2011 edition. Global market review of vodka forecasts to By IWSR Magazine editor Alexander Smith. May Published by

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1 Global market review of vodka forecasts to edition By IWSR Magazine editor Alexander Smith May 2011 Published by Aroq Limited Seneca House Buntsford Park Road Bromsgrove Worcestershire B60 3DX United Kingdom Tel: +44 (0) Fax: +44 (0) Web: Registered in England no:

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4 Table of contents Executive summary The big trends Imports v local products A fresh look at premiumisation Vodka fatigue? Flavour growth Main players The markets The Americas United States Canada Mexico Brazil Paraguay Uruguay Peru Jamaica Puerto Rico Europe Central Europe and CIS markets Western Europe The Baltics Finland Asia Australia China India Thailand

5 The Middle East The Gulf Israel Other markets South Africa Travel retail Appendix A: Vodka market measured by quality and flavoured variants Appendix B: Other CIS markets

6 List of tables Table 1: World vodka sales by total volume consumption - world total and by major market, ('000s nine-litre cases) Table 2: Top ten vodka brands in United States by total sales volume, ('000s nine-litre cases) Table 3: Top five vodka brand owners in United States by total sales volume, ('000s nine-litre cases) Table 4: Top ten vodka brands in Canada by total sales volume, ('000s nine-litre cases) Table 5: Top five vodka brand owners in Canada by total sales volume, ('000s nine-litre cases) Table 6: Top ten vodka brands in Brazil by total sales volume, ('000s nine-litre cases) Table 7: Top five vodka brand owners in Brazil by total sales volume, ('000s nine-litre cases) Table 8: Top ten vodka brands in Russia by total sales volume, ('000s nine-litre cases) Table 9: Top five vodka brand owners in Russia by total sales volume, ('000s nine-litre cases) Table 10: Top ten vodka brands in Poland by total sales volume, ('000s nine-litre cases) Table 11: Top five vodka brand owners in Poland by total sales volume, ('000s nine-litre cases) Table 12: Top ten vodka brands in Germany by total sales volume, ('000s nine-litre cases) Table 13: Top five vodka brand owners in Germany by total sales volume, ('000s nine-litre cases) Table 14: Top ten vodka brands in France by total sales volume, ('000s nine-litre cases) Table 15: Top five vodka brand owners in France by total sales volume, ('000s nine-litre cases) Table 16: Top ten vodka brands in United Kingdom by total sales volume, ('000s nine-litre cases) Table 17: Top five vodka brand owners in United Kingdom by total sales volume, ('000s nine-litre cases) Table 18: Top ten vodka brands in Lithuania by total sales volume, ('000s nine-litre cases) Table 19: Top five vodka brand owners in Lithuania by total sales volume, ('000s nine-litre cases) Table 20: Top ten vodka brands in Finland by total sales volume, ('000s nine-litre cases) Table 21: Top five vodka brand owners in Finland by total sales volume, ('000s nine-litre cases) Table 22: Top ten vodka brands in India by total sales volume, ('000s nine-litre cases) Table 23: Top five vodka brand owners in India by total sales volume, ('000s nine-litre cases) Table 24: Top ten vodka brands in travel retail by total sales volume, ('000s nine-litre cases) Table 25: Top five vodka brand owners in travel retail by total sales volume, ('000s nine-litre cases) Table 26: Global vodka market by quality segment, ('000s nine-litre cases) Table 27: Global vodka market by quality segment, ('000s nine-litre cases) Table 28: Top 30 vodka markets - proportion of flavoured vodka, (%) Table 29: Top 30 vodka markets - proportion of flavoured vodka, (%) Table 30: Top ten vodka brands in Armenia by total sales volume, ('000s nine-litre cases)

