In Tough Times, Diageo Still Going High End

Marianne Ingleby|Amsterdam News Coordinator, CNBC

Once known as the poor-man's drink, vodka is now a key premium spirit for drinks companies and Diageo is looking to the liquor to offset a 6 percent drop in sales.

The world's biggest beer, wine and spirits maker is still hoping that high-end consumers will pay for quality — and for bling — focusing on joint ventures with the family-owned Dutch Ketel One brand and rapper P. Diddy.

Vodka makes up 11 percent of Diageo's net sales, which totaled 12.3 billion pounds ($20 billion) last year. It is mostly sold in North America and analysts say it is an area where Diageo can grow in sales and market share, despite the current recession.

One of the toughest questions was how to be competitive with a colorless drink that smells and tastes predominantly of plain alcohol. Diageo created different types of vodka for different segments of the market, ranging from cheap to ultra-premium.

"We believe we have to educate people to appreciate the varieties in vodka," Jason Bowden from marketing at Ketel One said. Flavors can range from "‘spice marrying with chocolate" to "crisp and tingly," according to Bowden.

Ketel One is going up against ask-for-by-name vodka's like Absolut. Diageo bought a 50 percent stake in Ketel One, which has been owned by the Dutch Nolet family for over 300 years, in 2008, paying $900 million.

It passed up buying Absolut — the market leader for premium vodka — from the Swedish government.

Ketel One CEO Bob Nolet describes how he traveled through the United States with cases of Ketel One, trying to convince bartenders to switch to the Dutch vodka. Diageo opens up doors for Ketel One for more global marketing and distribution.

Red Carpets and Clubs

In creating a joint venture with singer P. Diddy Diageo is hoping to appeal to the VIP, red carpet walking crowd of American nightlife. The rap mogul gets 50 percent of the sales.

At $35 a bottle retail, Ciroc takes on the super-premium brands like Grey Goose.

"In exploring the market for high-end drinks, we found there was a niche for ultra-premium vodka and Ciroc fills in this blank space," said Strachan.

So far, sales volume of Ciroc is up 137 percent in 2009.

A problem Diageo will have to deal with is how to get the American public to buy a high-end drink while the facts about the global economy are sobering.

Drinks such as beer and wine traditionally keep selling during a recession, and analysts point out that there is little room for cost cutting in the spirits segment.

But Diageo will not risk its vodka's reputation by making it more accessible.

"Ciroc should not lower prices, because we need to maintain our more exclusive status", said head of marketing Marc Strachan.