Mother’s ruin. Australian ReGINeration.

The Four Pillars Distillery

Spirit manufacturing in Australia had a period in the sun. But the sun is setting.

IBIS World recently reported that over the last 5 years the spirit manufacturing industry grew 3.3% to revenues of around $568M p.a., under some pretty negative circumstances. But the next 5 years have a gloomier outlook with growth forecast at only 1.5%. Which is less than the forecast growth in GDP and effectively, the experts say, will go backwards.

How can it be sustained, or grow? Who will be the winners? What will help? What should a spirit manufacturer do?

Certain products can be sustained, grow even. Marketing nous will sort the wheat from the chaff. Gin for the win.

I’ll explain…

First the bad news. What are the threats.

•Industry revenue has slowed and is only expected to grow by 0.6% this year.

• That’s because of declining alcohol consumption. Alcohol consumption is influenced by factors such as legislation, the level of health consciousness in society, government and charity campaigns aimed at encouraging responsible drinking and temperance.
o Australian alcohol consumption is expected to decline over 2015–16, continuing a long-term trend and threatening industry revenue growth.
o In 2007 alcohol consumption per capita was around 10.75 Litres per person per annun (Lppppa). It has declined to around 9.5Lpppa and by the end of 2017 it is predicted to flatten off at 9.25Lpppa. That’s a drop in consumption over 10 years of around 15%.
o Because the overall level of alcohol consumption is linked to spirits sales, the industry is affected by any change in use and attitude.

• Growing competition from cider, beer and wine manufacturers for a share of alcoholic consumption will likely threaten industry revenue over the next five years.
o Cider, in particular, has exploded in popularity among young drinkers. Wine prices remain at record lows due to a global wine glut, which has driven demand for wine in the $10 to $20 price range.
o Demand for craft beers is also expected to continue growing strongly over 2015–16.

• Australians love imported spirits.
o 62% of spirits consumed were manufactured elsewhere and globally recognised brands dominate the landscape. Imports are estimated to account for 62.2% of domestic demand for spirits in 2015–16.
o Prominent importers include the United Kingdom, the United States, France and Ireland. The United Kingdom alone accounts for 34.3% of imports, while the United States accounts for 23.3%.

• The industry is expected to remain at a competitive disadvantage to imported spirits, as consumers opt for premium foreign products with higher profile brands.
o This is evident in the shift in consumer preferences towards higher quality products. Consumers have begun to associate their chosen spirit with social status, and are increasingly using their beverage choices to signal class and sophistication. This concept is being further cultivated by marketing strategies that portray drinkers as chic, trendy or cultured. Australians perceive imported spirits as chic, trendy, cultured, classy, sophisticated and therefore higher social status is imbued by consumption: I drink (sophisticated), therefore I am (sophisticated).

• The Ready-to-drink (RTD) beverages, which comprise the majority of revenue (53.3%), are in decline.
o Before the ‘alcopop tax’ of 2008 they were hugely popular as a value proposition, but they now offer little value beyond convenience.

Don’t cry into your beer. There is hope.

Good News & Opportunities

• Because a lot of Australians view heavy alcohol consumption as unhealthy, they’ve been drinking less but drinking higher quality, more expensive products, which has been a favourable trend for the industry’s spirits segment.

• The good value of many Australian spirits, increasing consumer preference for local products and the growing popularity of Australian whisky and gin have all aided industry revenue growth. These factors bode well for domestic manufacturers.

• RTS pre-mixed cocktail products have been the silver lining for the industry over the past five years.
o These products have recorded strong growth across similar markets in Europe and North America, as weakened economic conditions and a rising cocktail culture have led drinkers to entertain at home. A similar trend has been occurring in Australia.
o Over the five years through 2020–21, factors such as the rise of cocktail culture and the premiumisation of the beverage market are also expected to boost demand for pre-mixed cocktail drinks and value added bottled spirits.
o RTS pre-mixed cocktails have shown robust growth in the United States and Europe over the past two years, where liquor producers have targeted consumers who entertain at home, to make up for weaker demand for spirits in restaurants and bars.
o With the economy set to return to steady growth and discretionary income expected to rise over the next five years, RTS cocktails are likely to become increasingly popular in Australia.
o Spirit manufacturers hurt by the government’s alcopop tax perceive RTS cocktails as a strong growth market. Diageo Australia recently introduced a new range of pre-mixed vodka-based cocktails including Smirnoff Mojito, Smirnoff Tuscan Lemonade and Smirnoff Grand Cosmopolitan.
o Growth in RTS cocktail sales will be an important driver for the industry, as local producers profit from using international spirit brands as inputs for these products.

