enewsheader.jpg - 20593 Bytes


Lynn M. Walding, Administrator


abdblue.jpg - 2723 Bytes

 e - NEWS

February 20, 2004


1. Elbert: Vodka Drinkers Set to Taste New Tax Plan

2. Chilling, Thrilling Vodka

3. Spirits Industry Growth Trends In Infancy - UBS Analyst

4. Officials Want to Get Tough on Alcohol

5. New Products, US Market Drive Diageo Sales




1. Elbert: Vodka Drinkers Set to Taste New Tax Plan

By David Elbert – Des Moines Register 
February 18, 2004


DES MOINES, IA -- Gov. Tom Vilsack's efforts to reinvent government have taken an interesting twist with vodka sales.

On March 1, the state will begin using a sliding scale for liquor excise taxes. The effect will be to lower the tax rate on high-priced vodkas while increasing the rate on cheap vodkas.

That change reverses traditional progressive income tax policy, where tax rates increase as incomes climb.

Iowa is not trying to stand tax policy on its head, said Lynn Walding, administrator of the Iowa Alcoholic Beverages Division. The goal is to raise revenue by selling more of the pricey vodka.

Iowa's excise tax rate for low-priced vodkas will top out at 60 percent of the wholesale cost for the most popular sizes. For high-priced vodkas, the rate will drop as low as 40 percent of the wholesale cost. In between will be nine separate tax rates.

Iowa now taxes all liquor at the same rate: 50 percent of the wholesale cost.

Beginning March 1, Iowans who drink inexpensive brands will pay about 30 cents more in excise taxes for a bottle of vodka that retails for $5, while the tax savings for people who drink vodka that retails for $20 a bottle will be about $1.20. Tax savings continue to grow as prices climb. On a $50 bottle, the savings would be about $3.

If the experiment is"successful," you will see this sliding tax scale applied to other spirits.

The definition of"success" for this experiment is a tough one. Iowa's liquor excise tax generated $38.7 million for the state treasury last year. The state wants to increase that by $1.2 million without increasing Iowans' consumption of liquor.

A little history is in needed to understand the significance of the preceding statement. When Prohibition ended in 1933, many states, including Iowa, opted to "control" liquor sales. They did that by setting up state-owned liquor stores, which Iowa had until 1987, and state-owned liquor distributorships, which Iowa still has.

The theory behind liquor control is that states that exercise control do nothing to promote the consumption of alcohol.

Wholesale monopoly

Today, 18 states continue to exercise some form of control over the sale of liquor. In Iowa, the control takes the form of a wholesale monopoly. Every tavern and liquor store in Iowa must buy its liquor from the Iowa Alcoholic Beverages Division.

Like all wholesalers, Iowa imposes a "markup." In this case, the markup is the state's 50 percent liquor excise tax.

Here's how it works: A distillery charges $6 for a bottle of whiskey. The Iowa excise tax adds $3 to the cost. A store owner adds $1 to get his profit and sells the bottle to the public for $10.

Many states that do not have liquor control just slap a flat per-gallon tax on liquor, similar to the cigarette tax. It's a flat rate that increases the state's revenue based on volume sold, not price.

Iowa's liquor tax is different. It is a markup based on price.

Nobody objected when Iowa's markup was a consistent 50 percent for all products, but now that it is changing to a sliding scale, businesses that sell lower-priced vodkas have started making noise. "Why do you want to promote import brands over domestic?" Dave Day, head of Iowa Liquor Products in Marshalltown, asked when the change was first proposed. Day handles a number of "value" products, including Hawkeye Vodka, the most popular vodka in Iowa - and one of the least expensive.

Well-heeled will pay

Day thinks the state is targeting his customers. Not true, said Walding, the liquor control chief. In fact, Walding said, any significant increase in tax collections will come from well-heeled Iowans, not Hawkeye Vodka drinkers.

