirnoff Ice ahead of all imports, except Corona and Heineken, and all craft beers, including the category leader Samuel Adams (15 million cases). In most bars and restaurants, malternatives are often priced on par with imports and craft/specialty beers. On the other hand, among off-premise retailers it’s not uncommon to find a case of one of the top imported beers selling for a dollar or two less than a case of Smirnoff Ice.

“Retailers are very eager to get behind brands that deliver superpremium and import margins and meet the consumer’s need for alternative beverages,” said Tom Rose, vice president of customer marketing for Diageo’s Guinness USA, of Smirnoff Ice. “We just think it’s important to give the product visibility. Like traditional beers, the product performs well when it’s displayed.”

Yet regardless of the huge volume being realized by the category leader, many observers of the industry are skeptical of the continued growth and long-term viability.

“It’s a large category,” said John Chappell, senior vice president, marketing, for US Beverages. “What remains unclear is whether it will grow or stay stable or decline slightly. But it’s a sizable category that will be around for a number of years. There are a number of very strongly branded items in the category with strong to decent levels of support. These are brand names that people recognize and that have been around for a long time.”

After a disappointing launch year, Stoli Citrona and Sauza Diablo are focusing on developing key regional markets.

US Beverages, which recently introduced Seagram’s Smooth in two flavors, is among the newest entrants into this already-crowded field. The advantage that the company brings into the game is years of experience with coolers and hard lemonades and the cachet of the Seagram name. “In one way you could argue that this is a good time to get in,” Chappell continued. “Some brands did not have a strong enough build from the parent brand. We’ve worked very hard on the product and we’re very confident in the quality. It’s less sweet and less carbonated than the two leaders and differentiated enough to have a reason for being.”

Is More Better?

Based on the phenomenal success of Smirnoff Ice, earlier this year Diageo introduced a line extension, Smirnoff Ice Triple Black, designed to help the brand enhance its leadership position in the category. “The original is still outselling its closest competitor, but Smirnoff Ice Triple Black is second or third in a number of locations,” noted Guiness USA’s Rose. “In the five months since its introduction it’s outselling some very reputable imports.”

And the leader was not alone in using the line extension strategy this year. Following the success of Bacardi Silver, which hit 6 million cases in its debut year, Anheuser-Busch and Bacardi launched Bacardi Silver O3. The new product, which draws its name from the three types of orange used in its flavoring, is a logical extension based on the success of Bacardi O, Absolut Mandrin, Grey Goose L’Orange and other orange-flavored spirits brands in recent years.

Although Skyy Spirits has introduced several flavored vodkas in the past year, there has been no announcement to date about a line extension for Skyy Blue, brewed by Miller. With a volume of 7 million cases in its first year, Skyy Blue continues to receive marketing support for both its television commercials and print ads designed to tell the brand story to retailers. Certainly, the familiar blue bottle and brand identification with one of the fastest-growing vodka brands has helped with the product’s initial acceptance.

Leading Flavored Malt Beverages

(000 2.25 Gallon Cases)

Source: Adams Handbook Advance 2003

Of course, just placing the name of a well-known spirits brand on the bottle is no guarantee of success, even with significant ad spending, as marketers of products bearing the Captain Morgan, Stoli and Sauza names discovered.

Allied-Domecq and its brewing partner, Miller, expressed disappointment in the 2002 performance of the Stoli Citrona and Sauza Diablo products, but have expressed an intention to focus on distribution and development of key regional markets for the brands.

As seems obvious from sales figures and conversations with retailers and suppliers, there is definitely a market out there for these products. Many observers however are waiting to see how the all-important summer-selling season plays out before attempting a definitive answer to the fad or trend question. A shakeout is likely, as happened earlier in the cooler and micro/craft beer segments, but it’s also likely that in some form this business is going to be with us for years to come. *

A Fun Business in Fun City

Afew decades ago, New York was called “Fun City” in the city’s promotional advertising campaign. For two different retail operations in the Greater New York Metro area, “fun” is still the operative word. This is the first in a series of retail profiles that pair two operations in the same metropolitan area.

— Editor

David Braff and Mitchell Soodak, owners of Union Square Wines & Spirits in New York City, have the blues and they couldn’t be happier about it. “Blue chip to blue collar, blueblood to blue hair, we cater to everybody here,” explained Braff. “It’s New Yorkers in all their infinite variety and infinite is the way to say that because the clientele is wildly diverse. Sometimes when you do a tasting or special event, it’s amazing who’s sitting next to each other.”

With deep roots in New York City, partners Mitchell Soodak (left)
and David Braff have turned their love of the city and
old-fashioned philosophy of retailing into a modern day success.

The two partners have owned the popular shop in one of New York City’s most historic neighborhoods for close to eight years now, having bought the business from the original owners when it was two or three years old.

In the late nineteenth century Union Square was the culmination of the Ladies Mile, which paraded down Broadway and boasted the city’s most fashionable shops, much like Fifth Avenue today. Throughout the 1960s and ’70s, as people fled America’s major cities for more suburban lifestyles, the neighborhood became increasingly seedy with only the ornate architecture of many of the buildings giving a hint of the glory that had once been. Union Square Park, formerly the site of major political rallies, became nothing more than an illicit drug bazaar and only the unwary entered with innocent intent. With the economic boom of the late 1980s, the park was rebuilt, the drug dealers thrown out and a new stage of development began. Great restaurants opened and major retailers sought to cash in. Braff and Soodak saw the potential of the area and made their move.

Union Square Wines & Spirits is nestled in the heart of downtown Manhattan. Above: the store’s entrance is directly opposite the chalkboard. Below: a view of the front section of the store’s selling space, as seen from the loft/salon area.