• The success of Australian spirits is likely to encourage a more diverse range of boutique distillers to enter the industry.
o Since 2010–11, several new distillers have entered the industry in an attempt to carve out a niche and capture growing demand for different products.
o The number of enterprises is expected to grow at an annualised 4.5% over the five years through 2015–16.
• There are about 50 craft gin distillers around the country

• In 2015–16, the trade-weighted index is expected to fall, making imports more expensive and benefiting local spirit manufacturers.

• Demand from pubs, taverns and bars is expected to increase over 2015–16. As spirit manufacturers introduced new lines of Australian spirits, demand from bars, pubs and restaurants has assisted industry growth. In 2015, Australia had 29 whisky distilleries, most of which were located in Tasmania and New South Wales, with the rest spread throughout Victoria, Queensland and Western Australia. More recently, and with great success, the manufacture of white spirits has begun in Australia.

• Exports have demonstrated solid growth over the five years through 2015–16, to account for 34.4% of revenue. Exports mainly consist of rum, while brandy and liqueurs are exported in smaller quantities. Whisky is the fastest growing export category. In order of value, the most important export markets are Vietnam, New Zealand, South Korea and the Netherlands.

• International spirit companies have reported a change in the drinking habits of developed nations. Diageo has reported that its off-premise sales have increased as a proportion of overall sales. This shift has been attributed to an increase in the tendency to entertain at home. Other factors facilitating this shift have been smoking bans in many venues, weak economic conditions in developed economies and concerns over drink-driving.

Marketing starts with the markets

The Spirit Manufacturing industry primarily sells its products to export markets, domestic liquor wholesalers, or directly to hospitality venues and retailers.

Export markets account for 34.4% of revenue and the majority are sold to New Zealand and regions in Asia. Over the past five years, exports have increased as a share of revenue. This growth has been aided by the depreciation of the Australian dollar. Spirit exports tend to be high in quality and value.

Retailers are a close second at 33.2%. As domestic spirit production grows, it is becoming increasingly common for manufacturers to bypass wholesalers to sell directly to retailers and instigated by retailers, particularly in the case of private-label spirits, which are growing as a proportion of industry sales.

Domestic liquor wholesalers are getting 19.3%, but is the most efficient for smaller spirit makers, since they are able to achieve higher margins with one buyer rather than dealing independently with retailers that have greater bargaining power.

Direct Hospitality industries only account for 13.1%. Sales of spirits directly to hospitality industries account for a relatively small proportion of industry revenue, these sales largely involve smaller spirit makers that deal exclusively with their local pubs and bars.

Keep it simple.

What are the success factors for the brands that will win.

1. Promotion
Brand development and brand management of spirits is essential to sales (and profitability) success in this highly competitive global market. Creating a strong brand in terms of its heritage, purpose, personality, and differentiation through compelling copy and design — that translates across borders — can bring cache, higher pricing and therefore better margins. Weak brands will lose their focus. Strong brands like strong personalities will remain differentiated.

2. Distribution
Having products prominently displayed at key bars and hotels provides an advantage to industry firms by raising brand awareness that pulls through the wholesale and retail. But export is completely underplayed. The Australian wine industry exports 34.5% of $5.7bn. That’s $1.9bn. That’s three time the size of the whole spirit manufacturing industry.

3. Product development
Product innovation taps into new consumer tastes and trends. What are the trends, what tastes do people seek out? People are drinking lower volumes, higher quality, more prestigious, and more sophisticated alcohol.

4. Gin

Why Gin?

Gin consumption in Australia has increased by 36 per cent in the past five years, while consumption of other white spirits such as vodka and tequila stagnated or declined. At this rate, gin looks set to overtake vodka as our favourite white spirit by 2020.

The trend is based on an existing global trends: Cool and health.

The boom is being driven by Gen Y. They’re the ones who are most curious, value provenance, and authenticity — they want to know who’s making their and what botanicals they’re using. If it’s cool for Gen Y, then Gen X and Baby Boomers like me can dust off our avoidance of gin as the drink our parents drank — not cool — and reacquaint ourselves with the pleasure.

Added to ‘cool’, is health.

