Powerhouse Tito’s upends the vodka industry

The rise of Tito’s Handmade Vodka has been one of the biggest success stories of the beverage alcohol industry this decade. And it’s created a massive upheaval in the vodka segment.

Five of the top 10 vodka brands are in decline, including three of the top four market-share holders, according to Nielsen data analyzed in a recent report by Bank of America Merrill Lynch’s Bryan Spillane. Why? Many who follow the industry have settled on one primary driver: Tito’s Handmade is killing them on pricing.

The Austin, Texas-based brand finished the year up nearly 40 percent in sales dollars, according to Nielsen all-outlet and convenience data for 2017. That blows the rest of the segment out of the water; total vodka sales grew just 1.4 percent in the same period.

Over the four weeks ending Dec. 30, the trend has dipped into negative territory. Total vodka sales fell 0.7 percent on a 0.5 percent drop in volume. Even more telling: During the most recent period, price fell 0.2 percent, a downward trend that’s held for the last 12 weeks, per Nielsen.

Without Tito’s, the picture would have looked much more bleak. The brand surged 33.2 percent in the same period.

Among brands in decline are Diageo-owned Smirnoff (-5.1 percent in sales dollars in the four weeks ending Dec. 30), Ciroc (-6.8 percent) and Ketel One (-0.5 percent); Pernod-owned Absolut was off 2.5 percent; and Campari-owned SKYY slumped 10.3 percent.

(It’s worth noting here that the entire spirits industry took it on the chin in December, with sales dropping 1.2 percent on a 1.7 percent decline in volume.)

Tito’s is sold for an average price of around $16 per 750 milliliters, undercutting many of its competitors, particularly premium brands like Ciroc and Ketel One, per Nielsen.

With the brand eating up so much of the market with its runaway growth, other spirits companies have been forced to cut price to try to protect share.

Robert Ottenstein, who follows the industry for Evercore ISI, wrote in a note to clients that the spirit “remains a problem for just about everyone (except Tito’s) with prices still falling … and flavor innovation having run its course several years ago.”

Diageo is lowering its price premium of Ketel One and Ciroc (sales of which each fell double digits in the most-recent fiscal quarter) in response to Tito’s, reflecting what J.P. Morgan Securities analyst Komal Dhillon calls “intense pressure in vodka.”

Diageo’s North American president, Deirdre Mahlan, said in late November the company had to adjust in response to “different competitive reasons” in which prices “got outside our desired pricing strategy.”

Writing for his trade publication Beer Business Daily (subscription required), Harry Schuhmacher was succinct in his diagnosis: “There’s not a Diageo vodka problem, there’s a Tito’s problem.”

Schuhmacher surmises that Tito’s became the fastest-growing spirit in the U.S. primarily because of focus: Unlike many of its contemporaries, which released flavor after flavor over the past decade, Tito’s remained true to its flagship. The brand has just four items (also known as SKUs), and each are all straight Tito’s vodka.

“When you order a Tito’s, you know exactly what you’re getting,” Schuhmacher wrote.

On top of that, Tito’s has remained consistent with a marketing message rooted in authenticity that highlights the “handcrafted” nature of its product. But it never asked for premium pricing, remaining affordable for a wider swath of legal-age drinkers.

The brand’s ascent mirrors broader trends in and outside of the beverage alcohol industry. Today’s consumers, above all, are looking for value. At nearly all price points.

Part of that trend is playing out right now in beer from the growth of economy brands, to the rise of the value-added 15-pack, to the migration of more craft brewers into lower-priced multi-packs.

As MillerCoors Chief Customer Officer Dan Werth pointed out earlier this month, signs of the rise of the value shopper are everywhere, from “the success of value menus at fast food restaurants” to “the exponential expansion of dollar stores.”

And Tito’s landed right on top of it.