“The store was undermanaged and underfinanced,” explained Soodak. “We saw a diamond in the rough that needed to be brought to its potential. It had all that stuff that I thought made for a win, win, win going down the road.”

“We loved the location and the layout,” added his partner.

To even the casual observer it’s obvious what Braff is talking about. Union Square sits at the intersection of three major thoroughfares–Broadway, Park Avenue and 14th Street–as well as housing a major subway hub beneath the park. The store looks like an old-fashioned shop with wooden shelving and floor racks stocked with a wide array of wines and spirits. There’s also an upstairs salon area with a balcony overlooking the selling floor that can be used for events such as wine classes and tastings or private parties. But as any good retailer knows, a good location and physical plant are just the beginning of what makes a successful business.

“We brought a philosophy that I thought was the future of this business,” explained Soodak, whose parents were retailers and who had his own first store at the age of 21. “It was not about cutting the price to close to cost and offering no service and just being a major discounter, which doesn’t require much work on the owner’s part.

“As a person who lives in Manhattan and has a family in Manhattan, I like to shop in places that make me feel comfortable, that give me service and charge a fair price. It’s that philosophy I think that makes New York a great place to be. There aren’t too many wine shops in New York; there are a lot of liquor stores. And wine shops, even good wine shops in New York don’t have the physical space that we have in a destination location.

“Since 9/11 it’s more difficult to get people to come to a destination and to come to events,” he added. “But it’s still working, and it’s a great philosophy and way for us to grow our business.”

Union Square Wines & Spirits has indeed become a destination point for wine lovers in the New York City area. The store holds regular tastings and other free events that are open to the public and generate a lot of traffic. In all, wine sales account for about 75% of the store’s total sales volume.

It’s Not Just A Store, It’s An Experience

“We like to try and do events at least once a week,” said Soodak. “There are weeks when we do multiples, but it averages out to about 50 events a year.”

Wine events at the store can be a sit-down tasting and lecture with the representative of a single winery for 50 to 60 invited guests or a much larger event with a number of suppliers with 25 or more different wines available for customers to sample on a Saturday afternoon. The partners consider such events to be one of the services they offer as merchants. While there is no charge for tastings, for sit-down events, the store requires a $20 reservation fee, refundable upon attendance. Usually they sell out within minutes of being announced via e-mail.

As Union Square Wines & Spirits director of special events, Tim Eustis coordinates everything from “mega-tastings” with dozens of wines to surprise birthday parties in the store’s Salon space.

Responsibility for the logistics required for all this activity falls to Tim Eustis, director of special events. “The salon space offers a rich opportunity to do lots of things,” he said. “We like to do what we call mega-tastings, which are open to the public. For example, we might do a Loire tasting and bring in a number of distributors who will focus on certain wines in their portfolios, and we’ll pour 20 to 60 wines. It gets pretty crowded, but people get an opportunity to sample wines they don’t normally see.

“Another element of what we do is the private tastings,” Eustis continued. “For example, if an investment bank wants to celebrate a big deal or an alumni club wants to have a gathering, they can do it here.”

Eustis explained that the store has arrangements with a number of restaurants, including the Heartland Brewery next door, and a caterer to provide whatever food might be required.

Living In The Electronic Age

The store currently has a database of about 11,000 e-mail addresses, which makes for cost-effective and highly targeted promotional efforts. Other tools in the marketing arsenal include traditional advertising on news and classical radio stations and in The New York Times. There’s also a website but the partners view it more as an informational than a sales vehicle. They admit to doing some Internet business, but don’t see it ever becoming a major part of their business. “I still think that with food and wine people want a hands-on experience,” noted Soodak. “They want to squeeze their grapefruit; they want to see their bottle of wine. Usually when you’re shopping on the Internet, you’re looking for the best price.”

“The website is useful for people to see our inventory and to let them know we have certain things that other stores don’t,” added Braff.

People Who Need People

Like any successful retail operation, the thing that makes Union Square Wines & Spirits really work is the people. It starts with the partners whose strengths effectively complement each other. Mitchell Soodak lives and breathes the business and takes on the role of “bad cop” on occasions when that’s called for. “I’ve been in the business all my life. The old-fashioned way was to buy a year’s supply and turn your inventory once a year,” he explained. “My expertise is not wine. My expertise is numbers and for me a beautiful thing is turning inventory six, ten times a year. What turns me on is working with numbers.”

Katherine Moore has been Union Square’s general manager since 1997, and like the rest of the staff she has a deep and abiding love of wine. On the store’s website she’s quoted as saying, “It’s all about matching people with the right wine.”

And the numbers on the business are impressive. There are more than 4,000 wine and spirit SKUs and an inventory with a cost of more than $1 million at any given time. There’s about 3,000 square feet of selling space and another 1,000 in the loft/salon.

“Dave is more the human resources, the marketing, the creativity,” Soodak added of his partner in explanation of their different roles.

But no business of this magnitude would make it solely due to the efforts of the owners. “We do a lot of service,” said Braff. “And in order to manage that properly you need a dedicated team. Our staff is wildly diverse in terms of age, orientation, cultural background and what they’ve learned and know.”

“We hire people that are knowledgeable and require them to increase their knowledge while they’re here,” added Soodak. “For example one of our staff members is in Europe now with a supplier. Instead of ownership taking the trip with a supplier, it’s important to send the staff.

Braff explained that sales staff don’t work on commission because, “We don’t want salespeople fighting over customers. We want them serving customers.” Instead, team selling is encouraged — a staffer who is very knowledgeable about California wine might hand off the customer to someone else when the subject switched to sake or Bordeaux.

