Diageo solves its premium vodka problem

The new joint venture between Diageo and Nolet is a good deal for both companies. Gaining a 50% stake in the new joint venture and global distribution rights to the Ketel One brand gives Diageo entry to the dynamic super-premium vodka category for the first time.

Diageo lacks a brand in this segment, despite being the biggest vodka producer in the world. Nor is it a bad deal for Nolet Spirits. It will offer the opportunity to expand away from its US heartland, which accounts for 97% of its volumes, something it would have struggled to do alone due to its small size.

Diageo fills a gap

Diageo’s vodka portfolio, concentrated around the Smirnoff brand, is currently focused at the economy and standard end of the vodka market. Smirnoff is the leading brand in most regions, notably North America, Latin America and Western Europe and also has a growing presence in emerging markets such as India and China.

All these regions and countries are expected to grow strongly until 2012, making Diageo well placed to exploit the global volume growth of vodka, but less so in value terms.

Super-premium vodka has seen rapid growth in recent years. In the US the largest super-premium market, the category accounted for over 10% of the 492 million litres sold in 2007 and has seen 80% growth since 2003 (compared to 28% for the sector as a whole).

Super-premium vodka has seen growth of 160% (27%) in the UK over the same period, albeit from a small base. Meanwhile emerging markets such as Brazil and China have seen equally dramatic growth with super-premium volumes increasing four-fold (26%) and doubling (87%) respectively between 2005-2007 from very small bases. With consumers trading up in both mature and emerging markets this trend is likely to continue.

No Absolut, no problem

The joint venture also allows Diageo to do this without facing any competition issues it would have met had it bid for V&S and its Absolut brand. The acquisition of V&S and Absolut was never a realistic option. The combined share of Diageo’s and V&S’ vodka brands in many EU countries would exceed 40%, as it would in North America, enough to trigger competition authority investigations.

Problems would also arise in Australasia as well as many dynamic Latin American and Asian-Pacific countries such as Mexico and China.

The combination of Diageo’s strong distribution in the US and globally and the rapid development of the super-premium vodka category should mean dynamic growth for the brand. While Ketel One is unlikely to challenge Absolut in volume terms in the medium term, its more premium nature could allow it to do so in value terms.