Cigars and whisky and wild, wild profits

Liquor sales are up - thanks to young fogies with malt and stogies

At the Capital Grille steakhouse in Washington DC, cigar smoke swirls around the bar as men in silk suits perch on burgundy leather stools and sip single malt Scotch costing as much as $18 (pounds 11) a shot.

"Cigars and Scotch go hand in hand," says Vin Rosario, who manages the bar. "Every other drink is a Scotch, and one in four Scotch drinkers is smoking."

Cigar-puffing Scotch drinkers, younger drinkers trading up to premium brands, and a strong economy last year helped spark the first upturn in US liquor volume in 15 years, according to the industry research group Impact International.

Since the three biggest alcohol companies in the world are British-owned, the good news from America is a much-needed boost to an industry that's had more than its share of gloom over the past decade.

"All of our main brands in the US put on volume last year," says Guinness chairman Tony Greener. "Scotch whisky has been on a downward trend for many years in the States now ... and this is certainly the first year in my experience where brands actually increased their business from the consumer."

Other Scotch makers, including Highland Distilleries, are also reporting strong sales. Overall exports of Scotch whisky to the US rose 6 per cent last year, according to the Scotch Whisky Association, with exports of single malts surging 25 per cent.

It's not just premium Scotch. Remy Cointreau reported higher US sales of cognac in the first half, while Brown-Forman Corp's Jack Daniel's and Southern Comfort both increased volume during the third quarter.

"The cognacs have been extremely strong, single malts are up, and single batch bourbons have been very successful," says James Barrett, an analyst with Josephthal Lyon & Ross in New York.

Part of the increase can be traced directly to the robust US economy, which has prompted a broad-based increase in consumer spending.

"The spirits sector typically performs well in a mature environment when interest rates are rising, consumer spending is peaking, and the dollar is strong," says Mark Puleikis, an analyst with Merrill Lynch. "All of those three things are happening."

With a little more money in their pockets, Americans are willing to fork out more for their favourite brands, and that's giving distillers leeway to raise prices.

"The industry is getting more aggressive on pricing, following the lead of American brewers and wineries," says Mr Barrett. And while in 1995 and 1996 price increases were focused on premium brands, recent reports from the US suggest "very broad-based price increases", he says.

Yet there's more at work than just discretionary spending. While the UK economy, for example, is among the healthiest in Europe, liquor sales aren't as strong as in the US.

That's where the cigars come in. Many Americans are tired of being told what's bad for them, whether it's red meat, smoking, drinking or sex. Hence the so-called "pleasure revenge" factor, says Mr Puleikis, marked by the popularity of Richard Klein's recent books Cigarettes are Sublime and Eat Fat, an ode to obesity.

For an unholy trinity of guilty pleasures, Marcos Miguel Tobacco Corp teams up with restaurants like Morton's of Chicago and its liquor suppliers to host dinners. Young professionals pay about $150 for a dinner whose every course is accompanied by an appropriate liquor or wine and cigar.

"Between the cognac at the beginning and the vanilla cigar at the end, it drives them bonkers," says Michael Weiner, co-owner of Dallas-based Marcos Miguel. The company also travels to bars across the US to do joint tasting promotions featuring its cigars and premium liquors like Cuervo Reserve tequila.

Liquor and cigars "taste better when they're coupled", says Mr Weiner. Liquor stores are now scrambling to stock stogies [slender, roughly-rolled cigars], he says, estimating that the cigar craze still has another five to eight years to run.

Even the health-conscious may be more inclined to tipple, as studies suggest that moderate drinking, particularly wine, may have health benefits. "People feel less guilty or more inclined to have a drink or two," says Mr Barrett.

Moreover, there's been a resurgence of youth interest in the "cocktail culture", as proclaimed by a recent Esquire magazine cover and demonstrated by the new-found MTV cachet of veteran crooner Tony Bennett.

And liquor producers are using more aggressive marketing to convince twenty- and thirty-somethings to swap keg beer for cocktails.

Domecq Importers, the US arm of Allied Domecq, is trying to lure 28- to 35-year-old drinkers back to Martinis made with Beefeater gin through an ad campaign using the tagline "Live a little". Meanwhile, Highland Distilleries Macallan premium Scotch has co-sponsored New York readings by hip authors.

Companies are also hitting the Internet: Allied Domecq's web site touts snowboarding contests sponsored by its Ballantine's Scotch and chances to "get your own mating call out on the web" by creating a personalised homepage.

The marketing is paying off. Liquor companies are focusing on a handful of key brands, and those - as well as new products like Stolichnaya fruit- flavoured vodkas and TGI Friday brand cocktails, produced in association with the restaurant - are the most successful, says Colin Davies, an analyst with Goldman Sachs.

Still, analysts caution that while marketing premium brands may be boosting sales now, the long-term trends in mature markets like the US and Europe aren't friendly to the liquor industry.

Figures from the Distilled Spirits Council of the US show American liquor consumption peaked at 447.3 million gallons in 1981, but fell 27 per cent by 1995, the latest year for which statistics are available.