The PIGS Markets - Part I: Iberia (Spain & Portugal)
Following on from his introduction to the woes of the PIGS markets, the first part of this month's management briefing sees Richard Woodard focus more sharply on Spain and Portugal.
The beginning of April brought the news that almost every economist in Europe had predicted: Portugal was struggling to deal with its spiralling levels of debt and would need a bailout – similar to those already seen in Greece and Ireland – to avoid defaulting.
At the time of writing, the expected EUR80bn (US$116bn) injection was expected to be finalised by the European Union by mid-May, following a similar formula to that seen in Ireland: one-third funded by the EU, one-third by the eurozone and one-third by the International Monetary Fund (IMF).
While Greece spent beyond its means and Ireland was the victim of a property bubble, Portugal has suffered disastrously weak economic growth and low levels of productivity, which in turn have led to lower tax revenues to fund government spending.
And, when Jose Socrates’ government failed to get its tough package of austerity measures passed early in 2011, the country was plunged into a state of political limbo to match its economic woes.
Portugal’s troubles are worrying enough in themselves, but they are placed into an even more concerning light by the risk of infection with neighbouring Spain. Spanish banks are highly active in Portugal, and the constant subtext to Portugal’s debt crisis has been second-guessing the likely knock-on effects on Spain.
Any suggestion that Spain’s finance sector could suffer troubles similar to those experienced in Portugal would have much more serious and widespread economic effects for the eurozone in particular and Europe in general.
But, to date, Spain has continually insisted that its deficit is under control, despite concerns over the country’s banking sector and property crisis.
At the end of March, Prime Minister Jose Rodriguez Zapatero announced new measures to limit government spending, cracking down on tax evasion – following similar moves to cut state spending and to reform the pension and labour market. Meanwhile, finance minister Elena Salgado reiterated that the country would not need a bailout from the EU or IMF.
The drinks market
While Portugal remains a less significant destination for major drinks companies, Spain’s spirits sector in particular has been the envy of other western European markets for the past decade or two, with a buoyant market for Scotch whisky and then rum, supported by strong demand for gin and local spirits.
But the sector has been savaged in the past two years thanks to the economic crisis, with Spanish spirits sales falling 12% and 10% in 2009 and 2010 respectively, wiping nearly EUR2bn off the total value of the market in the process, according to trade body FEBE.
That worrying decline led to industry criticism of government increases in spirits duties, amid claims that spirits contribute 75% of tax earnings for alcoholic drinks, compared to 23% for beer and 2% for wine.
Meanwhile, Scotch whisky, already the victim of sales declines at the expense of the fast-growing rum sector, was hit even harder by the downturn: according to Scotch Whisky Association figures, sales fell 15% by value to GBP268m in 2010, and volumes dropped 14%.
Nobody has escaped the impact of the decline, and companies have been left clinging to increases in market share as some crumbs of comfort amid the meltdown.
“Economic conditions in Spain have certainly been very tough for everyone, but Chivas Brothers has actually grown market share for Ballantine’s against its key competitors, so we are happy with that,” says Robin Johnston, regional director, Africa and Europe at Chivas Brothers.
“Beefeater has shown itself to be a remarkably resilient brand, having weathered the storm very well. Chivas Brothers is less exposed to the economy in Portugal, and so we have continued to grow our business well throughout this period.”
However, as parent company Pernod Ricard noted in its most recent set of results (2010/11 H1), high-end blended Scotch Chivas Regal suffered a “marked decline” in Spain.
For Diageo, which does not break down its “Iberia” business between Spain and Portugal, sales declines broadly reflected the market, with revenues falling 14% and volumes down 13%.
“The business was impacted by further destocking, which accounted for over one-third of the volume decline, as customers experienced reduced financial liquidity and further declines in consumer confidence impacted demand,” reports a Diageo spokesperson.
J&B suffered a volume decline of 10% in the last six months of 2010, while destocking impacted Johnnie Walker, whose revenues slumped 12% – despite market share gains for both Red Label and Black Label, as well as for Diageo’s Scotch business in general in the off-trade.
Rum in general experienced slow growth, but Diageo’s premium Cacique brand from Venezuela was hit by a 26% revenue collapse over the same period, with the company blaming growth shifting to lower-cost private label and value brands.
But, despite a general decline in gin, premium and imported brands showed growth, with Tanqueray experiencing double-digit sales and revenue growth, losing one percentage point of price/mix in the process as sales shifted to the promotion-heavy retail sector.
Once again, Diageo reduced marketing spend in line with net sales, focusing the company’s remaining spend on J&B’s new kite surfing sponsorship and the national launch of Johnnie Walker’s 'Walk with Giants' campaign.
It’s a similar picture at the Scotch-led Edrington Group, which warned in September last year that the outlook for Spain remained “fragile against a backdrop of high unemployment and substantial government debt”.
However, the company was swift to add that its Scotch brands had maintained their market share, with Brugal rum increasing sales in what is its leading export market.
Even if Spain can avoid the same fate as its fellow PIGS markets and resist the temptation of a bailout, longer-term questions remain about the market, where retail is assuming a greater significance as consumers cut their spending in bars and restaurants.
“Three or four years ago, Spain was almost a 70% on-trade market,” points out Johnston. “Now this is closer to 60% as consumers drink more at home or outside. This has meant a growth in importance of the off-trade market.”
And he thinks some changes could be here to stay: “Probably the biggest effect [of the downturn] is the move to off-trade in Spain and the change in consumer behaviour: it is likely that even after a recovery much of that new behaviour will remain.”
To read the introduction to this management briefing, click here.
For the second part, click here.
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