Comment - Spirits - Beam Global Would Help Diageo Breach the Chinese Wall
Diageo's results last week spelt out one strong message, as far as M&A nut Richard Woodard is concerned. Let's watch him clap his hands and jump up and down as he tells us what he heard.
It’s nice to know that someone out there is listening. Following my plea last month for the big fish of the drinks industry to stop mucking about and splash some cash on new acquisitions, the biggest shark of them all – Paul Walsh – showed his teeth at Diageo’s recent H1 results presentation.
Responding to questions about the company’s possible interest in acquiring all or some of Beam Global Spirits & Wine, the Diageo CEO declared: “We would look at everything.” Okay, as a call to arms, it’s not exactly Churchillian, but in the peculiarly buttoned-down language of corporate-dom, it’s the equivalent of him jumping up and down and shouting: “Yes! Yes! Yes, please!” before launching into an impromptu song-and-dance routine.
A little context might help. A canny operator like Walsh will have known that, for all the talk about growth in emerging markets and new alliances in countries like Vietnam, the City would be wagging an admonitory finger at the company’s lacklustre performance in Europe (not to mention China, but more of that later).
So, his comments were perhaps partly a diversionary tactic – which, er, didn’t work, by the way, because the company’s share price dropped 4% in the immediate aftermath of the announcement – but I don’t think that’s all there was to it.
Emerging market growth is almost taken for granted at the moment, alongside recovery to pre-recession levels in the Western hemisphere. Anything else for a company like Diageo is either a pleasant surprise or an unthinkable calamity, but what the business needs more than anything else at the moment is new news.
Acquiring a few gems from Beam Global – competition concerns will surely preclude anything more ambitious – would certainly qualify, although Walsh seemed as keen to talk about lower-profile deals in emerging markets last week.
That’s fair enough, because partnerships with the likes of Asia-Pacific Breweries, white spirits group Shui Jing Fang and the latest deal with Halico in Vietnam will all be vital to Diageo’s long-term success in the region.
But, beyond locally-produced brands and new products, Diageo needs a tempting bundle of Western labels to sell to aspirational and increasingly affluent locals. And, while it has plenty of trump cards in Scotch – Johnnie Walker, Windsor, Singleton, to name the most obvious – alongside Smirnoff and Baileys, there are gaps.
Most significantly, there are gaps in Cognac and Bourbon. Glaring holes, in fact, for a company of Diageo’s size and position, and when you look at the continuing growth for premium Cognac in China.
Hennessy would be the biggest weapon, both in China and in the US where it dominates, but if Bernard Arnault still really doesn’t want to sell Moët Hennessy, why wait any longer? Why not instead wait for Fortune Brands to spin off Beam Global, then put in a bid for brands including Courvoisier; perhaps the least lauded of the big four Cognac names, but one with plenty of untapped potential, especially in Asia.
It goes without saying that Jim Beam Bourbon would be another great addition and, again, Diageo’s international footprint would practically guarantee growth for the brand. Maker’s Mark would be the icing on the cake.
Not convinced? Then look a little closer at those first-half results and the reaction of the markets. Beyond the disappointing trends in Europe, there was a far bigger shock in the shape of a 3% decline in organic net sales in China.
That lagged Diageo’s main rivals, and not having a big Cognac brand has to be a big reason for that. Quite simply, at this stage of the market’s evolution, Diageo is far too reliant on Scotch in China.
Of course, there’s far more to the Asia-Pacific region than China: Diageo’s new tie-up with Halico in Vietnam in particular should reap rewards, and quickly. Here's a market with 80m consumers, 1m new legal age consumers joining their ranks every year, with affluence heading in one direction, but which is, to date, made up mostly of unbranded, domestic liquor.
That’s ripe territory for a company like Diageo, for Johnnie Walker and, in time, for Smirnoff, Baileys and all the other tempting brands in the Diageo family. But, imagine how much riper it would be with the likes of Courvoisier, Jim Beam and Maker’s Mark in its roster as well.
Maybe that would be enough to make a fickle City fall in love with Diageo all over again.
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