Research in Focus - Emerging Markets Not Always the Answer
While there has been huge focus in the spirits sector on emerging markets in recent years, a new report from Euromonitor International suggests prioritising development in these up-and-coming regions will not be the optimal growth strategy for all companies.
Such has been the emphasis on emerging markets in the spirits sector in recent years that to suggest developing a presence in such markets is not a sine qua non appears almost heretical. It certainly runs counter to received wisdom.
However, a new report from Euromonitor International has said precisely that. Basing its findings on the comparative recent performance of major spirits companies, Euromonitor International's Passport report - Growth for International Spirits Companies in Difficult Times - suggests that geographic and spirits category breadth have been the key determinants for growth among major international spirits groups in recent years, and not necessarily strength in emerging markets.
"Those companies that have performed strongest recently have been those which have looked to have a broad geographic and category spread," the report states. "Emerging market presence is not necessarily key. Geographic breadth is more important than whether the market is a mature or emerging one. The key element is the remaining potential for growth in a particular market."
The report states that "many of the fastest-growing markets are emerging ones", and it is therefore important to be in these markets. However, the level of presence is dependent on the size of the company. Larger companies may require a greater presence in emerging markets as they may have exploited more of their growth potential in mature markets. However, for smaller companies, their presence in emerging markets "can and should be more selective".
The "vital factor", the report continues, is not whether a company has a strong presence in an emerging market, but whether those countries in which it is well placed offer sufficient potential for growth.
The examples the report cites are illuminating. For instance, The Edrington Group derives more than 50% of its volume sales from emerging economies. However, the report points out that, in 2011, Edrington continued to show relatively weak growth overall. Most of the company's emerging market volumes come from Brugal rum in the Dominican Republic, a market that actually offers little growth potential. By contrast, William Grant & Sons, a similarly-sized company to Edrington, still derives the majority of its volumes from mature markets and has seen continuing "healthy growth".
Even the largest spirits companies can still grow in mature markets, the report suggests, citing Diageo's "relatively weak" position in France and Germany, and Pernod Ricard's growth potential in the US.
The report concludes that there remains "plenty of room for growth in mature markets for all international companies, large or small", but adds that the potential is greater for the smaller international companies. "They are likely to have greater headroom in core categories, as well as room to move into new categories and countries," Euromonitor says.
According to the report, the major spirits companies have increased their dominance of the global spirits market, with the share of the market controlled by the top ten companies rising to 26% in 2011. Moreover, Diageo and Pernod are pulling further away from the pack.
However, the report points out that the growth performance of the world's major spirits producers has varied significantly.
"International companies had varied performances in 2011, both organically and inorganically," the report states. "Those companies that have performed most strongly organically have done so through diversifying their category and geographic spread, not just in the past two or three years but over a longer period. This has driven the strong growth of companies such as Pernod Ricard, Campari, William Grant and LVMH."
It is interesting to note that, some years back, there was a trend among the major spirits companies to focus heavily on priority brands and key categories. In today's market, there appears to be renewed scope for broadening brand portfolios.
Indeed, according to Euromonitor International's analysis, the companies which have performed weakly organically have remained "overly focused on core brands and core markets" that may have served them well in the past, but are now suffering because they have limited scope for growth in what are mature markets. "This has contributed to the sluggish organic growth of companies such as Diageo and Bacardi," the report states. "However, Diageo has countered this with a number of acquisitions, such as that of Mey Içki in 2011."
The report posits that many of the major international spirits groups would benefit from broadening their brand portfolios. Suggesting that Beam Inc is now vulnerable to takeover, it states that the acquisition of certain Beam brands would be a fruitful strategy for a number of spirits players.
The US group's key brands, Jim Beam and Sauza Tequila, would be of considerable value to Pernod. "These brands would complement its portfolio of international spirits and greatly enhance its position in the US and Australia, where it is relatively weak and there is potential for good growth."
Meanwhile, Bacardi "should look to acquire the Teacher’s blended Scotch brand, which is strong in both India and Brazil". Courvoisier Cognac could be a target brand for Brown-Forman and William Grant, while the latter company would also benefit from moving for Beam's small-batch Bourbon brand, Knob Creek. Both Rémy Cointreau and Edrington would also benefit from broadening their portfolios, the report states.
While at first glance the report does appear to challenge what has become a virtual orthodoxy around the prioritisation of emerging markets, its message is more nuanced. For some companies, emerging markets are clearly a key strategic priority but, in spite of the excitement around these markets and their undoubted growth potential, they will not be the most important priority for every company in every case. And in a way, it is quite refreshing that mature markets, still reeling from the effects of the global recession, are - for a change - not being viewed as moribund or at worst exhausted.
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