Comment - Diageo's Mey Icki deal
Turkish delight for Diageo as group signs Mey Içki deal
Diageo's deal for Mey Içki is set to mark a turnaround for the drinks giant's fortunes in Turkey's promising spirits market.
Investors gave Diageo's US$2.1bn deal for Mey Içki a lukewarm response today (21 February), with the company's share price broadly flat. But, in buying Turkey's leading spirits producer, Diageo has paid a reasonable price - around 10 times Mey Içki EBITDA - for an enviable platform in a promising drinks market.
Calendar 2011 could turn out to be a new dawn for Diageo in Turkey. The group, alongside other international drinks firms, has long been forced to curtail operations in the country amid a tax dispute with customs officials. Diageo did not trade at all in Turkey in the first half of its current fiscal year, to the end of December 2010, and its local subsidiary only registered operating profits of GBP10m in the previous year.
However, Turkey's Government is pushing through legislation that would help to it to reach a cut-price settlement with drinks companies. This, in turn, would open up the market. It's safe to assume that the timing of Diageo's move on Mey Içki further emphasises its confidence in this area.
Resolving the tax dispute would allow Diageo to harness Mey Içki's sales and distribution platform to expand the likes of Johnnie Walker, J&B and Smirnoff in Turkey. Mey Içki's dominance in raki, Turkey's version of the aniseed-based spirit that abounds in the Mediterranean region, plays more of a supporting role to Diageo's ambitions for its international spirits brands.
Mey Içki's distribution network covers around 80% of licensed outlets in Turkey and includes 650 sales people. It has a 71% volume share of the country's spirits market, according to market research group Euromonitor.
Outside of raki, vodka is growing particularly strongly in the country. Sales have risen by an average 15% in value every year since 2005, twice as fast as annual volume sales growth, according to Mey Içki figures.
More generally, Turkey's GDP is forecast for strong single-digit growth and the country's population is young, with an average age of 28. "Consumer spending is forecast to be twice the rate of GDP growth," Diageo said today.
There remain, however, potential hazards. Euromonitor warned late last year that persistent excise tax increases on spirits could jeopardise growth. "Although Turkey is a developing in alcoholic drinks with great growth potential given the size of the country, constantly rising unit prices will discourage a high proportion of the population from drinking," it said.
Turkey's ruling Justice and Development Party (AKP) has repeatedly hiked alcohol sales tax since coming to power in 2002. In 2010, excise tax accounted for more than 50% of the cost of Mey Içki's mainstreamn Yeni Raki brand. In addition, alcohol consumption remains politically-sensitive in Turkey, where 99% of the population is Muslim.
Diageo said that, assuming it completes the Mey Içki deal as planned, it will "rationalise" the group's sales operations. We can expect, then, Diageo to cut costs on raki and seek to target young and affluent middle class consumers with international spirits. Demand from these consumers should outweigh regulatory pressures.
Diageo is toasting the release of The IWSR's Top 50 International Spirits Brands list, holding on to the top spot and boasting the largest grower in the top ten....
- Remy, dead cats and the power of China's new year
- Focus - Remy Cointreau's YTD Performance by Brand
- Will Lucas Bols' IPO Bring Much Needed Stability?
- Price drops would damage our DNA - Remy Cointreau
- A Dangerous World and the Threat to Beverages
- Moët Hennessy unveils first Travel Retail outlet
- Pernod unveils Jameson bottle for St Patrick's Day
- Maxxium UK head to depart for Edrington role
- Remy eases declines as China hints at recovery
- SABMiller beer volumes fall as China holds back Q3
- Global RTD/RTS insights - market forecasts, product innovation and consumer trends research
- Global vodka insights - market forecasts, product innovation and consumer trends research
- Diageo plc (DGE) - Financial and Strategic SWOT Analysis Review
- just-drinks on-trend: Craft beer - fortunes and future
- The Sugar Backlash and its Effects on Global Consumer Markets