7 Table 31: Top five vodka brand owners in Armenia by total sales volume, ('000s nine-litre cases) Table 32: Top ten vodka brands in Belarus by total sales volume, ('000s nine-litre cases) Table 33: Top five vodka brand owners in Belarus by total sales volume, ('000s nine-litre cases) Table 34: Top ten vodka brands in Bulgaria by total sales volume, ('000s nine-litre cases) Table 35: Top five vodka brand owners in Bulgaria by total sales volume, ('000s nine-litre cases) Table 36: Top ten vodka brands in Czech Republic by total sales volume, ('000s nine-litre cases) Table 37: Top five vodka brand owners in Czech Republic by total sales volume, ('000s nine-litre cases) Table 38: Top ten vodka brands in Kazakhstan by total sales volume, ('000s nine-litre cases) Table 39: Top five vodka brand owners in Kazakhstan by total sales volume, ('000s nine-litre cases) Table 40: Top ten vodka brands in Romania by total sales volume, ('000s nine-litre cases) Table 41: Top five vodka brand owners in Romania by total sales volume, ('000s nine-litre cases) Table 42: Top ten vodka brands in Ukraine by total sales volume, ('000s nine-litre cases) Table 43: Top five vodka brand owners in Ukraine by total sales volume, ('000s nine-litre cases) Table 44: Top ten vodka brands in Uzbekistan by total sales volume, ('000s nine-litre cases) Table 45: Top five vodka brand owners in Uzbekistan by total sales volume, ('000s nine-litre cases)

8 Notes about the data Where - or a blank table cell appears in The IWSR data tables, this indicates no sales recorded by The IWSR. When 0.0 precedes - in previous years, this indicates that the brand had not yet been launched in the year(s). There may be some cases where low sales are registered as 0.0 due to rounding. Low sales may also be recorded as Min to signify minimum sales. Unless otherwise specified, all data quoted in this report refers to 2009 market data. When cases are quoted, these refer to nine-litre cases unless otherwise specified. Data in tables does not include figures for travel retail, unless otherwise specified. Data may not some due to rounding. Terminology CAGR: compound annual growth rate A&P: advertising and promotions

9 Executive summary Global vodka sales amounted to xxxxxm nine-litre cases in 2009 (domestic and travel retail). The CIS is the single largest consuming region, accounting for a near xx% share (xxxxxm cases), followed by Europe (Central and Western) at xxxx% (xxxxm cases), the Americas at xx% (xxxxm), and Asia at xxx%. Africa and the Middle East are relatively smaller at xxx%. The global vodka market had been growing strongly between 2004 and 2008, adding about xxm cases. However, the global recession hit the category hard and sales declined sharply in Preliminary indications are that the market recovered in most markets in 2010, particularly the large Russian market. It is better to view the global vodka market as two distinct markets, the vast locally produced and usually lowpriced market, and the premium (often) imported market. Total vodka imports/exports rose by xxx% CAGR between 2004 to 2009 to reach xxxxm cases, significantly outpacing the broader vodka market. The premium and super-premium tiers are relatively small with a market share of xxx% (xxxxm cases) and xxx% (xxxm cases) respectively. The US remains the paramount market for premium white spirits despite the country s protracted economic downturn over the past two years. Russia has a super-premium segment estimated to be in the region of xxxxxxx cases. Outside of that super-premium sales are relatively small. Marketers are confident that premium-and-above vodka will eventually extend beyond the US and become a factor in other markets. Super-premium sales in the US were hit hard by the economic slowdown and the contraction of the onpremise. What is not known is if the super-premium vodkas will regain volumes when the on-premise recovers. The IWSR believes it will, although it is likely to be different brands that make the running if the switch from Cognac to premium vodka continues. Yet by late 2010, there were signs of an encouraging rebound, although prices have yet to recover to pre-recessionary levels. Despite repeated claims, there is little evidence that vodka is showing any signs of imminent decline. Its neutral taste and mixability make it an ideal drink in the current US market. Flavours remain a driving force behind the category s growth. This has been particularly so in the US and Caribbean where the growth rate of flavours has outpaced that of clear vodka. The core citrus flavours such as lemon, lime and orange comprise most of the flavoured volume. Increasingly suppliers are introducing more esoteric flavours.

