A SPECIAL ALL-DIGITAL ISSUE

VOLUME 3 ISSUE 1 April 2014 SPIRITS A Distilled Look at What’s Working in HARD LIQUORS

◗ Market Overview ◗ Building a Brand ◗ Premixed A SPECIAL ALL-DIGITAL ISSUE Vol. 3, No. 1 April 2014 CONTENTS 4 3 Viewpoint In Spirit and in Truth 4 Q&A with Diana Pawlik The distilled beverage market has seen many changes through the years, particularly as consumers shift from focusing on brand name and bottle image to products they connect with on a more personal level. 7 What Comes First, the Business 7 or the Brand? by Matt Anderson Craft spirits may be all the rage, but breaking into the business is not for the fainthearted. Distributor negotiations, transportation costs and heavy competition from big-dollar brands are but a few of the challenges.

Premixed Cocktails – Then and Now •• 11 by Mark Newman The notion of “premixed cocktails” can evoke memories of the 1980s, wine coolers and slightly odd malt-liquor concoctions. However, ready-made cocktails originated almost 140 years ago—and innovative iterations continue to take hold.

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SupplySide Beverage Insights • April 2014 2 beverageinsights.com VIEWPOINT Alive and Well in the Spirits World

egardless of any weakness in the U.S. economy, the world of spirits continues to see increases by R segment of 3 percent to 7 percent compound annual growth rate (CAGR), according to Beverage Marketing Corp. That’s amazing! Spirits supplier revenues are up 4.4 percent to $22.3 billion, an outstanding $928 million gain. U.S. volume alone was up 1.1 percent in 2013 to 206MM cases. Another interesting factoid is that one would have perhaps thought—given the economic weakness since 2008—that value-priced spirits would be garnering great increases. But that’s not the case. As a matter of fact, they are down 1.3 percent; premium liquor sales are up 1.6 percent, high-end at plus 7.2 percent and super premium at a gain of 6.2 percent. From a preference perspective, whiskey—once the darling of the business— fell for years as the go-to spirit. During the last five years though, it is back in the game and growing, seeing a 6.2 percent increase in sales last year alone. Eighty percent industry growth is a lot to brag about if you are a single malt, Canadian or Scotch blend, all components of this growth number. If you are an imbiber, surely you’ve witnessed how hot the tequila category is, with volumes up 6.6 percent and increased revenues of 7.9 percent—impressive for sure. Vodka is up a mere 1.1 percent but has 66MM cases. Last year, more than 800 new items hit the retail store shelves as line extensions and brand-new entrants. All the activity is very cool for the industry. Carbonated soft continue to tank, and the only other real growth can be seen in bottled water and energy—leaving wine, beer and additional large categories closer to flat or losing. It’s great to see the health of the spirits world still building, especially considering the category was around long before the advent of Coca-Cola, 125 years ago.

Cheers—to your health!

James S. Tonkin Co-Founder of SupplySide Beverage Insights Founder and President of Healthy Brand Builders (480) 596-6360

SupplySide Beverage Insights • April 2014 3 beverageinsights.com In Spirit

and in Truth A Q&A Overview of the Distilled Beverage Market

iana Pawlik is vice president, marketing, Spirits & DGlobal Imports at Constellation Brands—a global wine, beer and spirits company with a broad portfolio of premium brands. She is an accomplished marketing executive with nearly 20 years experience in beverage alcohol, consumer goods and fashion. Pawlik is responsible for developing and executing the company’s long-term growth strategies, new brand initiatives and defining her brands as leaders in the market. Prior to her current role, Pawlik served as vice president, marketing, Vincor Canada (a Constellation Brands division). Her day-to-day responsibilities included the strategic management and development of the domestic wine portfolio with brands such as Jackson-Triggs, Inniskillin, and some of Canada’s leading estate wineries in Niagara and Okanagan.

In this Q&A, Pawlik shares insight into the distilled spirits segment.

Beverage Insights: Who’s drinking spirits? Diana Pawlik: Spirits are consumed by just about every type of person above the legal drinking age. It isn’t about who is drinking it, but more about how that is of interest. There are people who are making simple cocktails at home or drinking spirits straight, and others who consume most of their spirits outside the home at , lounges, bars and nightclubs. Spirits consumption has become more about the occasions, where culture has re-emerged and mixology is at the heart of the category. Vodka has certainly been leading the growth in the category, but now we are seeing resurgence in brown spirits; the flavor across key categories that helped to fuel the growth in vodka is now doing the same in brown spirits.

