Bacardi faces a serious challenge to the strength of its brands in the next decade, as its competitors continue to consolidate and Diageo eyes the number one brand spot for Smirnoff. But as Chris Brook-Carter and analysts Canadean report, the company at last appears to be responding with some vigour.

Let us not beat around the bush. By publicly stating its intention to rob Bacardi of its treasured position as the world's number one spirit, Diageo has thrown down the gauntlet to the owners of the famous rum, and in doing so given the clearest warning yet that Bacardi must start acting decisively to protect the position of its key brands.

Established in 1892 by Don Facundo Bacardi y Maso, Bacardi is still controlled by some 500 Bacardi family shareholders. It is a structure that has served the company well in the past by protecting its interests and preventing over-expansion. But the company is suffering from this structure now, as its competitors react with better efficiency and speed to the pace of the modern drinks world. And, Bacardi has been slow to react to the consolidation around it and to the growing momentum of rival products such as Captain Morgan and Smirnoff Ice.

Indeed, in its strategic review of the world's major drinks companies, Variations on a theme, leading drinks analyst Canadean reports that Bacardi's "family culture makes the company very much less flexible than other drinks group's, and this cautious approach…is now endangered by the continuing consolidation of the industry which is creating massively powerful groupings."

Encouragingly Bacardi looks to have woken up to the threat to its brands, particularly its eponymous rum and its RTDs - a category Bacardi helped make but taken its eye off in recent times.

The stronger financial position of Bacardi through its improving debt position and the reduction of investment behind weaker brands and markets, has allowed it to reinvest behind key brands and market combinations. There is good evidence of support to refresh the image of its three key brands, whose marketing, while of a consistently high quality, was in danger of becoming tired.

New campaigns for Bacardi were launched in the US, Spain and the UK last year designed to broaden the brand's appeal and Canadean believes "other initiatives to rejuvenate the lead brands appear to be in hand, including development of new products, improved packaging and careful monitoring of pricing relative to their flavoured and premium spirits in order to maintain the brand's positions and improve profitability."

Although perhaps a little slower to reinvigorate its corporate strategy, Bacardi has followed the likes of Allied Domecq and Diageo and focussed its efforts on driving volumes in key markets for each of its global brands, while selecting market/brand combinations for non-core products which offer growth potential.

Canadean says: "As a result all its main brands appear to have made strong growth in their key markets (excluding Mexico) and price increases have improved their profitability." But, it goes on to warn that the high A&P spend in support means no improvement in total estimated operating profit.

But above and beyond growing its existing portfolio, Bacardi has intimated its intention to play a role in the continuing consolidation that has been going on around it, a strategy it rightly sees as important if it is to stay among the very top flight of the drinks industry. 

However, it is not necessarily obvious where Bacardi's expansion options lie. Like its competitors, Bacardi now faces a market rapidly shrinking in acquisition options. But unlike its competitors, Bacardi is impeded by its family owners, who have resisted efforts to outside capital that may dilute ownership, or slide the company into more debt.

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Expert Analysis

Strategic Review 2001 - Bacardi-Martini
An in depth report from Canadean providing an exclusive review of Bacardi-Martini assessing the company's current position and provide an outlook for the future. Full financial details including results and margins, and a geographical review analyzing regional sales by value and volume are also provided. The brand review details sales and profitability, whilst management details complete the picture with full organizational responsibilities and structure.

The Strategic Review 2001 - Variations on a theme
Canadean's exclusive review of Allied Domecq, Bacardi-Martini, Brown-Forman, Diageo, Jim Beam Brands, LVMH, Pernod, Remy, Vin & Sprit AB.

 

The most recent example of this was illustrated by the resignation in frustration of former CEO Chip Reid. "The reasons for his departure may be complex," says Canadean, "but frustration at being unable to seek more funds through an IPO for further acquisitions, undoubtedly formed a part."

But opportunities to expand successfully do exist for Bacardi, though perhaps away from the acquisition route. The unsuccessful bid in 2000 with Brown-Forman for the Seagram wines and spirits business, demonstrated the ability of these two companies to work together. While a merger is probably not a possibility - both companies are fiercely independent - a joint venture is a distinct possibility, perhaps along the lines of the Maxxium model.

"Acquisitions would obviously cost money, but alliances with other companies would cut costs and broaden the group's portfolio without threatening its independence," says Canadean.

Indeed since the beginning of this year, Bacardi and Brown-Forman strengthened their ties with the announcement Bacardi would distribute the US-based company's vodka, Finlandia, in the UK. The two groups already have a number of other distribution arrangements.

And, further evidence of the more pro-active approach to brand building and Bacardi's attempts to build partnerships is no better illustrated than the recently revealed plans to launch another RTD, this time in alliance with the beer giant Anheuser-Busch, called Bacardi Silver.

Initiatives like these will help keep Bacardi at the forefront of the drinks industry and if the family can be persuaded to hand over some control to the company's management - Canadean believes it would benefit from more outside advisors - Bacardi is more than capable of resisting the Diageo challenge.