Although a 'mega' merger to create a business capable of matching the scale of clear market leader Diageo has still to materialise, the global spirits and wine industry has changed significantly since GrandMet and Guinness pooled resources in 1997 to become at least twice the size of all other rivals. By Mike Rohan.

Spurred on by the merger between GrandMet and Guinness to form Diageo, further consolidation in the global spirits and wine market is inevitable but the way in which this will take shape and the speed of transition remain uncertain. Below Diageo in the global spirits league (see Table) are a number of international drinks groups including Allied Domecq, Seagram, Bacardi-Martini, Brown-Forman, Pernod Ricard and Remy Cointreau, which are all possible candidates for merger. However, the picture is complicated by the fact that, with the exception of Allied Domecq, the other groups are in the hands of dynasties, which are extremely reluctant to yield control as a merger would demand.

Based in Canada, Seagram is controlled by the Bronfman family and in addition to spirits and wine also has interests in entertainment centred on Universal Studios and PolyGram. Seagram's leading brands include Chivas Regal and Glenlivet Scotch whiskies and Martell cognac.

Bermuda-based Bacardi-Martini owns the world's top selling brand - Bacardi white rum - but has been diversifying into other drinks categories through acquisition.

Another powerful but family-controlled US-based drinks group is Brown-Forman, best known for its Jack Daniels and Southern Comfort brands.

French drinks groups Pernod Ricard and Remy Cointreau are also family owned, while a third French drinks business, Moet Hennessy is part of LVMH, which in turn is controlled by Bernard Arnault.

The other major players in the global spirits market are Fortune Brands of the US and Suntory of Japan. Fortune Brands incoporates JBB International and owns the Whyte & Mckay Scotch whisky business and also the Jim Beam bourbon brand. Suntory of Japan is the world's eighth ranked spirits group and is yet another family owned business.

Given this scenario, it is clear that UK-based Allied Domecq, either by acquisition or as a takeover target itself, is destined to play a pivotal role in any future consolidation within the global spirits and wine industry. The group's key brands are Ballantine's Scotch whisky, Beefeater gin, Kahlua liqueur and Sauza tequila.

Future Mergers

A combination of Allied Domecq (the world's second largest drinks group by volume and third biggest by value) and Seagram (third by volume but second in value) is the obvious deal to forge a business capable of rivalling Diageo. Allied and Seagram are highly complementary in both geographical terms and there is little duplication in terms of their product portfolio strengths. However, talks between the two in the aftermath of the GrandMet/Guinness merger proved fruitless. The Canadian group has also talked to Bacardi but to no avail.

Seagram has since decided to go it alone in spirits and wine, and is using the cash generated by this business to help finance its growing entertainment activities. Allied has also met with other drinks groups in the past and has been approached by at least one potential bidder for its spirits and wine business, but with no positive outcome. In the absence of an alliance, Allied Domecq has been concentrating on improving its performance by refocusing on its core brands (see "A Spirited Performance by Allied Domecq" in Food & Drink Business, November 1998 issue) and streamlining its business.

Significant Changes

Despite the 'dynastic' barrier to a major deal to rival the GrandMet/Guinness merger, a number of significant changes have been taking place within the global spirits and wine industry since the start of the year. Allied Domecq has cleared the way for a possible deal with another drinks group by recently demerging its UK retailing interests. Bacardi has substantially strengthened its brands portfolio with the acquisition of the Dewar's Scotch whisky and the Bombay and Sapphire gin brands from Diageo for £1.15 billion. Diageo has also been selling other well known brands such as Cinzano vermouth, and Asbach and Metaxa brandies.

The major development within the Scotch whisky industry has been the acquisition of the publicly quoted Highland Distillers by Edrington, which is owned by a charitable trust, and private whisky distiller William Grant, producer of the Glenfiddich malt brand, in a deal worth more than £700 million (including taking on over £100 million of debt). Edrington, which already had a 27.9% stake in Highland, now owns 70% with Grant holding the balance. Highland, which produces The Famous Grouse and Macallan Scotch whisky brands, recently entered a global distribution joint venture with Remy Cointreau and Jim Beam Brands.

During the past few months, Bacardi and Pernod ricard have also both indicated a willingness to adapt their traditional ownership structures to meet the challenges of the evolving global marketplace.

Chip Reid, chief executive of Bacardi-Martini has suggested that the US drinks group would be prepared to adapt its traditional family owned shareholder base. "To exploit the right opportunities, we would consider tapping other sources, including the public equity markets," he says. However, he stresses that the company will always remain under the absolute control of the Bacardi family, and rules out any merger where this would be compromised. Instead, Bacardi is seeking to add new drinks brands to its portfolio as industry consolidation results in the sale of premium drinks brands in order to satisfy regulatory authorities - just as Diageo was forced to sell Dewar's and Bombay Sapphire.

Spotlight on Pernod Ricard

The spotlight has now fallen on Pernod Ricard, which is believed to be considering making a £4 billion bid for Allied Domecq, as a catalyst for industry consolidation. Pernod Ricard is the world's fifth largest spirits and wine producer, and in addition to the two famous anis brands, from which the company's name is derived, its portfolio includes Wild Turkey bourbon, Jameson Irish whiskey, Havana Club white rum and Jacob's Creek wine.