Look at it this way, he said: A 60 percent excise tax on a bottle selling at the store for about $5 is only about $1.90. A 40 percent tax on a bottle retailing for $20 produces more than $5 in tax revenue. It's simple math, he said. The more $20 bottles the state sells, the more taxes go up.

There's one problem, though: Some retailers may not be on board. Store owners could choose to keep any savings as profit and not pass them on to consumers. If too many store owners do that, there won't be much incentive for Iowans to buy higher-priced vodkas, Walding said.

How did this happen?

A question to ask at this point might be: Where did the state liquor division get the power to change tax rates in the first place? Isn't that a power of the Legislature?

That's where reinventing government comes in. Walding explained that the liquor division is one of six agencies "cut loose from normal red tape" by the governor to find new ways to do things more efficiently.

The tax experiment is an interesting one. Lowering tax rates that affect higher-income people while increasing tax rates that affect lower-income folks isn't something you would normally expect to see from a Democratic governor.



2. Chilling, Thrilling Vodka
By Jon Filson – Toronto Star

February 18, 2003


The icy age of vodka is upon us,

but you already know that if you're a young,

downtown professional

Rene Johnston / Toronto Star

Where better to enjoy the purity and simplicity of vodka than in Canada’s only ice hotel, just outside of Quebec City?





TORONTO, CANADA --Vodka has been around for centuries.  But only recently has it

become a way of life.


"Vodka is a lifestyle," declares Sean Haley, publisher of Vodka magazine, a bimonthly out of California that debuts this month.  "Vodka magazine is catering to the new  downtown urban bohemian. It's no longer just a cocktail, it's an attitude."


Consider it a counterpart, and a corollary, of single malt scotch. The same way that single malt scotch has come to mean "old school, right-wing, rich, red meat and cigar," vodka has cemented itself as "young, lefty, West Coast, urban, trendy and fun."


Over the phone, Haley says: "For the young professional, aspiring to live in the downtown area, it's the drink of choice." And not just in California.


Haley came up with the magazine concept when he realized that across North America, the same crowds attending the same gallery openings and parties and buying up downtown lofts were drinking vodka.


The timing couldn't be better.


Buoyed by smart advertising, new flavours, the comeback of the martini, and premium variations, vodka sales are up all over the Western world.


Sales increased 15 per cent in the past year in the United Kingdom, according to the Gin and Vodka Association, with more than 60 per cent of its drinkers between the ages of 18 and 35. In the United States, vodka recently became the top-selling spirit, with forecasted sales of nearly $3 billion (U.S.) in 2003, up more than 8 per cent over last year. And Statistics Canada reports vodka sales have climbed by 20 per cent here since 1998.


The entrenchment of vodka comes down to one part alcohol and one part advertising. The drink itself is not a complex spirit. To make it, you simply need a material that contains starch — anything like a grain, corn, carrot, potato or molasses. Essentially, the starch ferments, the resulting alcohol is distilled, then filtered. Lastly, water is mixed in, and the concoction is ready to drink — no aging required.


As a drink, vodka's outstanding feature is that it has none. Accordingly, companies hype their vodkas as either "the smoothest" or "the purest." "No taste, no smell" went one Smirnoff campaign from the 1930s, back when the spirit was billed as "Smirnoff White Whiskey."


But with no distinguishing features, selling vodka becomes a bit of a trick. Marketing a product that tastes like nothing requires a certain amount of imagination, whereas if you have a product that tastes like something, you market whatever that something is.


Pick up a bottle of whiskey and read the back of it. You're bound to get something like this: In 1232 B.C., 32-year-old Angus MacAlkie wandered the hills of Scotland and fell upon a spring filled with great bushels of rotting wheat. Sipping the 12-year-old fermented grain and water, he knew he had discovered a special drink. This bottle of MacAlkie's 12-year-old Finest has a peaty, vile taste, but it's made from that same spring MacAlkie found. When you drink it, enjoy the horse-like bouquet and long, painfully harsh finish.