The partners also expect the idea of teamwork to extend to the wineries and distributors that they do business with. “We look for suppliers who will help us build a franchise in a number of ways,” said Braff.

“We don’t want them to just sell us the bottle. We want them to be available for tastings; we want them to offer support for their products and to partner up with us in that way,” commented Soodak.

It’s All About The Wine

An important member of the store’s team is wine director Jesse Salazar, a California native who began his wine career in the restaurant business. “As far as selection goes, we try to have a little bit of everything, but the most exciting area for consumers right now I think reflects a price that’s $25 and below, no matter what it is.”

As has traditionally been the case with East Coast merchants, Union Square has a heavy concentration of European wines. “The biggest area of wine concentration, in terms of inventory, is French and Italian. We have about 200 facings of Italian wine, not counting special stuff locked away upstairs or in the basement.”

Like most wine professionals, he is always on the lookout for new wine discoveries and thinks there are still plenty of undiscovered gems in Europe.

Wine director Jesse Salazar stands before some of the stores many wine treasures.

“There are a lot of really hot spots there, like the Languedoc in France. Some of those smaller appellations are really fun, and you’ll find them at some of the cooler restaurants. I think that Spain is still undiscovered with regions like Priorato. You’re finding great winemakers making just beautiful, brilliant wines in those little appellations. You find them for less than $50 on the shelf, and they’re basically blowing away the competition in terms of things coming out of California.

“Obviously Australia’s very hot, but you have to pick through the swill. They’ve got a great amount of really good wine, and they have a huge amount of really lame wine. People love Australian shiraz.

“We like turning people on to things,” Salazar continued. “We’ve always been the rock & roll wine store. You see a lot of young faces on the floor, but we’re all fairly well informed and up on the current trends. The people here know what’s tasty, what’s not tasty.”

That’s Entertainment

“The business is a constant series of challenges,” noted Soodak. “You’re always asking, ‘What’s the next new thing that we can think of?'”

“It’s an ongoing thing,” echoed Braff. “You’ve got to be able to re-create it all the time. As hard as you work on a given day, you better be thinking about tomorrow and the day after.”

“The retail industry has gone through so many changes,” continued Soodak. “The theory over the last 15 years has been, if you want to sell more, lower your prices. I think that’s a formula destined for failure for everybody. I think that the people who created that formula are dinosaurs in the industry now. The next generation is not going to want to come in and buy something for $100 to sell it for $102. Anybody can sell it for cost.

“That’s a commodity business,” said Braff picking up the thread. “You can move mass goods, but when you take an internationally known $20 item and sell it for $12 you’re going to get a bunch of people to come, but will they come again? And will they buy anything else when they come in for that item?

“A lot of producers realize that steep discounting of their product is destroying their franchise. If you’re conveying elegance and the quality of your vineyards and your winemaker and the care that goes in, but it’s a $6.99 bottle, people are not going to believe it.”

“We don’t want to be a run-of-the-mill wine shop,” noted Soodak, who said they’re trying to take the old-fashioned idea of what a merchant is and update that for the 21st Century.

“We’re not just selling goods, although that is the core of the business,” said his partner. “We’re in the entertainment business on the level that fine food and drink is what you share with family and friends and business associates. If you want to enrich your life, you’re going to put a good bottle on the table with good food and they’re going to match.

“It’s a fun business,” Braff added in summation and that pretty much says it all. *

Survey Says

“We have the best tasting neighborhood in the city,” says Union Square Wines & Spirits co-owner David Braff. “There are just fabulous restaurants. Of Zagat’s top 20 you can hit about 10 of them with a rock from here.”

The Zagat Survey of New York City Restaurants was the inspiration for one of the store’s recent marketing tools. Braff and partner Mitchell Soodak had a special run of the 2004 Zagat Survey printed with their own cover and the store’s name and phone number printed on the spine. Just putting their name on the book and giving it away to customers would be enough for most retailers, but that just wasn’t going to be enough for these guys.

They also had staff members — Tim Eustis, Jesse Salazar, Bill Burke and Alexis Beltrami — put together a 30-page lead-in to the restaurant reviews. Mimicking the style of the restaurant guide, this special wine/dine section gave a brief description of major wine types, from albarino to chardonnay to sangiovese to zinfandel. An expected price range and the types of food the wine best matches with are also included

Stew Leonard’s, renowned in grocery retailing,
is looking to repeat that success with its new wine and spirits stores.

By Richard Brandes

Anyone serious about retail knows the story of Stew Leonard’s, the Norwalk, CT-headquartered grocery emporium that is renowned for its sometimes extravagant, always innovative merchandising techniques that range from a petting zoo to in-store animatronics and costumed characters to scheduled entertainment. The three-store grocery chain — which began its business life as an on-site dairy — differs from many supermarkets in that it offers approximately 2,000 items for sale, whereas most groceries average about 30,000 items. That focus, the company says, allows it to offer consumers fresh, quality merchandise at a good value.

Wine managers Doug Zucker (left) and Jerry Martellaro
oversee operations at Stew Leonard’s newest wine and spirits store,
which opened a little more than a year ago in Farmingdale, Long Island, NY.

Now, the company is also targeting wine and spirits consumers with a series of stores located in its two Connecticut grocery locations (Norwalk and Danbury), Yonkers, NY (just north of New York City) and Farmingdale, Long Island, in the eastern suburbs of New York City, which is the newest of the Stew Leonard’s wine and spirits operations and has been opened for a little over a year. Already, the two New York locations have helped make Stew Leonard’s Wines one of the largest retailers of wine and spirits in New York, with sales approaching $25 million a year.

