A Premium on Price
Only a decade ago, few producers foresaw vodka’s potential as a luxury spirit: Absolut remained the only high-end offering on retailer’s shelves. Then, in 1996, Edward Phillips, CEO of Millennium Import, the sole U.S. importer of Belvedere vodka from Poland, introduced Belvedere to the U.S. market at a price 75 percent higher than Absolut, creating an entirely new category: the super premium vodka. The eight years since have been tumultuous, with independent boutique producers going up against larger, established companies, all of them attempting to differentiate themselves in a product the Bureau of Alcohol, Tobacco, Firearms and Explosives defines as “without distinctive character, aroma, taste or color.” And many have succeeded.

If we happen to find ourselves seated at a bar alongside Phillips, we might hear him describe his drink as having an “aromatic, semisweet vanilla nose and a creamy, semisweet lingering finish.” He will, of course, not be sipping a glass of Corton-Charlemagne, but rather an ice-cold, straight-up splash of Belvedere vodka. It was Phillips who figured out that, while very little upside can be had investing in vodka itself, since it does not generally appreciate, much could be made by investing in vodka as a business—a luxury business.

“I found, to my surprise, that there are stylistic differences in vodkas: their texture on the tongue or ‘mouthfeel,’ and their heat on the palate—either hot, rough and raw, or, at the other extreme, smooth, round and finished.”

“At that time,” Phillips recalls, “the segmentation of luxury spirits had continued upward in every category: small-batch bourbons, scotches, gins and even tequilas were available in super premium or luxury brands and were commanding significantly higher price points and increasing consumer interest and commitment.” But vodka, he says, which accounts for one out of every four bottles of spirits purchased in this country, did not reflect that migration. “My belief was that the old paradigm could not only be refuted but also shattered. The industry was more than ready for a luxury vodka.”

This proved to be true. According to the Distilled Spirits Council of the United States (DISCUS), current statistics show that while the entire vodka market grew by 5.1 percent in 2003, super premium brands exploded by nearly 10 percent to 10.2 million 9-liter cases sold annually. How much of that was Belvedere? Nearly 700,000 cases, notes Phillips. These figures seem fitting, given that this year marks the 30th anniversary of vodka’s taking the lead as America’s spirit of choice. But vodka’s transformation from “odorless, colorless, flavorless” to “vanilla-creamy finish” is nothing short of a Cinderella story.

“Breathless” Appeal
Although vodka’s roots and tradition go back at least 600 years in and around the so-called “Vodka Belt”—Sweden, Finland, Russia, the Baltic states and Poland—it drew little attention in the United States until after the World War II. In his award-winning drinks tome, The Craft of the Cocktail, author Dale DeGroff states that Smirnoff was the first vodka of repute in this country, championed by a visionary named John Martin, then president of Heublein, who tirelessly promoted the spirit in four cocktails: the Moscow mule, the bloody Mary, the screwdriver and the vodkatini. It was Martin, in fact, who put Smirnoff and James Bond together for four decades of infamous product placement, beginning with Dr. No in 1962. DeGroff says that Martin transformed the image of the three-martini lunch forever when he created the famous catch phrase, “Smirnoff…It leaves you breathless,” to woo the lunchtime gin martini drinker.

Despite its Slavic-sounding name, Smirnoff was actually made in the United States. It was not until Finlandia arrived in 1970 that Americans got their first taste of vodka from the Vodka Belt. “Finlandia was the first designer luxury vodka in the U.S., first on the scene as far as an internationally imported brand,” explains Scott Reid, vice president and global marketing director for Finlandia. “Smirnoff was here domestically, but Finlandia was the first, and has maintained a solid presence in the U.S., despite the fact that it is a fairly understated brand.” Finlandia, Reid adds, is actually the second-largest premium imported vodka in the world. (Indeed, with regard to 007, Finlandia outbid Smirnoff in 2002 for partnering rights to the most recent Bond movie, Die Another Day.)

In the wake of Finlandia’s success, other premium vodkas emerged, each one raising the bar toward the $30 super premium. Wine and spirits are classified in relation to their price tier. According to DISCUS, a 750-ml “value” brand will usually retail for between $6 and $10. A “premium” brand will be in the $9 to $18 range, and a “super premium” vodka will usually sell for over $20, though many marketers of super premiums will tell you the minimum is really $25—Belvedere’s starting price. In the premium range, Finlandia was followed by Stolichnaya, a Russian vodka with pedigree, which, for a good part of the late 1970s, was the vodka to order. Absolut was soon to follow.