You get the idea. Whiskey-makers sell the history of a product and try to emphasize its qualities. For the most part, they're trying to sell people whiskey, not an attitude.


Ryerson marketing professor Ida Berger explains that any company trying to sell alcohol has "two jobs to do when they advertise a product. One is to communicate something about the alcohol itself, and the other is a brand benefit." In whiskey's case, the alcohol itself tends to be paramount.


"They're forced into selling their product — because it's going to be unique," explains University of Florida pop culture professor James Twitchell of most spirit-makers. "It will turn off or attract people on its taste alone.


"Most vodkas don't have that problem — they're tasteless. With vodka, the taste exists in the imagination of the user.


"The very thing that makes it hard to market then becomes its marketable advantage."


Which means that precisely because vodka doesn't taste like anything, vodka makers haven't had to market how the drink is made, so much as hype the brand — what drinking vodka means.


In Twitchell's 2001 book, 20 Ads That Shook The World, he lists Absolut's ad campaign among the most effective. The famous campaign features its apothecary-style bottle in differing, yet always stylish, backgrounds. And each ad always contains a variation of "Absolut Something."


The campaign is unquestionably one of the most successful print campaigns. As Absolut Book: The Absolut Vodka Advertising Story points out: "In 1981, Absolut was selling over 20,000 cases annually in the U.S.A. Last year (1995), sales were over 3 million cases — an increase of 14,900 per cent!"


Arguably, the Absolut campaign laid the groundwork for establishing the "brand" of vodka as hip, artsy, playful and intelligent.


But the rise of vodka hasn't all been the smoke and mirrors of marketing. The spirit itself has built-in benefits, which any vodka drinker will tell you.


Of all the hard alcohols, vodka is easily the most flexible. It can be shot or stirred and mixed with essentially anything.


To Twitchell, this means that vodka will always be able to attract two groups, both of which don't know quite what to do with alcohol: "Those who are just starting out, and those who are addicted. And to those two groups, vodka becomes very important, precisely because of its non-tastiness."


Since the spirit has no taste, it can't turn people off — unless, of course, they want to "graduate" to more complex flavours or the prestige and exclusivity of drinking a spirit of higher quality.


But vodka makers have moved to address both of these concerns. They have created a premium and ultra-premium market, featuring brands like Grey Goose. And when it comes to flavours, vodka-makers have embraced experimentation more than any other spirit seller.


Have you tried the new chocolate-infused dark rum from Argentina? Or that wild new single malt out of England, the one that's filtered with Cuban cigar smoke for extra flavour? Chances are you haven't, but don't feel bad — they don't exist.


However, vodkas with such flavours as lemon, vanilla, blackcurrant, pepper, cranberry and orange have burst on to the market. In the past year, more than 100 new "traditional" vodkas or flavoured vodkas were introduced in the United States.


All this experimentation means that snobbery is removed from the vodka equation. More so than any other alcohol, you can and are intended to drink vodka in a myriad of different ways — as a shot, a spirit, in a cooler, or in a drink you mix yourself.


The message is as clear as the beverage: Vodka is open to options. Other spirits? Try telling a scotch drinker you'd like your Dalwhinnie mixed with cherry Coke, and see what happens.


"(Vodka makers) are experimenting more than any other spirit on the market," observes Haley. "It's going after an early 20s audience, which is open to that." Vodka has cornered the "I'll try anything so long as it's fun" scene.




3. Spirits Industry Growth Trends In Infancy - UBS Analyst

By Christina Cheddar Berk – Dow Jones Newswires 

February 13, 2004

NEW YORK (Dow Jones) --Distilled spirits sales should continue to gain momentum, allowing the industry to grab a greater share of the alcohol beverage market over the next three to five years, according to UBS analyst Caroline Levy.

Levy reiterated her comments on a conference call Friday, which included Peter Cressy, chief executive of the Distilled Spirits Council of the United States, or Discus.

