Sector Insight: Dark spirits - Brandy sales ride fashion wave

Cognac's revival proves dark spirits have potential to grow despite light spirits' dominance.

THE BACKGROUND

From the denizens of hushed London gentlemen's clubs to the very different establishments frequented by US rappers, there could hardly be a more diverse group than the modern audience for fine Cognac. For many years brandy was viewed as the after-dinner tipple of the older, gentrified European classes, but the spirit underwent a major shift in fortunes when Busta Rhymes released Pass the Courvoisier in 2002. The track, which also mentioned the Hennessy and Remy Martin brands, turned a generation of younger drinkers on to the spirit, making Cognac cool.

As the hip-hop collective have added Cognac to the luxury brands in their drinks cabinets, the resurgence in the popularity of cocktails has similarly boosted the market for dark spirits.

Brandy, usually grape-based, and dark rum, made from sugar cane, are a key ingredient in many classic cocktails, which have enjoyed a revival as cocktail bars have become a choice destination for fashionistas, the theatre and experimentation involved appealing to those looking for a more upmarket and aspirational night out.

But while there has been growth in the category, another shift in drinking habits is affecting, and even stalling, the market: more consumers are drinking at home rather than the off-trade, and wine and lager consumption is eating into most other alcohol sectors. So despite headlines about extended licensing hours leading to excessive alcohol consumption, BMRB research shows that fewer consumers are drinking alcohol and those who do visit pubs and bars are doing so less often.

The sector grew in terms of both volume and value in the early-2000s. Its value rose by 8% between 2002 and 2006 to £722m, but that included growth of just £1m from 2005-2006, showing that the market flattened last year. Brandy has the biggest share of the market and was worth £509m in 2006 compared with dark rum's £213m.

As sales have shifted to the off-trade, price promotions have made an impact on their value. Moreover, dark spirits are typically seen as an after-dinner tipple, limiting potential drinking occasions.

Most brandy sold in the UK is produced in France and Spain, although there are a few niche brands from other countries. Connoisseurship is growing, so, whereas a basic grape brandy once sufficed, now only Cognac will do. Similarly, the most growth within the dark-rum sector has been among the more niche golden rum brands.

Ninety per cent of Cognac sales are made up from three-star brands (aged in the cask for at least two-and-a-half years). This has held steady as some consumers trading up go straight to VSOP (aged for a minimum of four-and-a-half years). But this trend has not resulted in a significant boost for the related brandy Armagnac, produced in South-West France, which has lacked the promotional backing or support of a major producer enjoyed by Cognac.

Most alcohol manufacturers have a dark spirit within their portfolio, but for many their presence is historical rather than key to their business. As such, many lack any significant marketing support.

Beam Global Spirit and Wine's Courvoisier Cognac is the leading brand and one of the few to advertise. The brand's 'Earn it' campaign has helped extend its reach and targeting of aspiring young professionals. It has also followed a strategy of widening its brand presence by using its VS Cognac in grocery products such as cream and Christmas puddings. In 2006 it made the interesting extension of entering the male fragrance market with Courvoisier L'Edition Imperiale, aimed at young professionals.

Pernod Ricard has a presence in both areas of dark spirits with its Martell and Noblige Cognacs and Lamb's Navy and Havana Club rums, although Halewood will distribute Lamb's Navy from July. Martell targets traditional over-35 drinkers of aged Cognac. However, the introduction of Noblige has seen the company try to appeal to the younger demographic so enticed by Courvoisier.

Diageo updated its market-leading Captain Morgan rum last year to give the brand more impact and has invested in marketing support.

All alcohol brands have faced far greater restrictions on their advertising over the past few years, especially around the issue of linking sex to alcohol and responsibility among younger drinkers. This has limited the amount companies are investing in advertising and pushing more of it into direct work.

