Consolidation on hold as the joint venture blossoms
It seems you are no-one in the drinks industry these days unless you have a joint venture partner to bring to the party. Affordable and low-risk, the jv offers an easy way to boost your portfolio and market reach. But as Jeanette Stamper discusses, are they really a marriage made in heaven or a disaster waiting to happen.
The drinks world's got consolidation fever, right? Perhaps not. While the high drama of a billion-dollar takeover will always dominate the news and keep tongues wagging round the water-cooler, another movement, quite contrary to consolidation, has begun to gather momentum. Speaking to industry executives over the last six months, it's striking how much of the bullish talk of big-money acquisitions has given way to cautious murmurs of the "sensible" joint-venture.
This year alone we've seen Suntory's Gruppo Campari forming a US$10m JV in the UK with Morrison Bowmore, Stellenbosch Vineyards beat off KWV and Distell to link up with Australia's BRL Hardy (which last year created Pacific Wine Partners, along with California's Constellation Brands, and says it's looking for still more JVs). Indian brewer Shaw Wallace has announced a JV with New India Breweries and held talks about a bigger deal with SAB after Scottish & Newcastle's alliance with United Breweries. Brown-Forman and Bacardi joined forces in a massive US marketing and distribution deal. The in the last few weeks Castel Freres formed a JV with Chinese wine group Changyu, and AmBev launched a new distribution JV with CabCorp in South America. I could go on, but I'm sure you get the idea.
Why do they do it? JVs tend to have a high failure rate. Why not just get out the chequebook and make it a takeover, creating a clearer management structure and maybe some synergies into the bargain? Well, for a start, it's cheaper.
The JV is seen by many companies as a way of dipping a toe into a new market, without committing to the full plunge
There is another, less commercial, factor, which is perhaps too easily underestimated. With so many family-run businesses in the drinks industry, a company's name and independence are sometimes simply not for sale. Where some might see this as a sentimental weakness in the face of commercial reality, to the Bacardis, Mondavis and Heinekens of this world, the family name should be etched as firmly on the front door as it is on the bottles.
A merger between Bacardi and Brown-Forman, for example, seems an inescapably good idea. A merger of the two companies would bring together Jack Daniels and Bacardi, make some excellent synergies (always popular on Wall Street) and offer a serious challenge to Diageo in the US. But Bacardi's powerful family shareholders would never countenance it - subject closed.
Instead, the two companies have been developing an ever closer marketing and distribution alliance of the sort pioneered by the industry's most famous JV: Maxxium. Jim Beam Brands, Remy Cointreau and Highland Distillers were finally joined last year by Vin & Sprit, and between them they control probably the most impressive spirits portfolio in the world after Diageo's.
Both Maxxium and Brown-Forman/Bacardi have been successful experiments so far. Asked about the latter's prospects, Paul Walsh, CEO of Diageo, wasn't fooling anyone when he said, "it's very difficult because you still have two principals trying to set the agenda and problems are bound to come about."
The fact that he felt it necessary to comment tells its own story.
While spirits, being by far the drinks industry's most consolidated sector, has seen the largest JVs, the practice has been put to different, but equally widespread, use in brewing and winemaking too. The beer world has been getting very excited about emerging markets recently, with China, India and Eastern Europe seeing the most frenzied activity, much of which has been in the form of JVs. Interbrew, SABMiller, Carlsberg and Scottish and Newcastle have been busiest on this front - the latter two finding themselves equal partners in the highly successful Baltic Beverages Holdings, after Scottish & Newcastle's purchase of Hartwall.
A joint-venture is a particularly attractive vehicle for big western companies with their sights set on the world's less familiar corners. "China's a very different place to do business," one European brewer told just-drinks. "It's good to get some practice understanding the market rather than charging in and buying everything up."
Many ambitious winemakers have taken the same approach to expanding their international reach. BRL Hardy, as mentioned earlier, has used joint-ventures to give itself a presence in North America and South Africa. Likewise its partners, Constellation Brands and Stellenbosch Vineyards, have increased their international profiles too.
Indeed, joint-ventures are a good way of supplying almost any particular area of ignorance or inexperience in a company's plans. We've seen this year how spirits majors, determined to climb aboard the US malternative bandwagon, have called in brewers to manufacture and distribute the new drinks. Anheuser-Busch joined forces with Bacardi to launch Bacardi Silver, and Miller with Allied Domecq, Skyy Spirits and Brown-Forman for Stolichnaya Citrona and Sauza Diablo, Skyy Blue, and Jack Daniel's Original Hard Cola respectively.
The joint-venture is clearly proving itself a useful strategy for many drinks companies, but that doesn't necessarily mean it's here to stay.
Internal documents from a major investment bank, seen by just-drinks, expose a fairly cynical attitude to our friendly JV
Of the six types of relationship identified by the bank, only one, the alliance of "complementary equals", was expected to last into the medium term. All the others were thought to be likely either to fail or end in a full acquisition. "A lot of them aren't real JVs," said one banker. "The reason they happen is that the seller won't sell - at least that's often the case." Perhaps consolidation fever is just in remission after all.
Companies: Bacardi, Brown-Forman, Diageo, Scottish & Newcastle, Constellation, Suntory, Gruppo Campari, Campari, KWV, Distell, SAB, United Breweries, AmBev, Cointreau, Carlsberg, Skyy, Anheuser, Allied
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