Earlier this month, Levy downgraded her rating for Anheuser-Busch Cos. to neutral from buy. The decision was partially based on the increasing momentum in spirits sales and partially based on the "gaining traction" of Miller Lite beer, which is made Miller Brewing Co., a unit of South Africa's SABMiller PLC .

Levy added Friday that she expects the spirits industry's recent marketing efforts to fuel a cycle of higher media spending.

"Media spend on spirits brands has increased exponentially in the past few years and could double in the next three years to $100 million," she wrote in a research note issued Friday. The spending is led by Diageo PLC (NYSE:DEO and Allied Domecq PLC, she said.

On the call, Discus' Cressy discussed some trends that he felt are leading to increased spirit sales. Among the items cited was that several states have lifted bans against the sale of spirits on Sunday and on-premise tasting of spirits. He expects to see additional states enact similar legislation.

"Sunday is the second-busiest shopping day of the week, and the market basket on Sunday is larger than any other day," Cressy said.

UBS has a buy rating on Diageo, the world's largest spirits manufacturer, and a neutral rating on Allied Domecq, which makes Beefeater gin, Kahlua liquor and Sauza tequila. Diageo's brands include Smirnoff vodka, Captain Morgan rum and Johnnie Walker Scotch.

UBS has investment-banking relationships with the companies mentioned in this story. Levy doesn't own shares in any of the companies.



4. Officials Want to Get Tough on Alcohol

By Vanessa Miller - Iowa City Press-Citizen

February 18, 2003


Underage drinking focus of law

IOWA CITY, IA -- Iowa lawmakers are considering a proposal to up the maximum penalties for underage drinking to include time in prison and $5,000 in fines. The proposal comes as underage drinking remains an issue in Iowa City.

Alcohol proposal
  • An underage person possessing alcohol would be charged with an aggravated misdemeanor. That would up the fine from $100 to a maximum of two years in prison and a $5,000 fine.
  • In addition to already- existing penalties for those under age 18 who are charged with alcohol possession, violators would have their driver’s license suspended for one year.
  • Penalties currently enforced for those of legal age who are charged with providing alcohol to minors would extend to those ages 18 to 20 as well.

State officials took the first step this week in upgrading the penalties for underage drinking. As presented, the law would increase the underage drinking charge from a simple misdemeanor to an aggravated misdemeanor - a charge issued for a variety of serious crimes including child endangerment and assault with a dangerous weapon. The resulting penalty would increase from a $100 fine to a maximum two years in prison and $5,000 fine. "I can't imagine we would put someone in prison for this offense," said Johnson County Attorney J. Patrick White. "I have reservations about making this an indictable offense."

Councilor Connie Champion said that while she supports stricter state enforcement, she agrees that imprisonment is not an appropriate punishment.

"That seems a little exorbitant to me, I don't think it deserves that kind of treatment," Champion said, adding that she would like to see the state do something. "It would take the burden off of the towns, who have no control over liquor licenses. It doesn't seem right to me that we have to deal with the problems but don't make the rules."

In 2002, local police officers issued 3,807 alcohol-related tickets, 2,271 of which were for underage drinking. That is more than double the underage tickets issued in 2001 - 988. In response to the rise in underage drinking citations, a City Council majority agreed to ban those under 19 from entering bars after 10 p.m. beginning Aug. 1, 2003.

While many bar owners and patrons have complained of the enforcement crackdown, ticket numbers continue to rise. From Aug. 1 through the end of January, officers issued 2,219 alcohol-related citations.

The proposed state law, which was introduced by Rep. Doug Struyk D-Council Bluffs on Monday, would not only crack down on underage possession, it would increase the penalties for minors who provide alcohol to minors as well.

Currently, state law is stricter on those age 21 or older who provide alcohol to minors than it is to those ages 18 to 20. The change would make everyone age 18 and older subject to a state law that punishes those who provide alcohol to minors with a minimum $500 fine.