Battle of the Titans
In Trading Up, The New American Luxury, authors Michael J. Silverstein and Neil Fiske report that, during the 1970s and early 1980s, the industry consolidated, and the large players were content to milk long-established brands for profitability. Then Michel Roux, president and CEO of Carillon Importers, broke away from the pack with the creation of Absolut, which was priced 75 percent above the industry leader, Smirnoff. Between 1985 and 2000, consumption of Absolut grew from fewer than 1 million cases to 5 million worldwide, a compound annual growth rate in volume of
13 percent.

All the while, Americans began drinking fewer spirits in general, claims Trading Up. “In sharp contrast to wine, per capita consumption of spirits in the United States has been flat or declining for more than three decades,” report Fiske and Silverstein. “In 1975, Americans consumed two gallons per capita of hard liquor every year. By 1995, that figure had fallen to 1.2 gallons, just over half its previous level.” But the new high-end market has successfully avoided these shoals. Since 1995, Silverstein and Fiske report, premium and super premium brands have seen a renaissance, growing by 40 percent in volume from 1995 to 2001, while the nonpremium segment declined 5 percent. Americans are drinking less, but drinking better.

While Absolut emerged as the market leader in the late 1980s (today it is the third largest international spirit in the world), a parade of wily entrepreneurs—not to mention corporate think tanks—began jumping on the luxury-vodka money train. In the early 1990s, two noteworthy newcomers gave Absolut a run for its money. Entrepreneur Maurice Kanbar created Skyy. With its distinct cobalt blue bottle and claim of being the purest vodka, Skyy grew from 3,000 9-liter cases in 1993 to just under 1.5 million sold domestically in 2002. According to the Adams Handbook Advance 2003, Skyy saw an increase of 15.1 percent over 2001, and a four-year annual compound growth rate (ACGR) of 20.7 percent. Today, it is the leading domestic super premium vodka in the United States. Similarly, Dave van de Velde, a visionary who negotiated the rights to import Ketel One from his homeland of Holland, touted its European pedigree. Adams Handbook reports that in 2002 Ketel One broke the 1-million-case barrier for the first time, registering a 10.6 percent sales increase, with a four-year ACGR of 23.2 percent. Absolut made vodka artistic; now the spirit was becoming sexy-yet-pure through “triple distilling.” That is when Roux set his sights on rebuilding Stolichnaya, and Millennium Import’s Phillips was preparing to take vodka to the next level.

The Birth of Luxury
On the way back from his maiden voyage to Warsaw, Phillips saw a bottle of Belvedere in the airport and had an epiphany. “I realized that … the perception of quality vodka would be the challenge [in the U.S.],” he recalls. “What we realized was that not only are there differences between vodkas in Poland, but that there are regional distinctions akin to some of the greatest wine-growing regions in the world.”

This allusion to winemaking was both clever and controversial. Could a spirit derided as flavorless, odorless and colorless display regional variations in taste? Spirits experts were mixed. In The Craft of the Cocktail, DeGroff explains that vodka is a rectified spirit, which simply means it is distilled at least three times, “a fact that some brands like to remind us of in their advertisements,” he muses, making reference to practically every vodka advertisement on the planet. “The final and very important step in vodka production is filtering the spirit through charcoal; though some brands claim to use diamond dust, glacial sand or even quartz crystals.”

DeGroff says the stylistic differences between vodka brands are subtle, because strong flavor is not a consideration. “As a young bartender,” he recounts, “I used to scoff at the idea that guests could tell which vodka they were drinking until I took part in my first vodka tasting. I tasted 12 vodka brands in a blind tasting, and I found, to my surprise, that there are stylistic differences in vodkas: Their texture on the tongue or ‘mouthfeel,’ and their heat on the palate—either hot, rough and raw, or, at the other extreme, smooth, round and finished.” Hence, says Phillips, Belvedere’s “unique flavor profile: an aromatic, semisweet vanilla nose and a creamy, semisweet lingering finish.”