The challenge is to translate its successful approach to retailing from its groceries to its wine and spirits operations. “Stew’s major goal is to provide the best customer service possible,” said Jerry Martellaro, one of the two wine managers at Stew Leonard’s Wines in Farmingdale. “To do that he makes sure to cultivate a knowledgeable, passionate and friendly staff. He wants to offer customers new and innovative products at competitive prices. With that in mind, the staff tastes dozens of new wines every week, trying to find wines that provide the best quality and value to our customers.”

The overall company motto sounds like something you’d read on a refrigerator magnet: “Rule #1: The Customer Is Always Right. Rule #2: If the Customer Is Ever Wrong, Re-read Rule #1.” But it works like a charm. Indeed, customers like it to the tune of almost $300 million a year in sales; and the almost 2,000 employees, called “team members,” also like it, for family-owned Stew Leonard’s has developed a reputation as a great place to work. Indeed, Stew Leonard’s was ranked 30th last year in Fortune Magazine’s “100 Best Companies to Work For in America.”

Why Wine?

But why does a successful, pretty famous grocer choose to open wine and spirits stores in one of the toughest markets in the country? Especially in an industry where individual state laws can be as serpentine as cooked spaghetti. [Because of these laws, it’s important to note that the Stew Leonard’s Wine stores are independent of the food stores. They are also independently owned by different members of the Leonard family, and doing business under different names. For example, Stew’s sister Beth Leonard Hollis owns the Yonkers store while Stew Leonard, Jr. owns the Farmingdale store. In addition, each store buys independently.]

The answer, according to Meghan Flynn, vice president, public relations for Stew Leonard’s, is: “Stew Leonard, Jr. said that a few years ago he was eating dinner with his family. The filet mignon, asparagus, corn, Ciabatta bread, all came from his family’s store. The only item on the table he was not happy with was the wine. He had bought it at a wine shop down the street and had not had any help picking it out, so he ended up just grabbing a bottle off the shelf.” He quickly became immersed in the wine business. Stew personally took the WSET course [Wine and Spirits Education Trust, taught by Mary Ewing Mulligan in conjunction with the International Wine Center] and accompanied his wine buyers to major wine shows and to meetings with vintners. He now regularly attends shows and visits wineries throughout the world; in fact, Stew and Jerry Martellaro just returned from a California wine trip at the end of February.

The Farmingdale Stew Leonard’s Wines contains 11,500 square feet, though the other wine and spirits stores range from 4,000 to 12,500 square feet. (The Stew Leonard’s grocery stores, in comparison, range from 103,000 to 130,000 square feet; the original Stew Leonard’s, which began as a 17,000-square-foot retail dairy store in 1969, has gone through 30 additions to its space through the years.) One area of the Farmingdale store is devoted to distilled spirits, while the majority of the floor and shelf space merchandise wine, which accounts for almost 80% of the store’s total retail sales.

With 11,5000 square feet, the Farmingdale Stew Leonard’s features lots of wine rack and case displays. Wine sales account for about 80% of the revenue at this location.

The retail space is organized by category and country/region and runs the gamut from a fine wine room to wood shelves to large displays selling product straight from the cases. The temperature-controlled fine wine room includes several hundred bottles of hard-to-get, highly rated, limited production wines from around the world.

The store features most nationally advertised brands, which are displayed in a variety of ways, from cut-case displays to wooden boxes. “Overall, the store is very tastefully merchandised,” Martellaro said. “There are maps of wine regions and signage — mostly created in-house — relevant to all manner of wine-related customer education.”

The custom-made signs are created to “try to tell a story,” Martellaro said. “We try to personalize the message… for example, a sign might say something like, ‘We found this great wine when we were visiting France.'”

To those of you on the front lines, selling or serving distilled spirits, it comes as no surprise to learn that rum is one of the hottest categories in the industry. Indeed, according to the new Adams Liquor Handbook 2004, rum gained 5.1% in 2003, to more than 19.5 million 9-liter cases. It is now the second-largest spirits category, comprising 12.3% of all spirits sold in the U.S., trailing only the vodka behemoth (at a 26.2% share of the spirits industry).

Why is rum shooting up the charts? One likely explanation is that it is a dynamic and diverse spirit with a “fun in the sun” image. Rums are made in exotic places, graced with brilliant hues, rich aromas and captivating flavors. Its approachable taste profile means that there’s no learning curve necessary to enjoy rum. It is a spirit that adapts well to barrel aging and is produced in an intriguing array of styles and types. Rum is also relatively inexpensive, another advantage it enjoys over other premium spirits.

Appleton Estate is featuring this new co-pack.

But the shared attributes that put rum on the map are its mixability and universally popular flavor. “Rum can be used in any cocktail that calls for either whiskey or vodka,” contended Chuck Shive, brand manager for Appleton Estate Jamaica Rum. “Premium rums have a taste and aroma that lifts them above any of the other light liquors when it comes to drink making.”

With the resurgence of the cocktail and strengthening sales of spirits on-premise, the category is a natural beneficiary. “Rum has always been skewed especially strongly toward younger legal age drinkers and the on-premise environment,” observed Reid Massie, marketing manager for Heaven Hill’s Whaler’s Rum. “Traditional on-premise consumers, empowered with more disposable income and knowledge as they mature, are now buying rum at retail outlets as well, further driving overall category sales.”