5. New Products, US Market Drive Diageo Sales

By Deborah Ball –The Wall Street Journal Europe

February 19, 2004

LONDON -(Dow Jones)- U.K. spirits giant Diageo PLC said Thursday net sales of its premium drinks portfolio rose 6% in its first half, as the success of a number of new products and strength in the U.S. balanced a tougher European market.

Reporting figures for the six months ended Dec. 31, Diageo, the world's largest liquor group, gave the first picture of the company as a pure premium spirits maker, following a long transition from a diversified consumer goods company.

Over the last several years, Diageo has bought part of the Seagram's spirits portfolio while shedding its stakes in Burger King and Pillsbury, and is now focused squarely on driving growth out of mega-brands such as Smirnoff vodka, Johnnie Walker scotch and Guinness stout.

Diageo's first half showed that the group's focus on its clutch of global priority brands has helped it exploit the gradual recovery in the global alcohol beverage market, which was hit hard early last year by the SARS outbreak in Asia, the war in Iraq and an economic slowdown.

Revenues declined 5% to GBP5.06 billion over the same period in 2002, due to the divestment of Burger King and negative currency movements. Premium drinks were up an unadjusted 4% and rose 6% after deducting excise duties.

Operating profit before exceptional items declined 2% to GBP1.181 billion, due to the Burger King divestment, but spirits' operating profit was up 3%. When adjusted for currency movements, divestments and acquisitions, operating profits were up 6%.

The group swung to a net profit of GBP891 million from a GBP459 million loss, due to an extraordinary charge for Burger King in 2002. The results were largely in line with analysts' expectations.

Diageo's main global brands were the drivers of the growth, with sales up 6% by value. Among the strongest performers was Johnnie Walker, which rose 11%, boosted by a tweaking of its "Keep Walking" ad campaign to encourage younger drinkers to try Johnnie Walker Red Label.

Baileys also continued to benefit from new products, including the introduction of a single-serve miniature version in the U.S. and a new product called Glide in the U.K.

And Captain Morgan rum rose 26% in the half, boosted by effective marketing in the midst of fast growth in the dark rum category.

Diageo echoed recent comments from rivals Pernod Ricard SA and Allied Domecq PLC in reporting an upswing in the North American market, which represents about 40% of Diageo's global operating profit.

North American sales (adjusted for currency movements, excise taxes and acquisitions and divestments) were up 10%, while operating profit before exceptional items rose 14%.

A mixed note came from the Smirnoff brand, which is undergoing a complete brand overhaul in the face of competition from premium rivals such as Grey Goose and Ketel One, and has been introducing new products such as flavored versions and raising prices. The price hike pushed volumes of Smirnoff, the world's biggest-selling vodka, down 1% in the half.

Elsewhere, Diageo's ready-to-drink products, which have been crucial to its growth in recent years, continue to level off. Global volumes in the products, the best known of which is Smirnoff Ice, fell 4%, as a steep decline in the U.K. balanced modest growth in North America.

Spain and Great Britain posted moderate growth, with volumes up 4% and 5% respectively. By contrast, Ireland was hit hard by the continued weakness in Guinness, a sharp hike in excise duties and move by consumers from drinking in pubs towards drinking at home.

Looking ahead, Chief Executive Paul Walsh signaled that the group expects to turn in a second half similar to its first six months.

"Looking forward, the trends that we have seen in the first half are expected to continue despite the uneven recovery in Europe," he said in a statement.

Finance Director Nick Rose said the company could report the first results from a major reorganization of its U.S. distribution system when it presents its full-year numbers in September, although the full impact isn't expected until 2005.

He also signaled that the weak dollar could have a strong impact on Diageo's results this year. He also said the company doesn't expect to sell its remaining stake in General Mills Inc. until at least the middle of this year, due to an ongoing investigation into General Mills by the Securities and Exchange Commission.