Beverage Insights: What are some of the biggest challenges faced by spirits brands? Pawlik: One of the biggest challenges is the continuing fragmentation within the category. In vodka, there is a low barrier of entry, therefore it is relatively easier to access IN THIS ISSUE from a supplier perspective. With other spirits such as Viewpoint p. 3 bourbon and whisky, there is an aging process; ingredients Business or Brand p. 7 make a significant difference and craftsmanship plays an Table of Contents p. 2 even greater and important role.

SupplySide Beverage Insights • April 2014 4 beverageinsights.com Beverage Insights: How can a spirits brand can stand out from the competition—is packaging everything? Pawlik: Packaging certainly helps, but is not everything. You need to have all of the pillars—marketing, advertising and the integrity of the product. It is about the whole package vs. the packaging.

Beverage Insights: What role should brand extensions play in a spirits brand’s business development strategy? Pawlik: Line extensions help innovate and ignite growth for a brand, to set and capture trends whilst recruiting new consumers. However, it is important to grow and continue to develop the core franchise of a brand and not rely solely on the newest extension to drive growth.

Beverage Insights: How are certain niches faring, whether organic, infusions, gluten-free, reduced calorie, etc.? Pawlik: Niches following trends come and go, but what remains a constant is that consumers are always looking to try new things, and also need a point of familiarity and context to embrace. Bringing new products to market is an exciting proposition that should be approached with a good measure of enthusiasm and diligence, as some trends propose longevity reflective of shifts in consumption— and others are quite fleeting.

Beverage Insights: How has the spirits market changed through the years? Pawlik: The spirits industry has certainly faced some significant changes— one being the emergence of flavors into the vodka category, which we are now seeing migrate across the category, proliferating it more in the brown spirits category as well. While a few years IN THIS ISSUE back it was about image and bottle service, now it is about Viewpoint p. 3 authenticity and craft, and the story and providence behind Business or Brand p. 7 the product. q Table of Contents p. 2

SupplySide Beverage Insights • April 2014 5 beverageinsights.com Proprietary Flavor Systems for Spirits and Cocktail Mixers

Allen Flavors has developed unique flavor profiles for various spirits including vodka, rum and liqueurs. Our Research and Development and Flavor Creation laboratories can collaborate on projects involving alcoholic beverages, cocktail mixers or combinations of the two.

Our custom flavor creation team enjoys a challenge so give us a call at 908-561-5995 or visitwww.allenflavors.com to learn more today! You can also watch a short video to learn more about Allen Flavors by clicking here. What Comes First, the BUSINESS or the BRAND ?by Matt Anderson

first dipped into the spirits business in late 2008. Having built a still in my I garage—made of two kegs welded together, 30 feet of copper piping and a Bunsen burner—I was open for business. Charging $60 a bottle for my “Gin, Sweat and Tears,” business was booming. Today, we distill with one of the most respected distillers in the Pacific Northwest, using ingredients and equipment surpassed by none—yet we can barely survive on the miniscule margins shaved for us as pittance after cutthroat distributor negotiations and transportation costs. So what gives?

Understanding the Game So you’re telling me I have a chance… With more than 300 commercial distilling permits granted in the during the past 10 years, domestic spirits manufacturing has more than quadrupled in a single decade. Stack on myriad line extensions being hemorrhaged into the market by the largest spirits conglomerates, increased foreign product offerings, the highly networked brokers and the distribution superpowers-that-be ... and a surface-level understanding of the competition in the industry can be grasped. The trenches are deep, and the stakes are high.

Putting Lipstick on the Pig Wait, you mean we need to take 2 percent of total market share? Lifestyle marketing has reached new heights IN THIS ISSUE within the American spirits market. From offensively Spirits Overview p. 4 material ultra-luxury vodkas that are dripped from the same Premixed Cocktails p. 11 stills as the quarter-gallon discounted vodkas, to iconizing Table of Contents p. 2

SupplySide Beverage Insights • April 2014 7 beverageinsights.com brown liquors that should loosely be described as a whiskey let alone bourbon, the world’s most elite public relations and marketing departments work together to paint the industry landscape. They create romance and evoke intrigue, all with a simple goal: to keep Americans drinking from the same bottles, and the cash flowing into the same pockets. For perspective, while micro-distilleries and craft spirits overall continue to aggressively trend, roughly 70 percent of all spirits growth in 2012 came from four suppliers.

