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Dec. 22, 2009

The Vodka Bubble Bursts

Bank stocks? Real estate? The biggest meltdown of 2009 might involve $100 bottles of a certain clear beverage.


The bubble was years in the making. In hindsight, it should have been obvious: Marketing hucksters crowded into the market, peddling their wares to an overleveraged American public only looking to claim a piece of the American dream.

And now the decade’s greatest bubble—vodka—has finally burst.

Initial year-end figures for 2009 numbers indicated that the high end of the vodka market—which grew at a torrid 40 percent annually in recent years—is flat or trending down, says David Ozgo, chief economist at the Distilled Spirits Industry Council, a trade group. “There was a time where I got a call at least once a week from an investment banker looking to invest in a vodka,” says Ozgo. “I haven’t gotten one of those calls in a while.”

At the height of the boom years, luxury vodka brands sprouted like fancy derivatives. Vodkas were launched in the U.S. at a rate of more than one a week, each one aiming to outdo the other. They were triple, then quadruple-distilled, and filtered over increasingly rarified materials, from charcoal and quartz crystals to crushed marble, diamonds, and gemstones. The spirits were then packaged in ever-more outlandish bottles, designed by starchitects, handblown by artisans, and encrusted in Swarovski crystals.

Among the 60 new vodka brands introduced in 2006 were eponymous offerings from Donald Trump and Roberto Cavalli. Cavalli’s, launched with much velvet rope fanfare, featured grain and alpine spring water from the fashion designer’s native Italy, and was filtered through layers of crushed Carrara marble. Price: $90 a bottle.

The parade continued into 2007, with Sean “Diddy” Combs’ Ciroc, created in partnership with beverage giant Diageo, and Gold Flakes Supreme, a $60 vodka from France infused with 24-karat gold shavings.

In the summer of 2008, as Lehman was beginning to unravel, the Frank Pesce International Group unleashed its Cristall Signature Series, a “super-ultra-premium” vodka that is “multi-filtered through quartz crystals and carbon granules made from the wood of Russia's native birch,” according to the company.

Around the same time, TransBorder Marketing, a New York-based startup looking to create luxury brands, released its first product: Diaka, a rye-based Polish vodka. Diaka (the name is a play off  “diamond and “vodka”) was made using a patented filtration process involving nearly 100 cut diamonds, of up to a karat in size, the company crowed, and packaged in a crystal-encrusted bottle. Price: $100.

Then came the meltdown. Vodka sales fell back to earth in 2009, and market share has been grabbed by the likes Smirnoff and Sobieski, in the $10-$13 range. For Sobieski, the leading brand in Poland, the timing of its mid-2007 launch was fortuitous. It rocketed to the 10th-bestselling imported brand in 2008, just after Finlandia, according to Liquor Handbook, published by Beverage Information Group.

The vodka bubble comes down to simple economics: Vodka, legally defined as a neutral alcohol without distinctive character, aroma, taste or color, is cheap and easy to produce. There are no extra ingredients, as with gin, or costly oak aging as with whiskeys and cognacs. And the cost of entry is low.

Many vodka producers get their raw material—ethanol—from industrial suppliers such as Archer-Daniels-Midland.

That, says Jack Robertiello, a wine and spirits writer and consultant, “partly explains why people are rolling the dice” with new brands.

And the marketing hype about multiple distilling and fancy filtering? It’s a little like Moody’s putting a triple-A rating on a package of subprime loans.

Not surprisingly, price is not always an indicator of quality. In an oft-cited blind tasting of 21 vodkas conducted by The New York Times in 2005, the winner was Smirnoff, at $13 a bottle. Grey Goose—the brand that invented and perfected the art of vodka snobbery—didn’t even make the top 10.

In a 2007 blind-tasting of 108 premium vodkas by the Beverage Testing Institute, the largest professional tasting of vodkas to date, $11 Sobieski came out on top, beating out pricier rivals.

Still, 2009 has continued to see high-end vodkas released into the market, albeit at a slower pace. Patron Spirits, known for its top-shelf tequilas, earlier this year debuted Ultimat, a vodka made from potatoes, rye, and wheat. The price, around $40 a bottle, puts it squarely in the “super-premium” category, in industry jargon.

In May, Diamond Beverages LLC introduced Diamond Standard Vodka, an “ultra-premium” $79 vodka that the boasts “world’s most expensive filtration process.”

Gimmicks are still in, too. Look no further than Dan Aykroyd’s Crystal Head Vodka ($50), packaged in a skull-shaped bottle ($50) and launched in October, or Ed Hardy Vodka ($50), adorned with the tattoo artist’s designs.

In a crowded market, you’ve got to raise the bar, which might explain why Akvinta, the latest entrant, advertises organic Italian wheat and Dalmatian spring water “from one of the last ecologically unspoiled regions in the Mediterranean.” (Which begs the question: Why are you depleting it to make vodka?). Akvinta is also certified organic and kosher, and “is uniquely filtered through a patented quintuple filtration process consisting of 5 natural filters: charcoal, marble, silver, gold and platinum.”

The rewards of a highly profitable, knockout hit, a la Grey Goose, seem to outweigh the risks of a flop. And some luxury brands, such as Diddy’s Ciroc, have come through the downturn just fine. At 247,000 cases for 2008, the most recent numbers available, Ciroc, at about $35 per, was the 11th-largest selling imported vodka in the U.S., according to the Liquor Handbook.

Trump, in contrast, sold a mere 30,000 cases, while Cavalli vodka (the fashion designer has since gotten into wine as well) doesn’t even register. Both TransBorder and its luxury vodka, Diaka, seem to have vanished without a trace.

For Crystal Head, Akvinta, and other hopefuls, only time will tell. But Robertiello, for one, isn’t optimistic.

“The outlook for someone coming into the vodka market with a luxury product featuring crystal and other flashy ingredients is not good,” he says. After all, “There are only so many saps in the world.”



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