Phillips enacted three campaigns to build buzz. First, he sent Belvedere (in expensive gift boxes) to prominent “influencers”—people who could be ambassadors for the brand simply by being in the popular eye—such as Robert DeNiro, Bill Clinton and Barbara Streisand. Then Phillips targeted bartenders across the country for taste tests. Lastly, he and his staff went to white-tablecloth restaurants across the country to spread the gospel of Belvedere and the value of introducing customers to a $15 Belvedere martini. His plan paid off, and, with Belvedere succeeding, he introduced Chopin, which has also been quite successful. “The sales at retail are in excess of $3 billion for Belvedere and Chopin—which is amazing,” Phillips says.

Naturally, once Millennium and Phillips opened the floodgates, the competition came at them with a fury, with seemingly dozens of new $30, $40 and even $50 vodkas being introduced quarterly. Then, Grey Goose, a French vodka, won a taste test conducted by the Chicago Beverage Tasting Institute against Belvedere and Chopin, among others. Suddenly, Grey Goose was on top. According to Adams Handbook, in 2002 Grey Goose broke into the ranks of the 1-million-case club, more than tripling its case sales since 2000. Despite this phenomenal market penetration, at least three Davids stand poised to take their turn at toppling this new Goliath of luxury vodka: Van Gogh, Three Olives and ZYR.

David H. van de Velde—of Ketel One fame—recently came out of retirement to form Luctor International, creator and importer of Dutch brand Van Gogh, which grew by 40 percent last year. “My experience with Ketel One was that it would take quite a few years in this big country to come off the ground,” he remarks. “And we’re following the same pattern—not that I’m saying we’ll be as big as Ketel One, but from startup to roll out, the growth last year and the expected growth for this year is 100 percent.”

Paul Coulombe, owner of White Rock Distillers, credits the creation of his English import, Three Olives, to one of his Florida sales reps, Lee Atherton, who convinced him to invest in the luxury vodka segment in 1999. “We did about 25,000 cases the first year and sold 250,000 cases in 2003,” he says. “We expect to sell 400,000 cases in 2004.” What does that mean in retail dollars? “About $250 million for last year, and we forecast $400 million for this year.”

Dave Katz, the president of Symphony Importers, which developed ZYR Russian Vodka in 2002, says of the competition, “In this field today, you either need to be the very best, or come out with something unusual.” ZYR resonates because it is Russian, says Katz, who lived in Moscow for five years dreaming up the brand, which he and his team of 10 hand-sell to only high-end bars and restaurants on the East Coast of the United States—for the moment. “Contrary to what many people might believe,” he says, “if you have better liquid, a truly better liquid, with a good concept, in a great bottle, then it is just a matter of time before it is a best seller.” While Katz’s numbers are considerably smaller than his competitors’ (he projects sales of 22,500 cases this year), ZYR has witnessed a 500-percent increase over its first year’s sales. “I believe I’ll outsell Belvedere in Miami, Manhattan and New Jersey by the end of the year,” he predicts.

Despite this seemingly unending succession of new spirits, the vodka wars are still going strong, attracting smart investors interested in capitalizing on the next trend. What this will be, only time can tell. But denizens of the distilleries have complete faith that it will come. “Over the last five to 10 years, vodka has continued to explode just exponentially in the U.S.,” observes Finlandia’s Reid. “It has become a great source of fashion, style and elegance for consumers in America and in other markets around the world to pursue vodka,” he says, adding that consumers “want their special drink, glassware, and to be a part of the glamour scene.”

Like the eternal career of that aficionado of the vodka martini, James Bond, this spirit will perhaps continue to reinvent itself again and again to conform to the popular tastes of coming generations, flavoring each of its incarnations with just enough classic style to keep its appeal eternal. If so, plenty of room exists yet for fresh entrepreneurs intent on distilling a
profit from this most remunerative liquor. 

Luxurious Surfing
Every Super Premium vodka worth its buzz has an official website. Expect each producer to lay on the bells and whistles with abandon. Here are 10 worth visiting.

Belvedere
www.belvederevodka.com

Chopin
www.chopinvodka.com

Ciroc
www.cirocvodka.com

Grey Goose
www.greygoosevodka.com

Ketel One
www.ketelone.com

Shakers
www.shakersvodka.com

Turi

Van Gogh
www.luctor.com

Vox
www.voxvodka.com

ZYR
www.zyrvodka.com

Additional Information
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