10 The big trends Global vodka sales amounted to xxxxxm nine-litre cases in 2009 (domestic and travel retail). The CIS is the single largest consuming region, accounting for a near xx% share (xxxxxm cases), followed by Europe (Central and Western) at xxxx% (xxxxm cases), the Americas at xx% (xxxxm), and Asia at xxx%. Africa and the Middle East are relatively smaller at xxx%. Russia is the single largest market with a xxxx% share (xxxxxm cases), followed by the US at xxxxm cases, the Ukraine at xxxxm cases and Poland at xxxxm cases. These figures exclude the very large unregistered, untaxed sales of similar products. The global vodka market had been growing strongly between 2004 and 2008, adding about xxm cases. However, the global recession hit the category hard and sales declined sharply in Overall, for the period global sales increased by a marginal xxxxm cases, representing a CAGR of just xxxx%. Consumers in Eastern Europe returned to readily available untaxed production. Russia lost an astounding xxxxm cases over that period in registered consumption and accounts for most of the global slowdown. Russia and Belarus were the only top 10 markets to post a registered loss over that five-year ( ) period. Thirty-four out of the top 50 markets posted gains over that period. The biggest cause for optimism is the continued growth in the US. Over that five-year period, vodka sales in the US climbed by an impressive xxxxm cases to xxxxm cases. Vodka even continued to grow through the recent recession. Much of this was at premium pricing levels. Other dynamic markets included the UK (+xxxm cases), Germany (+xxxm cases), India (+xxxm cases) and Brazil (+xxxm cases). Table 1: : World vodka sales by total volume consumption - world total and by major market, ('000s nine-litre cases) Country Russia United States Ukraine Poland Kazakhstan Belarus United Kingdom Germany Table 1: World vodka sales by total volume consumption - world total and by major market, ('000s nine-litre cases)

11 The markets In the US, the vodka market is attracting numerous so-called craft distillers. Many of these are small producers. The development mirrors the onset of the micro-beer phenomenon in the US nearly two decades ago, which served to transform the US beer landscape. In Brazil, there has been some substitution from cachaça into vodka. Cachaça producers have followed by producing their own vodka offerings. Some of these are now selling sizable volumes. Vodka s growth in India has led some of the big national whisky and rum producers, such as the giant UB Group, to focus upon vodka to a greater extent. UB s vodka sales have growth at around xx% CAGR between 2004 and 2009 and the company now sells in excess of xm cases of vodka, particularly with its White Mischief brand. The Americas Vodka s growth in the Americas has been explosive, rising by xxxm cases between 2004 and The growth was broad-based. Of the xx countries comprising the Americas region, all but eight posted gains over the period. In most of those countries posting declines, the decreases were marginal. The US accounted for around xxm of that increase and now has an xx% share of total vodka sales in the region. Brazil added xxxxm cases over the same period and is now the second-largest market in the region with a near x% share. Canada also added over xm cases and now has a xxx% share. Mexico added xxxxxxx cases over the period and holds a x% share of regional sales. United States In the US, vodka has enjoyed long-term dynamic growth. According to The IWSR, vodka sales rose by xxx% CAGR between 2004 and Locally produced vodkas accounted for xxxxm cases and imports xxxxm cases. In 2009, there was a significant shift in the dynamics of the market, with marked downtrading across the price points. Super-premium and premium vodka both declined, whereas standard and value vodkas rose. The recession was marked by a widespread slowdown in the on-premise market, a key channel for luxury vodkas, as consumers cut back on expenditure by going out less often, purchasing fewer cocktails and/or switching to other drinks altogether. Both Grey Goose and Belvédère lost volumes. Yet by late 2010, there were signs of an encouraging rebound, although prices have yet to recover to prerecessionary levels. The US national account on-premise has had an incredible bounce-back in the last quarter

12 Europe European vodka sales fell by xxx% in 2009, to reach xxxxxm nine-litre cases over the same period a year earlier as the economic crisis took its toll on overall consumption. Most of the contraction [Editor s Note: This was more apparent that real as the decline in legal consumption was offset by an increase in black market sales] was centred in Russia and the CIS region, the largest consuming region (with just under an xx% share of total European sales), which shed almost xxm cases (-xx%). The decline in vodka sales in Central Europe and the Balkans (-xxx% to xxxxxm cases), the Baltics region (-xxx% to xxxm cases) and the Nordics (-xxx% to xxxm cases) was somewhat less severe. It was a different picture in north-west Europe, which was generally positive. There were substantial gains in Germany (+xxx% to xxxm cases) and France (+xxxx% to xxxm cases), which more than compensated for a modest decline in the UK (-xxxx% to xxxm cases) and Ireland (-xxx% to xm cases). Sales in southern Europe gained by just under x% to reach xxxm cases, with increases in Turkey (+xx% to xxxm cases), Greece (+xxx% to xxxxxxx cases) and Portugal (+xxx% to xxxxxxx cases) more than offsetting the declines in Spain (-xxx% to xm cases). Central Europe and CIS markets Russia Russia accounts for the largest proportion of the apparent volume decline in Europe. Registered vodka sales in Russia plummeted by an incredible xxxxm nine-litre cases (-xxxx%) to xxxxxm cases in 2009 over Retail sales fell dramatically, but it is hard to estimate how much of this decline was cushioned by black market activity, which is still believed to make up around xx% of the Russian market. Consumers of premium vodkas did not necessarily trade down during the crisis, but many reduced the frequency of their purchases. In the value segment, for many consumers price is the main factor when making a purchase and they will buy the cheapest product available, even if it is illegal. The premium segment is expected to recover faster than the standard segments. CEDC president Bill Carey believes that premiumisation will be a continuing theme within the Russian market. Russia and the Ukraine are the first and the third world vodka markets respectively. Markets of such scale are not expected to grow with great dynamics. So we do not anticipate rapid volume growth in these markets in the long term. However, what interests us the most is the constant shift of consumers into branded vodkas. The Ukrainian and Russian markets are still fragmented and there is still the possibility to increase market share there, through consequent building of brand value in all key market segments: upper-economy, mainstream and premium. Premiumisation of the market, a gradual increase in prices and further consolidation should all be evident on those markets within next five years.

