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Premiumisation Takes Spirits to a New Level in Australia

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Given all the hype around premiumisation, there’s nothing ground-breaking in assuming that premiumisation will prove a defining trend of 2015. But why are consumers trading-up?

Australian aspirations

People are always talking about premiumisation, but nobody really talks about why.

Firstly, we need to look at how we got here.  We need to understand that Australia is not like other countries.  For many observers, the fact that we can even talk about a trend like premiumisation in Australia doesn’t feel right – after all this is a nation in which spirit-based RTDs outsell full-strength bottled spirits by a mind-boggling margin.

Australians drank 269 million litres of spirit-based RTDs in 2013, compared to only 63 million litres of spirits.  This is quite unique.  In the United States, for example, 45 million litres of spirit-based RTDs and 1.8 billion litres of spirits were consumed in 2013.  And the rest of the world resembles the US far more than it does Australia.

Even after the so-called alcopops tax of 2008, which closed the tax loophole through which spirit-based RTDs were taxed at a lower rate per unit of alcohol than full-strength spirits and led to significant decline within the RTDs category, Australia remains the third largest consumer of spirit-based RTDs on a per capita basis. What is most notable about this is how few countries are even in the same ballpark: only Australia, Japan and a couple of Baltic nations.

And then there is New Zealand, with the largest per capita consumption of RTDs at 14.4 litres.  Since 2008, these figures have remained more or less steady in New Zealand, whereas Australia’s have declined from 15.8 litres to 11.6 litres per capita.

Since the introduction of the “alcopops tax” sales of RTDs in Australia have plummeted 21% in volume terms.  Whilst most of that fall occurred during the immediate aftermath of the introduction of the alcopops tax, the market has continued to decline.

So where have all these consumers gone?  What are they now drinking instead of RTDs?  The rise of ciders, which dates back to around the same time, has been at least partially attributed to being a substitute for RTDs. Volume growth rates for premium lager (particularly imported lager) and full-strength spirits also spiked following the introduction of the RTD tax.  It has been spirits however, that have benefited the most, growing by 5% in volume in the first year, and growing a CAGR of 2% between 2008-2013.

Volumes of vodka (6% CAGR) and dark rum (5% CAGR) have largely driven volume growth during 2008-2013 in Australia. The growth of vodka, in particular, is almost certainly due to a switch from RTDs to spirits, since it has been vodka-based RTD brands that have borne the brunt of the decline.  The market share of Diageo’s UDL brand has fallen from 6% in 2008 to 4% in 2013 in volume terms, and that of Independent Distillers’ Vodka Cruiser fell from 5% to 4% over the same period.  It has not, strange as it may seem, been driven by the rise of flavoured vodka. Flavoured vodka only makes up around 7% of the vodka market in Australia, which is roughly comparable to its popularity in the United Kingdom. By contrast, flavoured vodka made up 23% of the vodka category in the United States in 2013, and is still growing.

The growth of dark rum in the immediate aftermath of the alcopops tax was also due to a similar shift, but has been given an additional boost over the last couple of years due to the emergence of spiced rum.  The popularity of spiced rum is important, since it shows that Generation Y is now searching for something a little extra in their beverage flavour profile.

Where to in 2015?

It’s now half a decade on from the original introduction of the alcopops tax, and the consequent switch of a generation of Australian consumers away from spirit-based RTDs to full-strength bottled spirits. Since the advent of ready-to-drink premixes in Australia, this is the first generation to start their drinking lives with spirits, instead of shifting to spirits in their mid-20s after a few years of RTD consumption.

Having consumed spirits for half a decade longer than previous generations at a similar age, this is a generation that is far more sophisticated in relation to their spirits than any generation previously. This generation has now reached their late-20s, with all the increased purchasing power that this suggests.

The average gross income of Australians aged between 25-29 years old has grown from A$56,130 in 2008 up to A$60,111 in 2013.  This is an increase of 7% in real terms.  It’s also 29% higher than the average gross income of 20-24 year olds.

Clearly there are a significant number of young Australians with the means to indulge in something a little more sophisticated than a premix.

And indulge they are.

Hence the specialist small bars that are emerging.  Not to mention the burgeoning local craft spirits industry.  We also have the rise of spiced rum and the success of premium brands such as The Kraken and Sailor Jerry, the latter of which grabbed a 3% category volume share of dark rum in Australia in 2013, just two years after its launch.  The market share of Captain Morgan, another brand with a strong spiced offering, reached 8% in 2013.

These trends will continue over 2015, as this new generation of spirit connoisseurs continues to develop their palates and continues to explore a world of gin beyond tonic, bourbons beyond cola and rum beyond the borders of the Sunshine State of Queensland.

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