FLAVOR DRIVES CATEGORY

Undoubtedly the primary driving force behind the category’s extraordinary growth is the popular appeal of flavored rums. Where once there was but a handful of flavored rums, now there are dozens. It’s clear that the rum-craving public has taken to them in a big way. Today, flavored rums account for over 30% of the category’s sales, growing an astonishing 40% over the past 12 months, according to ACNielsen, which tracks sales in supermarkets.

Malibu increased sales by 10.4% in 2003,
breaking the 1 million case mark for the first time.

Ilene Grimes, brand manager for Malibu Caribbean Rum, said that the explosion of flavored rums and vodkas make it perfectly evident that consumers want more variety in their spirits. “Flavored rums will keep the category highly competitive with other spirits by offering consumers the flavor options they desire.”

“The proliferation of flavored rums is also having the positive effect of bringing more attention and vitality to the entire category,” stated Tom Valdes, executive vice president of Todhunter International, importers of Cruzan Rum. “Bartenders are now featuring flavored rums in increasingly more cocktails, which surpass in every respect the tried-and-true rum drinks of the past. You now see bars and restaurants promoting Mango Mojitos, Pineapple Martinis, Banana Cosmopolitans and flavored rum Mimosas. They’re adding excitement to the market.”

“While consumers do bounce around trying new and different drinks, they are consistent in their expectations — they want cocktails that taste great,” observed Paul Francis, brand manager of Bacardi’s flavored rum portfolio. “Flavored rums deliver on this proposition. They offer a viable alternative to vodkas and flavored vodkas. They are drawing more consumers into the category, which in turn is causing our traditional rum business to grow in sales.”

EXPANDING PREMIUM PORTFOLIOS

This flavor explosion has caused most premium brands to expand their range of rums, particularly category leader Bacardi. Following the successful release of Bacardi O and Limon, the company recently expanded their portfolio with the introduction of Bacardi Razz (raspberry), Bacardi Vanila (vanilla) and Bacardi Coco (coconut). Each of the 70 proof rums are made from naturally flavored essences. Their recent product releases include Bacardi Ciclon, a blend of age-old rums infused with tequila and natural lime flavors.

Bacardi’s year-old flavor lineup has played a part in the brand’s 4.4% growth in 2003 to 8.14 million 9-liter cases.

The Bacardi family of flavors has been well received. Their combined impact added 4.4% to the brand’s already sizeable volume in 2003, which stands at more than 8.1 million cases.

Launched 20 years ago, Malibu Caribbean Rum continues to be the U.S.’s leading brand of coconut-flavored rum, increasing in case sales by 10.6% in 2003. Malibu recently extended it franchise with the introduction of Malibu Mango and Malibu Pineapple Caribbean Rums. Both are made on a base of light- and full-bodied rums that are blended together prior to the addition of natural fruit flavorings.

Grimes noted that the highly recognizable Malibu packaging presents a tremendous competitive advantage when releasing brand extensions. “We tried to stay true to the Malibu bottle while at the same time creating two totally distinct products. The packaging of the new Malibu flavors incorporates the same recognizable logo and bottle shape, only we made the packaging more vibrant and colorful.”

Cruzan recently launched this Mango Rum,
and has had notable success with its portfolio of tropical flavors.

One of the pioneers of the flavored rum category is Cruzan. With the additions of Cruzan Raspberry and Cruzan Mango to the line, the ever-expanding portfolio of flavor now has eight entries. Made in St. Croix in the U.S. Virgin Islands, the 55-proof rums are triple-distilled and aged in oak bourbon barrels between two and three years. After aging, they are filtered to remove any color and natural flavorings are added to create the finished product.

The company is also successfully marketing Cruzan Rum Cream. The light-bodied, 30-proof liqueur uses Irish cream, caramel and vanilla, as well as rum from St. Croix. The Cruzan line of rums is experiencing notable success, increasing sales by 11.8% in 2003.

TRYING TO STAND OUT

In 2003, Allied Domecq launched Kuya Fusion Rum. Produced by Kahlúa, Kuya is made from a blend of gold rums that are infused with natural citrus flavor extracts and an array of spices. The 70-proof rum is best described as a fusion between a classic spiced rum and the new breed of fruit-flavored rum.

Kuya is best described as a “fusion” of a classic spiced rum and a fruit-flavored rum.

According to Suzy Kilgore, brand manager for Kuya, Allied Domecq was looking to create a product that would differentiate itself from the competition. “Kuya offers consumers an entirely new taste experience. In fact, fusion rum is an entirely new category, one that we expect will be a long-term success.”

Mount Gay recently introduced Vanilla
and Mango Rum line extensions.

Of the various brands of Barbadian rum, the oldest and most recognized is Mount Gay. While renowned for their estate-produced dark rums, the 300-year-old producer has recently entered the flavor category with the release this year of Mount Gay Vanilla and Mount Gay Mango. Both of the 70 proof rums are singular creations, a blend of best-selling Mount Gay Eclipse rum with natural flavors — Madagascar vanilla and Mexican mangos.

“The two new rums from Mount Gay give consumers a clear choice and an opportunity to buy up into what will hopefully become a new segment of the category — premium flavored rum,” observed Kenya James of Remy Amerique and Mount Gay.

Whaler’s line of four flavors grew a hefty 13.3% in 2003.

Another popular brand closely associated with the flavored rum category is Whaler’s. Sales of these classic Hawaiian spirits grew a hefty 13.3% in 2003. Whaler’s Original Vanille is a dark, aromatic rum infused with natural vanilla flavors. The Whaler’s line also includes Killer Coconut, Pineapple Paradise and Big Island Banana.