13 Asia Australia Australia weathered the global economic downturn better than most developed markets and only went into technical recession for one quarter in 2009, while GDP rose by a healthy xxx% in This was underpinned by continued strong demand, particularly from China, for Australian commodities. Despite the expanding economy, consumers generally remained cautious and were perhaps influenced by news of the recession elsewhere. Australians were going out less often, but drank better at home and the premium segment across all key categories benefited from this trend. Premium-and-above spirits outpaced the broader market in However, the on-trade has been difficult since 2009 as a result of lowered consumer confidence. Vodka has been the fastest-growing spirits category for the past five years; in 2009, it became the number two spirits category after Scotch. Much of vodka s growth is attributable to the growing popularity of cocktails and an expanding demographic base; vodka used to be drunk mostly by women, but is now more unisex in its appeal. This is largely due to Diageo s launch of Smirnoff Ice Black, but also due to the success of RTDs in general. Vodka Cruisers one of the first RTDs introduced in Australia also continues to prove popular. In 2010, the vodka market grew marginally, partly due to some female consumers moving away from bottled vodka to newly launched Smirnoff Signature Serve. The product comes in two flavours Blood Orange and Cranberry and is available in a two-litre box. Smirnoff has long been the leading vodka brand in Australia and in 2010, it stood at xxxxxxx cases (xx% of the total vodka market). Absolut, at xxxxxxx cases, is the second-largest brand in terms of volume. Russian Standard was launched successfully in There has also been greater focus behind Stolichnaya, which is now sponsoring the Red Bull Air Race World Championships. Greater competition should ensure further growth in the standard segment, although drinkers might move to rum in the long term. There is also some evidence that some vodka drinkers are moving to more flavoursome spirits and aromatic wines. Russian Standard has also entered the RTD sector. A Russian Standard spokesperson adds: Australia has been the first market to launch a new ready-to-drink format, Russian Standard Vodka Citrus, an exclusive lemoninfused ready-to-drink beverage, which proved to be an immediate success. It will continue its international roll-out in Premium and super-premium vodkas (above AU$xx) have been gaining volume, growing from almost nothing five years ago to xxxxxxx cases in 2009.

14 The Middle East The Gulf Vodka is only growing slowly in the Gulf, where beer dominates, and Scotch is the main spirit for the betterpaid expatriates, as is Indian whisky for the more numerous labourers. Iran is showing a growing taste for Absolut, Smirnoff and Nemiroff. In Iraq, there is a marked demand for unidentified vodka in large PET containers. Israel To date, Israel has been spared the worst of the global economic crisis. In 2010, the country s economy was still in relatively good shape. However, 2011 is expected to be a tougher year, as the property boom comes to an end, and the first signs of a slowdown can already be seen. Vodka remains by far the largest spirits category, accounting for well over xx% of the market, but initial estimates show that growth slowed in Vodka remains the most dynamic category in Israel a trend dating back to the influx of Russian Jews in the 1990s. It accounts for such a large proportion of spirits that it is seen by some as a tool for getting drunk rather than something consumed for on its own merit. The long-term trend of growth in imported vodka at the expense of local products continued in 2010 simply because the imported brands have a social cachet that the local brands lack. However, the rapid growth in standard imported vodka that has been seen over the past two years, in particular, does appear to have slowed down in One of the causes of this is that, as a result of the tax changes, distributors have been forced to raise their prices in order to maintain margins; preliminary figures indicate that Absolut lost more ground to Finlandia in Premium and super-premium vodka brands fared better than standard brands, as their consumers are wealthier and less affected by any change in the economic winds. The changes to the tax system, which were announced in late 2009, were played out in the market from March 2010 onwards. Up to that point, low-priced products had paid lower tax, while luxury products paid punitive taxes. Following negotiation between distributors and the government, a new system was introduced which did away with the two-tier system and is expected to see the country move towards an ad valorem system, like the European one, by 2014, with the next round of changes due on 1 March This is driven, in part, by a strong anti-alcohol lobby and a government keen to reduce problems relating to alcohol abuse, such as crime and road accidents.

