Bottoms up: A breakdown of the spirits industry in 2015
U.S. consumers are propelling the industry forward thanks to their evolving tastes for shots, straight-ups, and cocktails.
The U.S. spirits industry gained market share last year. Because wine remained flat for the year, all of that market share was stolen from beer, though craft beer saw its own significant growth. In 2014, the global U.S. spirits exports market reached a record high, which made last year the eighth consecutive year that American spirits exports generated at least $1 billion.
Looking at the spirits industry as a whole offers one perspective, but breaking down individual spirits markets and examining legislation and business moves offers a more complex view of where the spirits industry stands today.
Whiskey, particularly American whiskey, has shown significant momentum in the spirits industry today, with 7.3% growth in the category, according to the Distilled Spirits Council's (DISCUS) 2014 Industry Review, and a 40-year high in inventory for Kentucky bourbon for 2014. This signifies the massive expansion needed to meet the fast growth in demand for American whiskey. However, in the first quarter of the year, value and volume of American whiskey and bourbon exports fell.
In the first quarter of 2015, flavored whiskey exports soared, likely due in part to the international rollout of Jack Daniel’s flavored whiskey brands. Flavored whiskeys, like Jack Daniel’s Tennessee Honey and Fireball Cinnamon Whisky, seem to be picking up speed among U.S. consumers, which may encourage whiskey producers to embrace the trend and release flavored varieties.
Consumer tastes are evolving, which bodes well for manufacturers of premium and super premium whiskeys.
"The trend to drinking better is a global one, but it's very strong in the U.S. and it's there in a sustained way," Diageo CEO Ivan Menezes told CNBC.
Luxury tequila in particular, which includes some of the fastest-growing brands in the American high-end spirits industry, is rising in the face of other categories, according to the DISCUS report, again signifying consumers' changing preferences for the quality of spirits they buy.
This is in part due to celebrity endorsements and brand ownership, which include Justin Timberlake and George Clooney, who both own or part-own tequila brands, and Sean "Diddy" Combs, who partnered with Diageo to acquire DeLeón Tequila.
"There will be continued growth of the 100% agave category as consumer knowledge of the category continues to expand as well as brands creating ultra-premium products/range extensions as the high-end segments of tequila continue to grow," Jesse Estes, co-founder of Ocho Tequila, told The Spirits Business.
Tequila producers may consider putting out one or more higher-shelf tequila varieties to capitalize on growth in this segment.
In the '90s, flavored vodka enjoyed its heyday with every imaginable flavor being added to the spirit. However, while many traditional vodka flavors are still successful, some of the more off-the-wall flavored varieties have turned off some consumers.
Vodka remains the spirits industry’s biggest seller by volume, but it lags behind other spirited competitors, like whiskey and tequila, in terms of growth. Vodka producers may not have to fear losing consumers entirely, but they do need to find new ways to innovate — beyond producing a mass of odd flavors — to recapture the market it's slowly losing.
According to Bill Owens, president of American Distilling Institute, the craft spirits industry is growing at about 30% per year. Currently, the organization works with about 900 distilleries that have a federal license, and Owens predicts the institute will break 1,000 craft distilleries in 2016.
Most of those 900 distilleries are open, but others are in the process of opening, which today comes with its own set of challenges. Local zoning permits, distillers, and barrels can be difficult to obtain, due to specialization and rareness of the equipment and misunderstandings with local zoning officials.
Despite these setbacks, Owens said that craft distillers are resilient and still pushing the industry forward. Craft spirits don’t yet have the market share that craft beer has in its industry, as craft spirits comes in at about 1% of the spirits market, Owens said. But he believes craft spirits will enjoy the same growth in the future that craft beer is seeing today.
More states are renouncing their Prohibition-inspired restrictions on spirits, including allowing sales of spirits on Sundays and spirits tastings, which is spurring industry growth.
The Trade Promotion Authority (TPA) bill was another piece of legislation supported by some in the spirits industry, which the Senate passed in June.
"TPA is critical to securing comprehensive trade agreements that open markets for American spirits. By continuing to expand the industry’s market access around the world, we can build upon the recent export growth, which is a victory for large and small distillers – and for the U.S. economy as a whole," said Distilled Spirits Council president and CEO Peter Cressy in a news release.
Cressy said that trade agreements can alleviate or remove high tariffs and other non-tariff trade barriers. This is true particularly in emerging markets, where the U.S. might not yet have come to a free trade agreement. Cressy said in a press release, "Trade agreements have contributed directly to record U.S. spirits exports, which have more than doubled over the past decade."
Major takeover in the works?
After Japanese food and beverage producer Suntory acquired the maker of Jim Beam for $13.6 billion in 2014, some experts thought that few attractive mergers and acquisitions were left in the spirits industry for the time being. However, rumbles of a Diageo takeover and other well-performing brands, such as Bacardi or Campari, could prove that statement false in the future if they generate enough interest for any of the bigger companies.
Growth in the U.S. spirits industry is undeniable, but where that growth is coming from has changed in recent years. As spirits companies sort out the trends that can help them grow their business, they can be confident that their industry has a future ahead that's as strong as their products' ABV.