Captain Morgan’s Parrot Bay
just debuted Pineapple and Mango flavors.

Captain Morgan’s is the fourth largest spirits brand in the country, with sales of more than 4.2 million cases (up 7.0% in 2003), and second in the rum category. This year Diageo expanded the Parrot Bay range with the introduction of Captain Morgan’s Parrot Bay Pineapple and Captain Morgan’s Parrot Bay Mango flavored rums. Each is made from a blend of Puerto Rican rum and natural flavors. The new 48-proof releases join the original Captain Morgan’s Parrot Bay Coconut.

RedRum is also a charter member of the flavor category that is continuing its winning ways. Introduced in 1997, RedRum is made in the U.S. Virgin Islands from barrel-aged rums and an infusion of natural mango, pineapple, coconut and cherry fruit juice. The 70-proof rum has built an on-premise following based principally on its mixability.

Domaine Charbay, a family-owned artisan distillery located in St. Helena, CA, has created the first American pot-distilled flavored rum — Charbay Tahitian Vanilla Rum. Priced at $28 (750 ml), this superpremium offering is triple-distilled from a proprietary blend of Hawaiian and Caribbean sugar cane syrup and infused with Tahitian vanilla beans. The 70 proof rum is now available nationwide.

Ronrico’s Vanilla, Pineapple Coconut and Citrus rums debuted last year.

Puerto Rican producer Ronrico has extended its range with the 2003 release of three new flavors — Ronrico Vanilla, Ronrico Pineapple Coconut and Ronrico Citrus. The trio is made at the Serrallès Distillery from a premium blend of barrel-aged rums and an infusion of flavor extracts. The Ronrico line has a suggested retail of under $10 for a 750 ml bottle.

White Rock Distilleries has just introduced Coconut Jack into selected major markets nationwide. A product of the Virgin Islands, the new coconut-flavored rum comes in an exuberant white bottle with a tropical scene. The brand has a suggested retail price of $12.99 for a 750 ml bottle and the company hopes to offer it in 20 states by the end of the year.

For its part, Admiral Nelson’s Rum has just added a Raspberry flavor to its lineup, which also includes Spiced, Coconut and Vanilla flavors. The brand has just launched a redesigned web site, www.admiralnelsonsrum.com. Besides historic information about the British naval hero Nelson, the site features favorites such as cocktail and food recipes, party planning tips, music and games.

Another line of flavored rums that carries a moderate price tag is Marimba. Imported from the Virgin Islands by Oregon’s Hood River Distillers, the Marimba range of 70 proof rums includes Tropical Tease, a blend of mango, guava, passion fruit, peach, grapefruit and banana, Orange S’Cream, Spiced Breeze and Lemon Squeeze.

AGED RUMS FIND A NICHE

Añejo rum swirled and sipped from snifters is becoming a common sight in many bars and restaurants, one indication that the category has ascended to the next level. Enthusiasts are enjoying superpremium rums straight — no mixers, no ice.

There is a cachet surrounding aged rums, similar to what is associated with añejo tequilas, single malt Scotch and alembic brandies. Smooth and luxurious, aged rums are elegant, sophisticated spirits best appreciated neat. Drinking patterns are changing and añejo rums are clicking in a big way.

“The complexity and style of the different islands and regions produce high quality sipping rums that vary dramatically in taste profile,” explained Kelley Spillane, executive vice president of Castle Brands, importer of Sea Wynde Pot Still Rum. “Consumers are discovering more and more the wonderful taste and body that comes with enjoying these fine rums neat or on the rocks.”

Matt Gilmore, brand manager of Matusalem Rum, believes that the rum category has years to go before reaching its fullest potential, but that it’s soaring popularity means good things for añejo rums. “The trade is becoming more educated about rum, much in the same way that vodka evolved in the minds of consumers. Rum is not the rumbuillon people used to drink in college. In fact, sipping rums play right into today’s consumer taste preferences.”

Chuck Shive of Appleton Estate Jamaica Rums has observed that consumers and bartenders alike are discovering that what they thought were only “sipping” rums actually produce more flavorful and character-laded cocktails. “The overall value that you get from aged, premium rums far exceeds the relative value of any other spirit. Consumers are beginning to appreciate and discover the affordable

This has been a year of expanding line extentions and shrinking numbers for flavored malt beverages, or “malternatives.” These sweet, low-alcohol beverages found their natural audience in the 1990s among young adults raised on sugary sodas. But behind the scenes, the biggest issue of the year has been a fight over the legal definition of the category itself.

This debate over the classification of malternatives — the question of “what is a beer?”– only surfaced in recent years (see sidebar). But malternatives themselves have been in U.S. markets for over a decade. Coors launched Zima, an early malternative, in 1993. Unlike the “clear beer” that Miller tested around the same time, Zima distanced itself from its beer identity in appearance, flavor and marketing.

The next wave of malternatives was variations on hard lemonade, starting with the introduction of Hooper’s Hooch in the mid- ’90s, and followed by the hugely successful Mike’s Hard Lemonade (still the number two brand in the category). Similarly themed Two Dogs Lemon Brew, Jed’s Hard Lemonade, Doc Otis’ Hard Lemon and Rick’s Hard Lemonade all conjured the same folksy, nostalgic image.

THE SPIRITS CONNECTION

The styling of Tequiza, launched by Anheuser-Busch in 1999, and Smirnoff Ice steered the category’s identity away from the old time medicine show and into the cocktail lounge. It may also have pitched it into controversy.

The overt association with spirits caused alarm among opponents, who condemned the malternatives as “gateway” beverages, which promised the sophistication of hard liquor with the easy drinkability of soft drinks.

