Research - Asia Pacific giants expand horizons
The Asia Pacific region is home to some of the world's largest spirits producers though many of them are focused predominantly on their domestic markets. Others, however, are expanding their international horizons. Jeremy Cunnington of Euromonitor International looks at three of the region's most prominent spirits producers, Suntory, United Spirits (UB Group) and Thai Beverage.
With Asia Pacific accounting for around 48% of global spirits volume sales, it is no surprise to find nine of the world's top 20 spirits companies by volume based in the region.
However, these regional giants are invariably focused on a single, domestic market, giving them dominance but leaving them vulnerable to that market's poor performance. Also, many have little ambition outside their local markets. Some of these companies are less reliant on spirits as they have interests in other sectors such as beer and non-alcoholic drinks, mainly in their own countries.
With the exception of the Japanese companies, the Asia Pacific giants are large in volume terms but financially relatively small, due to their brands being low-margin local products.
But among the majors of the Asia Pacific region are three giants, Suntory, United Spirits (UB Group) and Thai Beverage, all of which to varying degrees have been looking to broaden their international horizons.
Of the three, Suntory is the company going through the most international expansion. Its Midori and other liqueur brands are sold in a number of countries, such as the US, Australia and Taiwan, and since 1994 it has owned Scotch whisky producer Morrison Bowmore. It also has its own distribution companies in Australia and Thailand, and owns 20% of San Miguel Corp., the parent company of Ginebra San Miguel.
The moves Suntory has made in the spirits market have tended to be small, as witnessed by its acquisition of a 50% stake in Austrian producer Mozart Distillerie in June, which also seemed to suggest its foreign expansion is focused on liqueurs. This followed the formation of a joint venture company with spirits marketer Blavod Extreme Spirits in 2005 called Diamante Spirits, which was created with the aim of launching new spirits brands in Western markets. However, it has so far only undertaken one major launch, and reported losses in fiscal 2007 of GBP0.3m.
The diverse nature of Suntory's portfolio - it is involved in beer, soft drinks as well as food - combined with high levels of debt (its long-term debt to equity ratio was still above 100% in 2006), means the company has limited resources. Its acquisition strategy therefore seems to be built on small strategic acquisitions across a variety of sectors.
UB Group's spirits division, United Spirits, has been by far the boldest of the three companies, with its recent GBP595m (US$1.2bn) acquisition of the world's ninth biggest branded Scotch producer, Whyte & Mackay. This was followed by the much smaller acquisition of US vodka producer Liquidity and its Pinky brand for $3m. Unlike the domestic markets of the other two companies, the Indian spirits market is booming and is expected to continue to do so with more than a 7% CAGR increase expected between 2007 and 2012.
The Whyte & Mackay acquisition was undertaken with the Indian domestic market in mind as much as for reasons of international ambition. It secures the company a supply of Scotch both for its premium Indian variants as well as offering blended Scotch brands to exploit the expected dynamic growth in India. But the acquisition should also allow UB to increase its international presence, not just in the markets in which Whyte & Mackay brands are already present, but also in fast-growing blended Scotch markets such as India and Russia. UB Group has also been looking to expand its distribution outside India with reciprocal distribution agreements, such as the one with Roust in Russia.
United Spirits is in a strong financial position, benefiting from being part of a conglomerate. This means that the debt used to buy Whyte & Mackay was paid off by early 2008. It also dominates a dynamically growing and increasingly premium market. Finally, it could raise a sizeable amount of money by selling a stake in United Spirits to a foreign multinational, something that has been rumoured in recent times.
As with the other players, spirits is only part of the Thai Beverage portfolio. The company was the leading beer producer in Thailand in 2006 as well as being the dominant spirits producer and has started to make tentative steps in the soft drinks market. Thai Beverage's move to broaden its horizons is more to do with diversifying away from its domestic market. 2007 was a bad year for the Thai spirits market, which suffered due to a combination of poor economic performance and floods in early 2007. This decline is ongoing; Euromonitor International expects the Thai spirits market to drop by 3m 9-litre cases between 2007 and 2012.
The company is looking to expand in spirits and also beer. Its main focus is in the Asia Pacific region, in countries such as Singapore and Malaysia, but it is also targeting India and China. It is also looking to expand in Western markets. In 2006 it set up a wholly-owned subsidiary, International Beverage Holdings Limited, which has operations in Singapore, Malaysia and Cambodia and has established sales offices in the US and the UK. It also bought the small Scotch whisky distillery, Inver House, in 2006. Having failed to acquire the Chinese spirits company, Anhui Gujing Distillery, in 2007, the company launched its Mekhong spirits range in the US, the UK and other European markets in the first part of 2008.
With regard to acquisitions, UB Group is in the strongest position, having made the greater moves to expand beyond its main market and core portfolio of brands. Being part of such a large conglomerate, and present in a major market which is expected to continue to perform well, gives the company huge potential to expand through acquisition.
Thai Beverage, with a 2007 turnover in excess of US$3.3bn and a very low debt to equity ratio (45% in 2007), has the potential to make a sizeable spirits acquisition or two, although that potential may be lessened by the fact that it is looking to expand in beer as well. Suntory looks to be in the weakest position of the three regarding capacity for acquisitive expansion, both in terms of focus and capital resources.
Even UB and Thai Beverage would struggle to make major acquisitions of Western companies or brands, especially in the short to medium term. Perhaps the best option is to move into the fragmented 405m-case local Chinese spirits market, which is expected to grow by over 93m cases between 2007 and 2012, and which also offers opportunity for higher margins due to the expected strong growth of premium products.
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