What is the premiumisation trend?

Market Bulletin | Issue 86

21 Nov 2017
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Premiumisation is arguably the most significant trend influencing the global alcoholic drinks market. Generally, most markets worldwide have seen consumers trading up to higher value products across a wide range of categories.

What is premiumisation?

Premiumisation is competition to offer higher quality items that consumers value. It is the opposite of commoditisation, which is competition to lower prices for a standard level of quality. Commoditisation is driven by consumers who view products as much the same and purchase primarily based on price. This causes prices to fall and quality to be cut to a minimum acceptable level. Premiumisation occurs in a product category, market or industry where customers are willing to pay more for higher quality. Premiumisation sparks competition to produce higher quality items with average prices rising over time.

Premiumisation does not necessarily refer to an expensive product. While it certainly can be, in the main it is less about the price and more the aspirations that the brand stands for and – more importantly –the values it represents to the consumers who want to consume it.

How it does that relies on a myriad of factors, none more important than how it is made. Consumers are increasingly looking for products with genuine stories, based on their history and their provenance, with the more artisan qualities the better.

Positioning premium for brands

The beauty of the premiumisation trend is that it means different things to different people. What one person perceives to be a premium product might be very different to what another person thinks and there’s the opportunity.

It is also why a genuinely premium product usually has so many hooks to help tell its story. The hooks won’t all necessarily be interesting to one person, but collectively they will appeal to a wide range of consumers and, better still, bring new drinkers into the category.

It is also why a genuine premium brand is not just positioned at the elite or the wealthiest. By nature, those consumers are always looking for the next most important or exclusive item and are not a solid basis on which to plan a long-term brand.

Premiumisation has created a bridge between the desirability of the luxury world and the function and necessity of the mass market by making the ‘good’ better and the ‘greater’ more accessible, giving consumers a taste of all things premium.

Drinks market trends

In developing markets, such as China, premiumisation has largely been due to the emergence of an aspirational middle class seeking to assert its status. In contrast, economic downturns have dampened the impact of premiumisation in some regions; particularly Eastern Europe, Latin America and parts of Africa.

Driving the trend in more developed markets such as the United States (USA) and Australia have been increasingly engaged consumers keen to explore unique and interesting products. In a recent publication, Wine Intelligence predicted that growth in the USA wine market in the next 12 months will come from the US$15 or more per bottle price segment. Trade research conducted by Wine Opinions on behalf of Wine Australia is consistent with this view. When considering adding new wines to their portfolios, interest among the USA wine trade was greatest in the US$15–25 price segment.

This trend has manifested itself in several ways in the global drinks market in recent years, including an explosion in the number of craft producers and brands in almost every category. Examples include the growth of premium niches such as ‘natural’ wines and Japanese whisky, and the revival in fortunes of aged brown spirits, taking advantage of their image of heritage and quality.

A commonly cited example of premiumisation is craft beer. Where mass produced beers are typically cheaper, consumers in many markets show a willingness to pay a premium for beer produced in small batches using unique techniques and ingredients. In many markets, this has driven intense competition, not to produce the cheapest product, but to brew the product that tastes the best or that has an interesting character.

Niche engagement

Wine Intelligence has identified a general trend of ‘engagement’ that is playing into the premiumisation trend. This relates to how businesses are fighting for consumers’ attention by appealing to their niche desires through unusual combinations and unique offerings.

An example of this is single-dish restaurants and bars. As per research published by restaurant finder app Zomato, showed that one in ten restaurants that opened in London between April and November 2015 focused on a single dish – double the number in 2014. Assuming a restaurant excels at crafting the dish it offers; a simple menu should make life easier for the consumer. Professor Sheena Iyengar in The Art of Choosing suggests an overload of options may actually paralyse people or result in them making poor decisions. As a result, simple menus with limited choices make dining straightforward. The same could also apply to wine portfolios and wine lists.

Australian wine premiumisation

Australian wine producers are taking advantage of the premiumisation trend in both domestic and export markets. According to IRI Market Edge liquor figures for the domestic off-trade market, Australian wine sales at below $10 per bottle free on board (FOB) declined by 1 per cent, while sales above this price increased by 8 per cent in the 12 months ended 2 July 2017. This trend is particularly apparent for Shiraz, where 80 per cent of volume growth was at $10 per bottle and above FOB, compared with Sauvignon Blanc, where 85 per cent of growth was wines below $10 per bottle FOB.

There has also been strong growth in exports of higher priced Australian wines. Exports at $10 or more per litre FOB increased by 23 per cent to a record $672 million in the 12 months ended September 2017.