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Liquor Discounts Become Bad Habit for Spirits Makers

(February 25, 2010 - Wall Street Journal)—Liquor giants are cutting prices in the U.S. to stir demand and hold onto market share but they're also feeling some hangover effects. Revenues are dragging and there is concern that it won't be easy to raise prices as the economy improves.

The promotions aim to attract customers who were switching to less-expensive rival brands, says Rob Sands, chief executive of Constellation Brands Inc., which is the world's largest winemaker and sells a few spirits products.

In 2009, the volume of spirits sold in the U.S. rose 1.4%, but the total revenue for spirits producers was essentially flat at $18.7 billion, as drinkers shifted to cheaper beverages.

For example, the average price for Smirnoff vodka fell 2.3% in U.S. food stores in the 52-week period ending Jan. 24, while rival brands Grey Goose, made by Bacardi Ltd. and Pernod Ricard SA's Absolut fell 1.6% and 1%, respectively, according to market-research firm Information Resources Inc.

In certain markets, Diageo PLC, the world's largest distiller by sales, has been aggressive with prices for Smirnoff, the top-selling vodka brand in the U.S. Consumers in Virginia can buy a 1.75-liter bottle of Smirnoff for $19.95 in the state's government-run liquor stores. That's just $1.05 more than the 750-milliliter version, according to a price list posted on the Web site for the state's liquor board.

Meanwhile, the price of a 1.75-liter bottle of Absolut fell by $5.05, or 12%, to $36.90 in Virginia in February from the price posted by the state in November.

Liquor producers generally have been able to maintain prices for whiskeys, but vodka, tequila and imported gin have shown lower prices over the past year in U.S. retailers, says Jeff Nowicki, chief strategy officer with beverage consultancy Bump Williams Consulting Co.

Discounting often begins with the producer offering a deal to a distributor, which then passes along the savings to a retailer. Coupons and rebate offers have popped up in newspaper ads or alongside bottles on store shelves.

Scott Spolverino, a 22-year-old college student, said he has noticed a lot of discounts and coupon offers in recent months at stores around Rochester, N.Y., where he goes to school. About a week ago, he bought a 750-milliliter bottle of Captain Morgan Parrot Bay rum for $18, taking advantage of a $2 mail-in rebate offered by Diageo.

Several industry executives said they haven't seen price promotions and couponing to this extent in at least a decade. Some analysts worry that prolonged discounting could dent the images of some brands and make it hard to raise prices later.

"You destroy brand equity very quickly by discounting on price," said Simon Hales, an analyst with Evolution Securities in London.

"The major suppliers have conditioned the consumers and retailers that there is going to be major deals," says John McDonnell, chief operating officer at Patron Spirits International, the maker of Patron tequila, an upscale brand that has resisted the price-cut trend.

Pierre Pringuet, chief executive of Paris-based Pernod, the No. 2 spirits maker in the world, told analysts last week that it appears that the level of discounting among its rivals in the U.S. may have reached its "outer bounds." In the fiscal first half ended Dec. 31, Pernod's net sales in its Americas region fell 1% on an organic basis, which strips out acquisitions, divestitures and currency effects.

At an investor conference last week, Diageo Chief Executive Paul Walsh said the company's discounts have led to "increased visibility and display of our brands" in large retail chains. "We have gained share and we have retained consumers in the category," he said.

Meanwhile, though, Diageo's net sales in North America fell 6% on an organic basis in its fiscal first half ended Dec. 31.

Diageo said in an earnings conference call earlier this month that it's unlikely it will be able to raise prices in the U.S. in the first half of this calendar year. But Mr. Walsh isn't as concerned about pricing further out. It will be easier to get consumers to pay more in better economic times, he said, "if they do not leave the category."

Several retailers said that, although discounting is prevalent now, the brand loyalty that many liquor products enjoy will enable producers and retailers to raise prices when the economy is healthier. According to David Trone, co-owner of Total Wine & More, a chain with more than 60 stores in 11 states, "A person that wants to buy Johnnie Walker is going to continue to want to buy Johnnie Walker."

By DAVID KESMODEL

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