Miller Brewing’s recently introduced Skyy Sport was the first malternative to highlight low-carb positioning.

But the new generation of malternatives, with their overt connections to familiar spirits brands, caused unease in corners of the beer industry, as well. Skyy Blue, Captain Morgan Gold and Bacardi Silver found space next to traditional beer in retail cold boxes and advertising media where the parent brands weren’t allowed.

Moreover, their malt-basis — their technical connection to beer and the legal justification for malternatives’ advantageous tax position and market access — appeared increasingly shaky.

THE TTB STEPS IN

In March of last year, the United States Alcohol & Tobacco Tax & Trade Bureau (TTB) published proposed new regulations on the formulation of ready-to-drink (RTDs) products or “flavored malt beverages” (FMBs). The comment period on the proposed ruling closed in October 2003, by which time the TTB had received over 16,500 responses, a record for any TTB rule-making.

There are two dominant positions on the proposed regulations. Each of the opposing camps in this fight is peculiar in its composition, bringing together the Davids and Goliaths of the brewing world on one side and FMB manufacturers of all sizes (some of whom are also conventional brewers) on the other.

The brewers’ side is represented by the powerful Beer Institute, the similarly powerful National Beer Wholesaler’s Association (NBWA); and the far smaller Brewers’ Association of America (BAA), which represents the interests of small brewers. They support the so-called 90/10 composition standard, under which 90% of the alcohol content in a malt-based beverage must be derived from malt, with only 10% coming from a distilled source.

In this argument, the brewing community emphasizes the integrity of beer, and the importance of not blurring the distinction between different categories of beverage alcohol that have been regarded as separate by tradition and in law.

Leading Brands of Flavored Malt Beverages

(Thousands of 2.25-Gallon Cases)

(p) Preliminary. – Source: Adams Beverage Group

In a speech last year to the National Conference of State Liquor Administrators, Art DeCelle, General Counsel for the Beer Institute, explained, “As we know, distinctions between malt beverages, wine and spirits date back to colonial times in the U.S. and to ancient times in Europe and the Middle East. Those distinctions are reflected in hundreds of statutes and regulations.”

A review of U.S. statutes supports the point. “[W]e find that the terms ‘spirituous liquors’ or ‘distilled spirits,’ and ‘malt liquors,’ are not used as synonymous,” said DeCelle. “On the contrary, they are treated as different substances; and in the system of revenue restrictions, in providing for their manufacture and sale, they are regarded as distinct.”

According to Don Meyer, Director of New Products for Anheuser-Busch, which produces the Bacardi line of malternatives, “We support TTB’s proposed rules that set specific limits on the amount of distilled hard liquor that can be used as a flavoring agent in these products. This change is helpful in further clarifying the rules in this product category. Our flavored malt beverages affected by this proposed change will be able to comply.”

The opposing side, represented by the Flavored Malt Beverages Coalition, an organization of FMB manufacturers, has already conceded ground to the extent of agreeing to some composition standard, rather than none. However, the coalition advocates a so-called 50/50 standard, which in practice means that a majority (51%) of the alcohol in a malt-based beverage would have to come from malt.

Gregory Altschuh, administrator of the coalition, points out that consumers have had 12 to 15 years to become accustomed to this flavor and product category. “As for these products confusing the consumers, the ATF concluded that no consumers were being misled. They discovered that consumers don’t care what the alcohol source is — they’re indifferent to the alcohol source. They know they’re drinking a cooler-like beverage, that it’s low alcohol and refreshing, and they just want something with a certain taste.

“We think the majority composition is the fairest,” continued Altschuh. “The category has evolved with the government’s knowledge. If you move to the dire level [of the 90/10 standard], you’ve set the bar so high you’ll damage the category. You’ll certainly increase the cost of production until only a limited number of industry players can play.”

Harry Bigelow, senior vice president of National Sales for Diageo/Guinness, producer of malternative brand leader Smirnoff Ice, echoes the concern about cost. “We know there will be incremental costs. It’s not great from a consumer perspective. The net is, it will cost consumers and producers more.”

Complying with new standards will be easier for some companies than others. “Can A-B do it?” Bigelow asks. “Probably while standing on its head. But what about the smaller guys, like Mike’s, who only have one product, and don’t have those kinds of resources? It could really hurt smaller players.”

No firm date for a decision has been announced, though it could come at any time. Meanwhile, it’s a fair assumption that every major malternative producer has both a 90/10 and a majority composition recipe ready. No matter which option is selected, all present brands will probably have to be reformulated.

THE HEALTH OF THE CATEGORY

As producers wait for the regulatory shoe to drop, they have had to cope with the more immediate issue of falling numbers in 2003. Preliminary figures from Adams Beverage Group indicate a 10% sales slump in the category overall for 2003; the January 2004 IRI report showed malternatives down by 14%.

Jack Daniel’s Hard Cola has grown modestly but steadily since its
introduction last year.

Among the largest-selling names, Smirnoff Ice, the number one brand, fell by over 34%, with Bacardi Silver and Skyy Blue dropping 33% and 27% respectively. Tequiza and Hooper’s Hooch fared worse, with their numbers cut in half from 2002 to 2003. Mike’s Hard Lemonade and Seagrams Coolers both held their losses to single digits. The only gains were for the number three brand, Bartles and James, the Gallo wine-cooler malternative that predates all the other brands, and which might be considered in a class all its own; and relative newcomer Jack Daniels Hard Cola, up 11% but still selling less than 1 million cases in total.

Across the beer industry, 2003 was not a good year, with domestic barrellage down in every category except light beer. Still, the losses by malternative brands look serious even against that backdrop.

