How the ‘Premiumization’ Trend Will Impact Retail
How operators can make the most of trading up, even in a time of changing purchasing behavior
Over the past two decades, consumers have gravitated towards more premium alcoholic beverages. Due to myriad influences — among them increasing societal wealth, broader options for high-quality products and categories, and consumer appreciation for production and origin — consumers are increasingly willing to spend more on higher-quality products across wine, spirits, and beer.
“The premiumization trend has been going on for some time,” says David Ozgo, the chief economist for the Distilled Spirits Council of the United States (DISCUS). But with some categories acting as stronger drivers of premium growth than others, and the impact of Covid-19 upending the beverage purchasing climate, retailers should invest carefully to make the most of the premiumization trend.
Amidst Covid-19, Premium Growth Continues
“Premiumization across beverage alcohol has been an ongoing trend for over 20 years, particularly among wine and spirits,” says Brandy Rand, the COO of the Americas at IWSR Drinks Market Analysis. According to the IWSR, the volume of premium (defined as spirits retailing for $22.50+ per bottle, and wine retailing for $10+ per bottle) wines and spirits sold in the U.S. grew by 6.3 percent in 2019. At the sub-premium level, the volume of wines and spirits sold decreased by 1.2 percent.
While Covid-19 has greatly impacted the alcohol industry in 2020, premiumization appears to continue as consumers adopt new purchasing habits. According to Nielsen, retail prices increased across wine, beer and spirits during the week ending April 25. For wine, bottles with a price point of $20 to $25 surged ahead. For spirits, the premium and super-premium tiers showed the largest percentage growth.
But it’s difficult to tell if the increasing spend per bottle in the wake of Covid-19 is resulting solely from premiumization. In Nielsen’s beverage alcohol practice report for the week ending May 2, the volume of beverage alcohol sold on promotion fell sharply during the last six weeks because retailers have less of a need to promote deals.
In a previous report for the week ending April 18, Danny Brager, the senior vice president of beverage alcohol at Nielsen, expressed optimism for continued growth of spending on more expensive alcohol products. “Despite deep economic impacts, we continue to see premiumization in the off-premise across all three categories,” he wrote. “Perhaps we’ll see that slow or reverse in the months ahead, but we also recognize that consumers are transferring money they might have spent on alcohol in a restaurant, bar, or tasting room to something they are buying at lower mark-ups from stores or online.”
Liz Paquette, Drizly’s head of consumer insights, agrees. “You’re looking at a share shift here,” she says. “On-premise has shifted heavily to off-premise.” Because consumers can’t enjoy beverages at restaurants or bars, they are spending for those products at retail, where their money goes even further. “Consumers are used to paying a premium for an on-premise experience,” adds Paquette. “We’ve seen that notion really translate to home during these times.”
This is especially true with spirits. “We have seen a considerable increase in the practice of mixology at home,” says Scott Moore, the SVP national accounts off-premise for Southern Glazer’s Wine & Spirits. “Consumers are looking to recreate many of their favorite on-premise drinks. These consumers are willing to spend a little more to provide the restaurant experience at home.”
The boom of online alcohol sales has also contributed to continuing premiumization in 2020; Moore has seen ecommerce growth of premium and super-premium brands outpace brick-and-mortar sales, so he recommends that retailers take advantage of these trends by promoting trusted brands in the premium-plus segment both online and in store.
Spirits Categories Lead Premiumization
While data does indicate that premiumization is continuing across beverage alcohol categories, it’s showing signs of decline in the wine industry, according to an analysis in Silicon Valley Bank’s State of the Wine Industry 2020 report. Data from Nielsen shows a decline in growth rates for wines above $10 since 2015, and this decline is expected to continue.
Spirits, on the other hand, strongly reflect the premiumization trend, and DISCUS’s Ozgo notes that there has been a 10-year trend of spirits gaining market share over beer and wine. According to the IWSR, growing premium categories in spirits include American whiskey, tequila, cognac, and gin.
Brown spirits, especially whiskey, are some of the most important products for the premiumization trend; according to Paquette, whiskeys above $30 experienced a nine percent share increase on Drizly in March and April compared to 2019.
“Americans have gained a new enthusiasm for American whiskeys,” Ozgo says. Once interest rose for bourbon, Americans sought out other options, like rye, which Ozgo estimates is growing 15 to 20 percent per year. Seeing this, suppliers saw an opportunity to offer high-end, niche options within American whiskey. “Whiskey in general sells at a higher price point than vodka does, so you’re buying more expensive products,” he adds. “It has caused the category to take off.”
