Thursday, May 12, 2005

‘ . . . Bartender, Grey Goose and tonic please!’

How to pour $2 billion out of a bottle with marketing wiz Sidney Frank.

"We charged $30 a bottle. The next competitor was Absolut at $15. The consumer thinks that if it's the highest priced, it's the best. The difference between $15 and $30 is profit", said Sidney Frank, now a billionaire after selling Grey Goose Vodka to Bacardi for more than $2 billion in 2004. This sounds like an interesting strategy. Open a fast food joint next to, say, McDonald’s. Charge twice what they are charging for everything and make a bundle. Then when you’re tired of it, sell it for millions to McDonald’s. Obviously, it’s not that simple but it can be done. Let’s take a look at this unusual strategy and how Frank was able to pull it off.

The hard alcohol business is an interesting one. While distilled spirit consumption has been declining over the past several years, revenue has actually been increasing. People are drinking less but they’re paying more for what they consume. They are substituting away from beer towards hard alcohol which is counter-intuitive. That seems like it’s going the wrong way but more likely it was an income effect from all the wealth gained in the late 90’s. People wanted more luxury items, including exotic alcohol brands and Frank noticed that trend.

In 1996, there was no super-premium niche of vodka even though it represented 26.5% of the distilled spirits market, the largest share. These were the early Dot Com days. Lots of 20-somethings with cash ready to throw around on Friday and Saturday nights. Absolut had the largest market share at the time and was charging an unheard of $15 a bottle. Frank decides he wants to enter that market but how? Come out with a better product that’s cheaper? The fact is most people can’t taste the difference between vodkas so differentiating on taste was going to be difficult. Price is another option. If you make the same tasting vodka and charge less, maybe there’s an angle. Frank decided he was going to use price but not by under-cutting Absolut, he’s going to double it!

Another interesting aspect of the distilled spirits business is that the consumers are very image conscious. The drink says something about who’s drinking it. You want to be sophisticated and successful; you need to have a favorite drink and particular ingredients. Frank knew to enter the market at a premium, he was going to need a good story and a strong image, to reach is target customer.

He went to France because in his words ‘everything good comes from France’. He struck a deal with the distillers of Cognac. Their production had slowed so they switched the excess capacity to vodka. Frank then started to build his story around quality. This wasn’t some regular Russian vodka; it was from France, a luxury good. He put ads in the Wall Street Journal telling he’s target customers how Grey Goose has won awards in international competitions. He shipped it in wood crates like a fine wine, rather than cardboard boxes like cabbage. The bottle design was distinctive and extra large bottles were put on the shelves at bars to grab attention. Then he started his viral marketing campaign: ‘The Grey Goose Girls’ started appearing at all the hot spots on the best nights. What’s key here is Frank recognized he needed to ‘influence the influencers’, the people who liked to tell others what was cool and get the early adopters and the early majority hooked. Once he convinced them, it was only a matter of time. Even characters on the HBO hit series ‘Sex and the City’ were ordering Grey Goose Cosmos. Grey Goose’s position as the premium vodka was solidified.

It sounds crazy, doesn’t it? Go after the market leader with a product you don’t have by doubling their price. Strategically, it sounds like suicide. We’re supposed to stick to what we do the best, where we actually have a defendable competitive advantage. Hiring models to promote your drinks in trendy clubs and charging a premium hardly seems like defendable competitive advantage. Absolut has since launched its own premium brand, Level and Stolichnaya has a premium brand, Elit, boosting its price to $60 a bottle. But even the guys who should know what they are doing seem to have trouble duplicating the recipe. In fact, Bacardi before buying Grey Goose tried with its own brand, Turi, but sold a meager 20,000 cases in 2002.

The competitive advantage seems to be Frank himself. He certainly has the ability to build a good story around a brand (Jägermeister and Grey Goose). He also seems to know where to find the influencers and how to convince them to persuade the early majority so critical to a product’s large scale success.

Is the strategy is repeatable? Frank is certainly going to find out. He signed a non-compete agreement with Bacardi so he’s out of the vodka market for another four years but that hasn’t stopped him from looking into the rum business, Bacardi’s bread and butter. He’s already found an Australian rum he wants to call ‘White Pelican’ to launch into a new super-premium rum category. When questioned, executives at Bacardi say they don’t think there’s really a super premium rum category. That’s fine. In a few years Frank will sell them one for another $2 billion.

Paul Thomas
Allison Brown

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