15 Other markets South Africa Vodka mainly locally produced Smirnoff, which retails at circa US$x per bottle has benefited from the economic environment and a transfer of consumers from brandy to Smirnoff has been reported. Vodka grew overall +xxx% to over xxxm cases in Smirnoff accounts for xx% of this volume and is consumed mainly by black South Africans. The CAGR for the category in the last five years has been xxx%. At the premium end, Absolut increased prices significantly and lost volumes. Absolut s retail price in South Africa has doubled in the last three years from ZARxx in 2007 to ZARxxx in E. Snell recently launched flavours for its Russian Bear brand and they seem to be doing well: this could further boost an already dynamic category in Vodka should continue to grow in the short-/medium term as the switch from brandy continues. The superpremium segment will grow from its small base, but will not explode: most vodka consumers are not financially able to bridge the gap between mainstream vodka and super-premium brands. The IWSR forecasts that the South African vodka market will rise by xxx% CAGR between 2010 and Travel retail The white spirits market has historically tended to play secondary role to brown spirits in global travel retail. Even today, Scotch outsells vodka by a ratio of more than x:x in travel retail. Nevertheless, vodka is certain to play a larger role in the channel in coming years. Duty Free Americas purchasing manager, liquor Jon Bonchick says: White spirits are huge categories, especially when you look at vodkas and gin and throw in silver blanco Tequila and white rum. They are big volume categories that have huge followings. Consumption of those categories is huge worldwide. When someone is buying their brand there is a good chance they are going to buy a white spirit. A lot of people are buying for themselves but also because they tend to be more affordable. The less expensive the more it is likely they are to rotate on shelf. The rate of turnover is definitely higher for white spirits. They also appeal more to women, which can be a tough demographic for this industry. It also twigs with travel retail operators who have been seeking to rejuvenate the liquor category through a variety of means. Retailers are seeking to make the liquor section more exciting and entertaining through promotions and merchandising initiatives. White spirits, and cocktails in particular, are playing a leading role in this process. In-store cocktail bars are increasingly popular vehicles for generating consumer interest. Nuance was one of the first groups to really recognise the potential of white spirits to add excitement and a more contemporary feel to its liquor operations. Other operators are following by installing in-store cocktail bars.

16 Appendix A: Vodka market measured by quality and flavoured variants Table 2: : Global vodka market by quality segment, ('000s nine-litre cases) Quality Vol 2000 Vol 2001 Vol 2002 Vol 2003 Vol 2004 Ultra Premium Super Premium Premium Standard Value Low-Price Total Source: The IWSR Table 3: Global vodka market by quality segment, ('000s nine-litre cases) Quality Vol 2005 Vol 2006 Vol 2007 Vol 2008 Vol 2009 Ultra Premium Super Premium Premium Standard Value Low-Price Total Source: The IWSR

17 Appendix B: Other CIS markets Table 4: : Top ten vodka brands in Armenia by total sales volume, ('000s nine-litre cases) Brand vol2004 vol2005 vol2006 vol2007 Nemiroff vol2008 vol2009 Cristall Khortytsa Green Mark Staraya Moskva Russian Standard Khlibniy Dar Finlandia Putinka Beloye Zoloto Source: The IWSR Table 5: : Top five vodka brand owners in Armenia by total sales volume, ('000s nine-litre cases) Owner vol2004 vol2005 vol2006 vol2007 Nemiroff vol2009 vol2009 Lacaves Cristall Distillery Image CEDC Source: The IWSR