DGE Diageo Plc

By Saabira Chaudhuri and Cara Lombardo 

The owner of Ketel One vodka thinks it has an answer to slumping U.S. sales: less alcohol.

Diageo PLC, the world's largest liquor maker, said it is launching a botanical version of Ketel One with 30% alcohol by volume. The new drink doesn't meet the definition of vodka under U.S. and European regulations, which mandate that neutral distilled spirits must be bottled at 40% ABV and flavored ones at 37.5%. Instead, Diageo will market the new Ketel One as "made with vodka."

Ketel One and other big vodka brands have been losing market share to Fifth Generation Inc.-owned Tito's Handmade vodka, which is made from corn and is advertised as gluten-free. Tito's market share by volume stood at 8.1% for the four weeks to March 24, up from 6.1% a year earlier according to data from Bernstein. Ketel One's market share stood at 1.7%, down from 1.8% over this period.

Diageo, which owns Smirnoff and Ciroc vodkas and co-owns Ketel One with the Nolet Family, is hoping the new drink taps into the demand for healthier drinks. It says a 1.5 oz. shot of Ketel One Botanical will have 73 calories, 40% less than in a 5 oz. glass of white wine and 25% less than in a shot of regular Ketel One.

Ketel One Botanicals will retail for a suggested price of $24.99 for a 750- milliliter bottle, the same as a bottle of Ketel One Vodka.

For the six months to Dec. 31, Ketel One's net sales dropped 13% in North America on an organic basis from a year earlier. Ciroc's net sales dropped 11%, and Smirnoff's were down 2%.

In its previous attempts to resurrect its vodka brands, the London-based company has sponsored music festivals, marketed to the U.S.'s gay and lesbian community and experimented with flavors. In 2016 it began selling Smirnoff infused with real fruit. More recently, Diageo has cut prices on Ketel One to try to compete with Tito's.

The launch of Ketel One Botanical is the first time Diageo has sold a low-alcohol version of the vodka brand. It comes as many consumers, and especially millennials, are cutting back on alcohol, both by having fewer servings at a time and switching to weaker drinks.

A 2016 survey from research firm GlobalData found 54% of Americans between 25 and 34 years old were actively trying to cut back on alcohol, a higher percentage than were trying to consume less fat, carbohydrates and sugar. While beer sales have been slumping, some of the bright spots have been sales of lower-alcohol, lower-calorie brews such as Anheuser-Busch InBev SA's Michelob Ultra.

Diageo is hoping the new Ketel One will appeal to women and in particular wine drinkers. It plans to market it as something to be drunk in a wine glass with soda, ice and fresh herbs or fruit. It will come in three flavors: cucumber and mint, peach and orange blossom, and grapefruit and rose.

"There's huge growth in vodka soda in America, particularly with women," said Diageo Chief Executive Ivan Menezes on an investor call earlier this year. "A lot of that consumption is moving away from wine and we've got a targeted campaign against it."

Not everyone is as optimistic. Bernstein analyst Trevor Stirling said it is unlikely the latest offering will have a meaningful impact on sales. "Innovation like this rarely pulls a brand around," he said.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

May 01, 2018 08:54 ET (12:54 GMT)

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