Buying the Bar Money Talks & Bull Walks … Into Your Bar Public endorsement for sale in any other industry would immediately draw individual integrity into question; but, this is the booze business. Since prohibition, the almighty dollar has prevailed from the top down. Be it increased margins to distributors for guaranteed quantity orders from the supplier, marketing-dollar support per bottle to key accounts from the portfolio manager, $500 cash in the hand of the beverage director for a cocktail menu placement by the brand owner, or a large tip and smile to every bartender in the city by the army of spirits representatives (that are set against impossible sales goals), everyone is paid, and the world turns.

We the People Mixing Drinks & Dealing Cards Bartenders are the gatekeepers to the spirits industry, and the waning barroom politics of single distribution loyalty are beginning to give them the respect and power—make that “buying” power—they deserve. Interestingly, the role of a brand ambassador or employed representative specifically for one product has begun to merge supplier and street, as the most talented barmen and women are being hired directly by well-capitalized brands to integrate their portfolios into the tight-knit circles of the taste-making mixologists, spiritualists and cocktail elite.

The Liquid Renaissance Innovation Is Born from Necessity As the competitive pool of new spirits suppliers continues to waterfall over the regulatory boundaries archaically defined by the governing lobbyist organizations and legal departments that regulate IN THIS ISSUE one of the most lucrative industries in this nation, innovation Spirits Overview p. 4 is being born from necessity. Boutique distribution networks Premixed Cocktails p. 11 are being organized throughout the country, talented Table of Contents p. 2 brokers are accepting niche craft spirits into their portfolios,

SupplySide Beverage Insights • April 2014 8 beverageinsights.com and as bartenders and consumers alike are offered competitively priced craft offerings of a greater caliber, these distribution networks are beginning to establish a personal clout and cache in the industry.

Until We Again The Future Feeling the pressure, leading distribution houses have rapidly worked to “claw back” market share in the craft space. The nation’s largest distribution networks, in conjunction with the biggest multinational portfolios, are creating and positioning darling brands as “boutique”—building marketing divisions focused specifically on mixology and the small-batch marketplace. The competition is stiff, but there is room for intelligent, well-positioned brands to grow. Quality spirits are being made, and the brands that are finding national reception have forged a resolve to succeed. Seeking adequate capital, obtaining experienced executive guidance and developing rhinoceros-thick skin is a good start, but remember this: Within the heart and soul, the love and vision to create a brand is born. However, only through an unyielding dedication to that love and an unfaltering commitment to that vision will you find success in this industry. Distill with passion, sell with conviction and drink with reserve. q

Matt Anderson is the founder and creative director of Enlightened Grain Spirits, a portfolio of pure, organic ultra-premium craft spirits featuring savory botanicals. With a decade of experience in the hospitality, and spirits industries, Anderson has guided EG through product development, brand strategy and North American sales growth.

IN THIS ISSUE Spirits Overview p. 4 Premixed Cocktails p. 11 Table of Contents p. 2

SupplySide Beverage Insights • April 2014 9 beverageinsights.com 2014

Call for ENTRIES Discovering Innovative Launches and Exploring their Market Significance

For more than 15 years, SupplySide has helped those in the dietary supplement, food, beverage, personal care and animal nutrition industries break through the hype and ambiguity to find the information they need to explore, discover, innovate and market their next best-selling product. The 3rd annual SupplySide Editor’s Choice Awards will recognize innovative launches from CPG companies in more than 20 categories.

The 2014 winners will be announced at SupplySide West, Oct. 6 to 10, in Las Vegas.

Entry Deadline: July 31 Nomination Details http://bit.ly/ECAwards2014

@SupplySide /SupplySideEvents #ECAwards Premixed Cocktails – Then and Now by Mark Newman

