From honey whiskey to pumpkin pie vodka, bold new flavors are the toast of the global drinks industry. At Diageo, drinks created in the past five years account for half of the beverage giant’s sales growth in that period

September 17, 2013, 4:33 p.m. ET

Spirits Soar on Flavored Liquors

Sales Growth Is Being Driven by Dessert-Inspired Vodkas and Other Innovations

SIMON ZEKARIA

BISHOP’S STORTFORD, ENGLAND—From honey whiskey to pumpkin pie vodka, bold new flavors are the toast of the global drinks industry. Diageo DGE.LN +0.62% PLC’s technical laboratory here, which makes drinks for Europe and Africa, is tucked away in a bland office block, but inside beverage scientists are playing with pipettes, spices and colored liquids. Drinks created in the past five years account for half of the beverage giant’s sales growth in that period. Some 80% of the company’s investment in innovation is directed to products launched within a three-year time frame.“The kind of options you might have had in soft drinks and non-alcohol beverages 20 years ago, consumers expect from alcohol now,” says Denny Brooks, Diageo’s vice president of technology research.

Diageo’s U.K. “liquid developers” took three years, 839 formulations and analysis of 300 types of chocolate to create Baileys Chocolat Luxe, a new version of the Irish cream liqueur. Developer Anthony Wilson says chocolate gives its true smell when broken. “We needed to get that nose in the product,” he says.

The brewer also recently created Snapp, a champagne-inspired apple drink marketed at women in Kenya and Nigeria, as well as rum brand Shark Tooth, which is sold in Russia.

The U.S., meanwhile, has seen a candy and confectionery-flavored vodka boom. Flavored varieties account for more than a fifth of the consumption in vodka, which accounts for a third of spirits sold in the U.S., says Liberum Capital.

Kissed caramel and iced-cake versions of Smirnoff helped Diageo’s North American operating profit rise 9% in the year ended in June. Whipped cream and cotton candy twists contributed to a 13% jump in the second-quarter sales of Beam Inc.’s Pinnacle vodka.

At the end of last year, Beam, which is known for its Jim Beam bourbon, moved its scientists into a new innovation center in Clermont, Kentucky. Its “Liquid Arts Studio” has a bar, workspaces and retail shelves for product trials.

Chief Marketing Officer Kevin George says Beam has more than tripled its output of new products over the past few years. It aims to get about 25% of medium-term sales growth from innovation. One plan is to increase sales of ready-to-drink canned spirits to women.

“You can go to Yankee stadium and get a [low-calorie] margarita in a bottle. That didn’t exist two years ago,” says Mr. George.

Pernod Ricard SA RI.FR -0.29% launched five twists to Caribbean coconut rum Malibu across the globe in 12 months to reinvigorate sales, such as Malibu Red with tequila. “[Generating] value is clearly what it is all about,” says Chief Marketing Officer Martin Riley.

Even in a fragile economy, U.S. consumers are trading up, with ultra and superpremium spirits growing at volumes well above the market rate, analysts say.

“Premium and above is where we innovate,” said Larry Schwartz, Diageo’s president of North America. Experimenting around vodka and North American whiskey, such as amaretto-flavored Ciroc and 10-year-old bourbon Bulleit, is driving U.S. growth, he added.

Last year, Diageo’s innovations in North America over the past three years produced nearly $800 million of sales.

“We have pretty much built a billion-dollar business over the last 4½ years on innovation in the U.S.,” says Mr. Schwartz.

Competition to tempt drinkers means ideas are getting quirkier. Pernod Ricard’s U.S. innovators released new variants of Polish vodka Oddka, including fresh cut grass and electricity, which tingles on the tongue.

“[The innovation pipeline] is accelerating. There are far more projects [now] than a few years ago,” said Mr. Riley.

But sales and customer loyalty can be eroded by over-innovating, says Mr. Barden. “There could be some frustration with the complexity of choice, which could lead to dissatisfaction.”

Mr. Riley says consumers remain the arbiters of a brand’s success. “If we think we have got a good idea, [we] get it into market in a limited way. Strong immediate feedback will then enable us to develop more.”

To plunder new trends, distillers are teaming up with local innovators. Pernod Ricard asked British mixologist Tony Conigliaro to create bespoke glassware for Beefeater Burrough’s Reserve, a sipping gin.

Mr. Conigliaro also creates liquids. At his Drink Factory in north London, horseradish vodka is evaporated through pressure rather than just heat to keep liquid molecules undamaged.

Nearby, at Mr. Conigliaro’s The Bar With No Name, vodka is teamed with tomato yolk and Oloroso sherry to create a “Prairie Oyster” amuse-bouche served in a ceramic “shell.”

Guillaume Ledorner, the bar’s 27-year-old manager, says customers are getting more curious in a growing cocktail culture. Looking for odd flavor combinations, Mr. Ledorner picked seaweed from beaches on Scotland’s Isle of Islay.

“People have some very strange requests,” he joked.

Beverage is the new battleground for taste aficionados, said Mr. Conigliaro. “Foodies are aware of where they eat and how they eat. That mentality has permeated into the drinks world.”

“If you push boundaries, [creativity] will make its way back into the mainstream. You are going to get more multisensorial drinks coming out,” says Luca Lupini, technical innovation director at Diageo’s U.K. technical center, one of six it has globally.

Whiskey-based Old Fashioneds and gin tonics are the most popular classic cocktails in the bar, but the industry is tapping into fast-moving trends, says Mr. Ledorner.

“The general public know much more about drink than they did about five or six years ago.”