Whether vested parties try to convince us otherwise, people will continue to enjoy (responsibly) some alcohol into their lifestyle. Yet they are increasingly health conscious. So how do they trade this off with ‘alcohol is bad for your health’.

Many have begun to have position white spirits high on the spectrum of acceptable ‘low calorie’ alcoholic drinks. The antithesis of which are the globally recognised white spirits: Vodka, gin, mescal and white rum: A 25ml gin and diet tonic is around 56 calories, compared to a 175ml glass of white wine (c120kCal) or a pint of lager (c200kCal). And there are no carbohydrates in vodka or gin — so it’s Atkins friendly.

Yet unlike the generic neutrality of vodka, gin is more distinctive. Even the common or garden ‘cooking gin’ used as ‘house gin’ in less salubrious dinking establishments (IMHO Gordons, Bombay Sapphire & Beefeater) can emote brand preference due to taste preferences.

OriGin

Gin originally started as a partly medicinal beverage in 17th century Holland. The main botanical flavor coming from juniper oil is a powerful diuretic. The juniper also made crude spirit taste palatable.

But it was gin’s jump over the Channel to Britain that brought it global distribution and the drink became an absolute sensation. While the UK government had imposed a tough tax on imported spirits (if only they would here and now!), it was kind enough to let people distil their own spirit without a license. This resulted in distilling becoming something close to a national pastime. Bathtub gin was everywhere, and public drunkeness became an epidemic. Which is why still today it’s known as Mother’s ruin.

During the American prohibition, gin joints, and bootleg gin were synonymous with illicit (cool) drinking and took hold in the US psyche. Nowadays, Gin is famous around the world, from Manchester to Manila. (In fact, the Philippines is the biggest consumer of gin per capita worldwide.

While every gin features juniper as a main ingredient (except Sloe gin), each brand flavours the standard recipe with its own unique blend of 6, 9 12 or more herbs and botanicals. So the combinations can lead to an almost infinite permutations of flavour possibilities.

Unbelievably, 97% of gin consumed in Australia is imported from overseas distilleries, but Australia produces some of the world’s best gin. Some local gin distillers are taking on the cause to get more people to drink more Australian gin. So they should.

So, what does Australian gin have to offer?

The botanicals that are added during the distillation process, to give the spirit its distinctive character, are critical to each individual gin. Popular botanicals and/or flavourings for gin include citrus elements, such as lemon and bitter orange peel, as well as a combination of spices, such as anise, licorice root, cinnamon, saffron, baobab, frankincense, coriander and/or others.
One of the great things about Australian gin makers is how many of them are exploring indigenous ingredients as the botanicals like lemon myrtle, wattle seed, Tasmainian pepper berry, bush tomatoes and finger limes here in Australia are totally unique.

The botanical flavor combinations in gin are not as hard to discern or detect as in wines, so even unsophisticated palates can discern the nuances, which is great for newcomers, enthusiasts or connoisseurs.

People get it because they can taste it. It’s because very few gin brands taste the same that gin drinkers can become intensely loyal to a specific brand, but obtusely are more open to trying more exotic ‘recipes’. There’s a real shunning to the ‘cooking gin’ stereotypes.

Gin is also perfect to be mixed, adding real opportunities at individualisation and the trend for personalisation. Even the garnish in a gin martini or gin and tonic becomes critical and can be controversial. Forget a slice of lemon. It’s the grapefruit, or cucumber, capsicum or even a sprig of rosemary that add the pièce de résistance.

Importantly, a lot of new Australian gin makers, such as West Winds, are actively engaging with their customers directly, in the flesh at spirit focused bars such as Frisk in Northbridge, and through social media. The Four Pillars launched on a crowd-funding site and it was three times oversubscribed; Poor Toms also, it was looking for $20,000 and received almost $70,000.

People are falling over themselves to spend money drinking gin, on gin companies, and even for gin-making masterclasses.

And this means that there is the potential for uniquely Australian gins to do well overseas: for example the gin boom is even bigger in the US, for example, than it is here.

Conclusion

That’s the argument that gin could be the savior of Australian spirits manufacturing. The volume of gin sold is growing in size and sophistication on the back of an irreversible health trend. The potential for converting gin drinkers to aussie gin is huge. It permits a dearth of opportunities for branding. It’s eminently exportable to markets that already enjoy huge volumes of Australian wine.

Drink Australian Gin. Export Australian Gin.

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