It’s possible to speculate that the light beer and low-carb juggernaut has captured drinkers from the same demographic group malternatives target. Perhaps acknowledging that new diet trends are influencing consumer choices profoundly, Miller introduced Skyy Sport Low Carb, the first low-carbohydrate malternative.

Some of the losses, regardless of their source, have been partially offset by new product launches, extension brands that may have either propped up or cannibalized their older siblings, depending on the interpretation.

Diageo’s Smirnoff Twisted V line, which comes in four flavors, recently joined the company’s malternative mix.

Diageo introduced Smirnoff Ice Triple Black, and Smirnoff Twisted V (Five) in four fruit flavors. Their combined sales of $7.5 million nearly match the loss in lead brand Smirnoff Ice in 2003, and Diageo’s Harry Bigelow reports that the category is now strong and growing. “Malternatives and FMBs are up since the beginning of the year. We moved from the test phase to national roll-out with Twisted early this year. Anywhere we were in test last summer we got great figures, so we saw this upturn coming.

“Triple Black is aimed at males 21-29, positioned with a little edge. Twisted is still male-focused, but with also more of a female sell than Triple Black.

“Our research shows that up to 15% of our new consumers come from consumers who aren’t drinking beer or FMBs. It truly is an add-on. Consumers are asking, ‘What product am I going to have on this particular occasion?’ We can grow if we get them to think of these on a greater number of occasions.”

Mike’s Hard Lemonade, still the number two brand, has launched new lime and cranberry flavors.

Bacardi Silver Low Carb Black Cherry, boasting only 2.6 grams of carbohydrates, is the newest entry in the Bacardi Silver malternative line.

Anheuser-Busch saw its lead brand, Bacardi Silver, drop from an estimated 7.5 to 5 million cases last year. However, new Bacardi Silver Raz has picked up 1 million cases, and Bacardi Silver O3, named for the three orange varieties used as flavoring, has added 2.5 million, more than making up for Silver’s losses. Bacardi Silver Limón, introduced in 2003, and the just-debuted Bacardi Silver Low Carb Black Cherry, complete the portfolio. This latest entry boasts only 2.6 grams of carbohydrates and 96 calories, while featuring the flavors of black cherries and hints of vanilla.

According to A-B’s Don Meyer, “The primary audience for the FMB category is a diverse group of contemporary adults, ages 21-27, who currently drink FMBs. When we introduce new Bacardi Silver flavors, we do expect some cannibalization since FMB drinkers like to try new flavors. We want our Bacardi Silver drinkers to try our new flavors.

“Our Bacardi Silver brands have performed well since the brands’ respective introductions. In fact, the Bacardi Silver Family holds a 24% share of the industry’s spirit- based FMBs.” (Source: IRI Infoscan combined C-Store and Grocery, YTD March, 2004.)

Seagram’s Coolers recently launched Mango Passion Paradise Punch, among other new flavors.

A proliferation of flavors seems to be the trend. Seagram’s Coolers (considered by the company to be a ready-to-drink beverage because of its lower alcohol, rather than a malternative) celebrated its 20th anniversary by unveiling new bottle design and packaging, and two new flavors to join the nine existing Coolers. Many of the flavors are fruit combinations.

Seagram’s Smooth, United States Beverage’s malternative brand, which launched in 2003, has also added flavors in the past month and, as with the Coolers, the new choices are fruit combinations rather than single fruits.

Brand manager Justin Fisch sees product differentiation as the biggest challenge. “Other brands are limited to single fruit flavors: cranberry, green apple, orange. The packaging is grey, the liquid is clear. We looked for unique flavors and packing to differentiate ourselves from the competition.

“We realized that the category in total has become saturated in the past year. But this is a category driven by flavor. It’s not unusual that a brand will launch a new flavor every year to keep it fresh. This demographic comes to expect a new flavor every spring.”

Julie Johnson Bradford is the editor of All About Beer magazine.

A Taxing Issue

The malternatives drinks category was born of an opportunity presented by beverage alcohol tax laws. It’s not alone in that origin. Guinness, the iconic Irish stout, was formulated in the eighteenth century with unmalted roasted barley, which was not taxed, instead of black malt, which was subject to taxes. Its unusual, gristy flavor turned out to be popular with beer drinkers.

In present-day Japan, the light beer style known as happoshu relies on smaller amounts of malt than traditional beer, in order to avoid malt’s taxes.

Malternatives are simply the latest example of drinks makers responding in creative, if
unanticipated, ways to government regulation.

Under U.S. laws, beer is taxed at a lower rate than wine and spirits, and enjoys access to advertising media and retail outlets denied to the other categories as well. So, the legal classification of a beverage as a beer — a malt-based beverage — is worth fighting for.

In fact, the malt base from which the malternative derives its legal benefits only makes up between 0.5% and 2.0% of the final product. The remaining 98.0% to 99.5% comprises water and flavorings. But the flavorings are also the source of the majority of the alcohol in the final product. Flavor-infused alcohols are not taxed as beverage alcohol, so long as they are unfit for drinking on their own.

If a malternative contains, at most, 2% of the malt base, it is obtaining at least 98% of its
alcohol from “flavorings.” Clearly, if it were not for the special tax position enjoyed by beer, the malt would be eliminated altogether. In European countries with different tax arrangements, the malternative niche is occupied by so-called “alcopops,” which are diluted, flavored spirit-based drinks — with no pretentions to beer.

The U.S. beer industry’s fear is that any suggestion that the legal category of beer is meaningless could jeopardize its tax position.