Pernod Ricard, which is under the control of the Pernod and Ricard families, is anxious to strengthen its international spirits and wine business. During the summer it established a £3 billion loan facility and is in the process of selling its Orangina soft drinks business to Coca-Cola to raise more funds. However, the FFr4.7 billion (£481 million) sale of Orangina has been delayed by the French competition authority, which has until December to reach a decision.

Chairman and chief executive Patrick Ricard recently indicated that the two controlling families would be willing to dilute their shareholdings to secure a suitable acquisition. "We are pragmatic - if we need to dilute to achieve a goal, we will," he says.

Other Bidders

But a move by Pernod Ricard for Allied Domecq is likely to precipitate bids from other global drinks groups which may be better placed to succeed, assuming they are willing to overcome dynastic reservations about conceding control.

Pernod Ricard is not considered to be the preferred partner for Allied Domecq. While a merger between the two would yield considerable cost savings in Europe, it would still lack true global penetration, with Asia-Pacific being a key region where distribution would remain weak.

Although the emerging market of Asia, South America and eastern Europe have been hit by economic turmoil, they still offer attractive long-term prospects as consumer affluence increases. Consequently, establishing a strong presence in these regions is considered essential for drinks groups seeking to sustain profits growth, as the more traditional markets of western Europe and North America are mature and offer only limited growth opportunities.

In terms of creating a global drinks business capable of rivalling Diageo in geographical coverage and brands strength, a link-up involving Allied Domecq and Seagram would be the most attractive, but a merger between Allied Domecq and either Bacardi or Brown-Forman would also produce a formidable combination. However, a bid for Allied Domecq could be Pernod Ricard's last chance to break into the 'big time', and this is likely to prove a powerful incentive for the French drinks group.

No Approaches

Speaking at the recent announcement of its annual results, new chief executive Philip Bowman stated that Allied Domecq has received no approaches from other drinks groups. His immediate priority is to concentrate on improving "the return on our existing assets and to enhance our position as the number two global spirits and wine company." This is likely to entail improving geographical distribution, as exemplified with Allied's recent agreement with Jinro in Korea, while strengthening the existing infrastructure and developing the group's international wine business.

The £2.75 billion disposal of its UK retail business to Punch Taverns has left Allied in a much better position to develop its spirits and wine business. Allied Domecq still has a restaurant business, including Dunkin' Donuts and Baskin-Robbins, which could also be sold off in the future to further sharpen group focus.

Focus on Key Brands

Like other global drinks groups, Allied Domecq has been concentrating market resources on its key brands. Benefiting from increased marketing spend (up 3%), Allied's core four brands - Ballantine's Scotch whisky, Beefeater gin, Kahlua liqueur and Sauza tequila - increased volume by 8% last year.

"There are significant opportunities for improving the performance of the business," Philip Bowman points out. "Management is focused on delivering these improvements. Achieving the objectives will strengthen the company's position and therefore the return to shareholders in any future industry consolidation."

Managing for Value

While the smaller drinks groups have been jockeying for position, the clear market leader, Diageo, has been streamlining its global spirits portfolio in line with its policy of 'managing for value'. Introduced by chief executive John McGrath following the GrandMet and Guinness merger, managing for value aims to maximise shareholder value by using economic profit criteria to shape business strategy.

"It's a process we use to help us develop strategies to build our brands looking some years ahead. We look at different strategic options, different levels of investment, different levels of sales support for our brands and we determine which route will generate the most value," explains John McGrath. "Managing for value aligns everything we do with the interests of our shareholders."

Indeed, Diageo now bench marks its performance, not just against rival drinks groups but against an elite band of the world's most successful consumer goods companies including Coca-Cola, Gillette, Philip Morris, Procter & Gamble, Colgate Palmolive, McDonald's and Unilever.

In its spirits business, Diageo is focusing on nine core brands globally, including Johnnie Walker whisky, Gordon's gin and Baileys cream liqueur, which generate about 70% of profits. These brands will receive the lion's share of the marketing budget although other brands with strong positions in regional or local markets, such as Dimple, will also be supported. This review of its drinks portfolio prompted Diageo to sell four European brands - Cinzano to Campari of Italy, Asbach and Metaxa to Bols of Holland, and Vecchia Romagna to Montenegro of Italy - to raise £255 million to add to the ££218 million from the sale of a number of Canadian whiskies and bourbons earlier this year. Of course, Diageo received £1.15 billion last year from the sale of Dewar's and Bombay Sapphire to Bacardi.

Diageo's strategy of focusing on its best selling global brands is starting to pay off with spirits sales and underlying profits up by 7% in the second half, despite the prevailing, adverse trading climate in key international markets.

At group level, Diageo has also recently disposed of its Pillsbury packaged food division for £150 million, and is selling its Cruzcampo Spanish brewing operation to Heineken for £426 million.

The World's Top Spirits Groups

CompanySales of Spirits (m cases)
Diageo106
Allied Domecq43
Seagram41
Bacardi33
Pernod Ricard26