Tequila is also a premiumization driver, launched by an influx of higher-quality tequilas entering the market. “These are good products, so all of a sudden people are treating tequila like you would treat a cognac or whiskey and enjoying tequila for its own flavor,” says Ozgo. These new consumption habits have driven continued growth in premium tequila and led consumers to discover mezcal, which is often a premium product, as well.
Though total gin sales are generally flat, Ozgo notes that the growth that is happening is in super premium products. According to Drizly data, gin was right behind whiskey in terms of premium growth; in March and April, bottles of gin above $30 saw a share increase of six percent over 2019.
A return to classic cocktail culture has also boosted the premiumization of spirits. Before the 1920s, it was normal to use premium spirits in cocktails because the other ingredients were meant as a complement, not a cover-up; however, the onset of low-quality, bootleg alcohol during Prohibition led bartenders and consumers to use cocktails to hide the spirit’s flavor.
“It took a long time for people to get away from that,” says Ozgo. “Now, bartenders are almost always using a premium spirit, and people are trying to replicate that in their homes.”
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Driving Sales With Premium Products
To make the most of the premiumization trend, retailers should start by offering premium products within categories seeing growth, like whiskey, tequila, mezcal, and gin. Because spirits in general are seeing more premiumization than other categories, Ozgo suggests that retailers — even the ones that primarily focus on wine — carry more spirits options.
“With some more advanced wine retailers,” he says, “they don’t just carry a basic selection of spirits; they curate it to their neighborhood.” The growth of premium options within categories like tequila and rye also offers opportunities for retailers to differentiate themselves from the pack, particularly across the ecommerce channel. Offering a unique or craft brand as opposed to a widely-available, mainstream one adds additional value to consumers.
Ozgo also encourages retailers to offer several options within categories with strong premium growth. “It’s important to offer variety in products at higher price points,” he says. “You don’t need seven value vodkas that give a margin of $3 or $4 a bottle, for instance, but it’s a good idea to expand your premium options with a margin of $10 per bottle.”
While this strategy requires that retailers purchase more higher-priced products, it is also a way to make inventory more profitable — something that will be increasingly important in a post-Covid-19 landscape. “They can make $6 on a premium product,” says Brian Rosen, the president and founder of BevStrat, an alcohol brand sales and strategy firm, “or $1 on a regular product. Commoditized brands traditionally don’t yield enough gross margin dollars for retailers to make money.”
For brick-and-mortar sales, Rosen also recommends strategically organizing the store for a premium shopping trip. “Put higher-margin goods towards the storefront, stacked four to five cases high,” he says. “People buy more when they first come in, and sales go down as they get closer to the register because mentally, they’ve already spent their money.”
The Impact of a Potential Recession
Of course, the premiumization trend could come to a halt with the onset of a potential recession. Ozgo has reviewed data from recessions beginning in the 1970s, each of which showed a decline in premium sales and an increase in mid-priced and value brands. However, this economic downturn seems to be different.
“It’s interesting that we don’t see that this time around,” says Ozgo. “I think it’s because this is a self-induced recession. People might have more confidence that the economy will bounce back more quickly than it normally would.” For instance, while the unemployment rate is high, the unique situation causing the rate to spike may allow employment to normalize more quickly.
Even if trends more closely reflect previous recessions, experts are optimistic that premium growth will continue. “As we know from the last recession, consumer spending on premium and higher alcohol still showed growth,” says Rand. “During economic downturns, people will choose to make small indulgences when large ones are less likely.”
Ozgo agrees. “Spirits are an affordable luxury,” he says. “A person may not be buying a Rolex or a BMW, but they can afford an $80 bottle of Scotch on occasion.”
It will be important, though, to sell products that offer a value-add for consumers. “If there are any learnings from the last recession, it’s that consumers will likely continue looking for quality, but expect greater value from their purchases,” says Paquette. “That means getting creative with pricing discounts, higher volume packaging, and value-add experiences.”
Rosen predicts that there will be a wave of growth in unique brands of high-end wine, beer, and spirits after Covid-19 restrictions loosen because most consumers, unable to browse in-store, are forced to stick with what they know right now. Luckily, the premiumization of alcohol has created room for more of these craft brands, which is a win for both consumers and retailers.
“Like fashion, books, or movies, people use what they eat and drink as a form of personalization,” says Rosen. “They want to be the first to discover a brand. Consumers are going to push towards higher-end, more unique items — which generally carry higher margin dollars with them.”