Flavoring Their Drinks Can Be Risky for Booze Makers

By Saabira Chaudhuri 

To flavor or not to flavor: That is the question for booze makers.

Alcohol executives argue that flavored extensions of existing spirits brands can attract new customers -- particularly women -- while reviving interest among existing drinkers.

But flavors often tend to be fads, meaning sales plummet when customers tire of the new taste. That piles pressure on alcohol makers to continually discover the next big thing or brace for wild revenue swings.

"If you overdo it, you get into dangerous territory. You're a little bit like a hamster on a wheel who has to run faster and faster just to stay still," said Bob Kunze-Concewitz, chief executive of Davide Campari-Milano SpA, which owns brands such as Campari liqueur and Skyy vodka.

An apple variant of Crown Royal Canadian whisky that Diageo PLC launched at the end of 2014 helped the brand rebound from stagnant revenue to a 12% jump in North America sales for fiscal 2015. Diageo in 2014 also unveiled a range of Canadian whiskies in pie flavors such as apple, cherry and pecan.

Diageo's Piehole Whiskey, however, hasn't gained traction, and Crown Royal's North American growth halved in fiscal 2016. Now, Diageo hopes that its new vanilla Crown Royal flavor, which it announced last month, will again juice sales.

"It tastes good and a lot of my friends like it because they can drink it straight," said Justin Capetillo, a 35-year-old Houston-based cameraman.

Although advertising costs can be hefty, creating the new flavors isn't particularly expensive. New variants usually are developed internally and packaging costs generally are minimal, mainly requiring a modified label. Consumer research typically runs between $50,000 and $150,000, said Angelo Vassallo, a former marketing executive for Seagram Co.

Results, however, are choppy. Brown-Forman Corp. in August reported its cinnamon-flavored extension of Jack Daniel's Tennessee whiskey declined in the U.S. by a double-digit percentage in the first quarter of fiscal 2017. The company doesn't plan to create any new flavors for Jack Daniel's, instead focusing on expanding the brand outside the U.S.

John McDonnell, a former Seagram executive, recalls how the company's Leroux cordials brand churned out flavor after flavor.

"We were releasing a new flavor every month and just doing it to pipeline product into distributors' warehouses," said Mr. McDonnell, now the managing director of international operations for Fifth Generation Inc.'s Tito's Handmade Vodka, which hasn't released flavored extensions. "It finally just backs up." Leroux is now owned by Beam Suntory Inc., which sells 27 flavors of the cordial.

San Diego-based Jeremy LeBlanc, who has been a bartender for 18 years, says the recent trend toward craft cocktails hasn't helped demand for flavor extensions. "A lot of mixologists doing craft cocktails stick their noses up at flavored spirits because everything is about fresh ingredients," the 41-year-old said.

Companies sometimes decide to flavor brands that are struggling.

Pernod Ricard SA in 2013 rolled out honey- and apple-flavored variants of its Paddy Irish whiskey, but the new lines weren't able to stop the declines in market share. In May, it sold Paddy to Sazerac Co.

By contrast, Pernod hasn't created flavors for its flagship Irish whiskey Jameson, instead pouring money into more sophisticated innovations such as Caskmates, a Jameson variant seasoned in beer casks.

"The Jameson Caskmates initiative has a lot more substance to it and is much more appealing than just coming up with yet another flavor," said Pernod CEO Alex Ricard earlier this year.

Sazerac CEO Mark Brown said he is reviewing the flavored versions of Paddy and won't roll out additional ones. "When you take a brand down the flavor path, you really are taking an enormous risk with brand equity," he said. "You don't see serious brands of whiskey launching flavors."

Mr. Brown remains in favor of stand-alone flavored brands, such as Sazerac's Fireball, a cinnamon-flavored whiskey that soared to five million cases in 2015 from 50,000 in 2009, according to investment research firm Bernstein. But even Fireball's growth has all but flattened recently.

Nowhere has the volatility been more apparent than in vodka, which for years has relied heavily on flavored extensions.

Diageo in July said full-year sales of Cîroc plunged 43% from a year earlier, when customers had embraced a new pineapple variant of the brand. About 80% of the high-end vodka brand's sales come from flavor extensions.

"In the U.S., we have got to get more resilient and less dependent on big flavors every year," said Diageo CEO Ivan Menezes.

Pernod last year took a EUR652 million (about $693 million) write-down on its Absolut vodka brand, which kick-started the modern American wave of vodka flavorings.

Flavored vodka's growth slowed to 2.2% in the 52 weeks ended Sept. 10 from 12% in the same period in 2013, according to Nielsen data. The slowdown of flavored vodkas portends the potential risk for flavored whiskey, whose growth deteriorated to 13% in the 52 weeks ended Sept. 10 from a 132% rise in 2013 and a 71% increase in 2014.

Diageo, however, remains upbeat about its recent launch of Crown Royal vanilla-flavored whisky. "The life cycle of flavors on whisky may be longer than the life cycle of flavors on vodka," said James Thompson, Diageo's chief marketing officer for North America. "Our research on vanilla gives us confidence."

Write to Saabira Chaudhuri at [e-mail]

(END) Dow Jones Newswires

November 18, 2016 11:20 ET (16:20 GMT)

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