The shifts in demographics should help this category. The number of 25- to 34-year-olds who are key consumers of cocktails is set to rise; similarly, the number of over-45s, who have traditionally been a strong consumer base for Cognac, will increase. It is less certain whether the next generation of over-45s will embrace a brandy nightcap with the same enthusiasm as previous ones. It is as likely that they will retain their current drinking preferences into older age.

There is room for sector growth in terms of penetration, as only a small proportion of the adult population drink brandy (15.4%) or rum (7.3%). As such, the dark spirits market is predicted to reach £763m by 2012, a 5% rise on 2007, according to Mintel. However, when inflation is taken into account, this means a dip of 8% over the period.

DARK SPIRIT BRANDS BY ADSPEND (£000)

2006 2002 02-06
1 Remy Martin 517 260 2790
2 Martell 382 364 2233
3 Courvoisier 367 66 1596
4 Hennessy 199 283 1202
5 Morgan's Spiced 262 11 650
6 Three Barrels 183 23 613
7 Captain Morgan 58 n/a 420
8 Havana Club 78 n/a 260
9 Cockspur 21 14 69
10 Bacardi Oro n/a n/a 45
11 Appleton Estate 5 9 21
12 OVD 4 n/a 9
13 Sailor Jerry 3 n/a 9
Others 4 7 111
Total 2083 1037 10,028

Source: Nielsen Media Research/Mintel


BRANDY BRANDS BY SALES AND MARKET SHARE

2006 2002 02-06
pounds m % pounds m % % chng
1 Courvoisier 138 27.1 105 22 31.4
2 Martell 125 24.6 110 23 13.6
3 Remy Martin 40 7.9 30 6.3 33.3
4 Three Barrels 39 7.7 30 6.3 30.0
5 Hennessy 33 6.5 32 6.7 3.1
6 Jules Clairon 7 1.4 1 0.2 600.0
Other brands 41 8.1 79 16.5 -48.1
Own-label 86 16.9 91 19 -5.5
Total 509 100 478 100 6.5

Source: Mintel


DARK RUM BRANDS BY SALES AND MARKET SHARE

2006 2002 02-06
pounds m % pounds m % % chng
1 Morgan's Spiced 71 33.3 65 34.2 9.2
2 Captain Morgan 40 18.8 46 24.2 -13.0
3 Lamb's Navy 35 16.4 36 18.9 -2.8
Other brands* 67 31.5 43 22.6 55.8
Total 213 100 190 100 12.1

Source: Mintel
*includes own-label

ANALYST COMMENT - KEVIN BAKER, DIRECTOR, ALCOHOLIC BEVERAGES, CANADEAN

The overall trend in the UK spirits market away from brown spirits and toward white spirits masks a very mixed picture. If whiskies are excluded, the trend is actually positive, with growth of 2.3%.

Brandy's fortunes have been in the ascendant since the turn of the century after many years of slow decline. This revival has been driven by Cognac, which grew by 12% between 2002 and 2006. This is in part attributable to its fashionable association with rap music. By contrast, Armagnac has failed to find a market, with volumes falling 26% over the period.

The brandy category is led by the Cognac brands Courvoisier and Martell, followed by Three Barrels and Jules Clairon. These four brands account for almost half of all brandy sales in the UK. Courvoisier, owned by Beam Global, has seen volumes grow by 13% over the past five years, while Pernod Ricard's Martell grew by more than 9%. The performance of Three Barrels, now distributed by First Drinks, and Halewood's Jules Clairon have been more pedestrian, at 4% and 6% growth respectively.

Traditional dark rum volumes fell by 7% between 2002 and 2006, but the much smaller spiced rum segment saw volumes increase by almost 9%. This segment is virtually synonymous with Morgan Spiced, which accounts for more than 90% of spiced rum sales.

The dark rum segment is led by Diageo's Captain Morgan followed by Pernod Ricard's Lamb's Navy brand, which account for about a quarter of the market each. Captain Morgan has borne the brunt of the segment's decline, with volumes falling 9% since 2002, while Lamb's has maintained sales levels and is now in a very strong position to challenge its rival.

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