you thought premixed cocktails were a new So phenomenon. Perhaps the newest versions of wine- and malt-based cocktails are relatively new, but the original premixed cocktail dates back to 1875! That’s when the Heublein Co.—founded in 1862 and now known as Diageo—took an order for premixed manhattans and martinis for a governor’s event that was ultimately cancelled due to rain, and the company felt all was lost. The Heublein’s restaurant ordered an employee to dispose of the crazy new premixed cocktails, but the employee’s curiosity led him to take a taste. He found that the drinks were not only “still good,” but also quite tasty. The “ready made” cocktails became such a hit at the restaurant, the Heublein brothers decided to build a distillery just to produce the easy-to-serve drinks, and thus the ready to drink (RTD) cocktail category was created. Sales of the wildly successful ready-made cocktails were interrupted by the “social experiment” known as Prohibition. Once it ended, the Heublein family picked up where it left off, using the cocktails as its base from which to grow. Heublein’s RTD beverages spawned several copycats, such as Schenley Distillers’ Cocktails for Two line. Heublein also introduced the first alternative package for liquor by putting the cocktails in a can for its Club Cocktails, which still exist today. The category languished for decades—although consumers seemed to want convenience, no one product line grabbed any real traction. Certainly, Jose Cuervo’s pre-made margarita gained some attention, along with Bacardi’s mojito. But the next RTD explosion happened as an outgrowth of the wine cooler business, which was controlled by Bartles & Jaymes and Seagram’s Coolers. It occurred when low-alcohol RTDs entered the market from big brands such as , Bacardi and Jack Daniels. Clearly targeted at a younger consumer segment (ages 21 to 35), these recognizable brands quickly gained shelf space and consumer acceptance. Although low IN THIS ISSUE in alcohol, most of the brands moved to malt-based alcohol Business or Brand p. 7 for lower tax rates and lower shelf prices. While these major Contacts p. 13 spirit brands sell plenty of low-alcohol malt-based drinks, the taste can often be less than fulfilling. Table of Contents p. 2

SupplySide Beverage Insights • April 2014 11 beverageinsights.com What’s Really New in RTDs … Pouches More recently, brands such as Daily’s, Cordina, Parrot Bay, Seagram’s and Croctails have blasted on the scene with pouches ... just like a Capri Sun, but for adults. Daily’s started selling RTD cocktails about four years ago and, according to Nielsen tracking data, its sales in 2013 catapulted the brand to the number 1 U.S. wine item for a substantial period of time. It’s shocking that a wine cocktail was the sales leader for most of the year. Newcomer Croctails experienced more rapid growth, quickly rising to number 12 in the Nielsen rankings in several markets. However, the brand is quite different than its pouched competitors—with a larger pouch and, at 9.9 percent, nearly double the alcohol. Since the majority of other Craft-oriented RTDs pouches are less than 7 percent alcohol by volume, their packages tend to be 10 oz. or 296 ml. As a result of the are coming in droves, higher alcohol, Croctails falls into a completely different demonstrating that category, governed by the Taxation and Trade Bureau division of the Treasury Department (TTB), just like regular the “cocktail culture” wine and spirits. Thus, the brand was forced into a larger driving mixologists to 375ml/12.7 oz. TTB-compliant approved package size. The create new and unusual lower-alcohol competitors follow the guidelines set by FDA and, as such, can put their products in non-conventional cocktails is coming to sizes to achieve a lower price point. However, the onus is the world of convenience on those companies to put out a product that will create repeat customers. Even brand powerhouse Mike’s Hard in RTD form. products entered the niche and quickly vanished.

What’s Next in RTD Cocktails? Craft-oriented RTDs are coming in droves, demonstrating that the “cocktail culture” driving mixologists to create new and unusual cocktails is coming to the world of convenience in RTD form. One of the most recent entries in upscale craft-oriented RTDs is Austin 360 cocktails. The brand owner decided to use a high-end, six-times distilled vodka for the company’s Cucumber Vodka Mojito, Paradise Found, Tea Twister and Vodkarita, along with natural fruit juices, herbs and organic agave nectar. So far in 2014, the convenience trend continues to fuel the popularity of RTD cocktails—but only time will tell which brands, flavors and packaging consumers like best. q

Coined “the million dollar palate” by colleagues, mixologist Mark Newman is vice president of business development at GoPouch IN THIS ISSUE Beverages LLC. He has held key executive positions with Young’s Business or Brand p. 7 Market Co., Bohemian Distributing, Laetitia Vineyards and Accolade Contacts p. 13 Brands Inc. Newman was named a “Market Watch” industry leader when serving as CEO of Liquor Barn Arizona. Table of Contents p. 2

SupplySide Beverage Insights • April 2014 12 beverageinsights.com CONTACTS supplysidebeverageinsights.com

SupplySide Beverage Insights is the industry’s premier destination for information about the beverage market to help companies innovate and market successfully to customers and potential clients. The online hub focuses on the most pressing issues affecting the industry and delivers this information via premium content optimized for the web, including video analysis, news, digital magazines, reports, slide shows, case studies and more.

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