Preview of the Year - 2011 – Part II: Spirits
By Jeremy Cunnington and Spiros Malandrakis at Euromonitor International | 13 January 2011
Euromonitor International considers the year ahead
Part two of just-drinks' first management briefing of 2011 sees Euromonitor International shine the spotlight on the spirits sector. What does the year hold for the stronger stuff?
Key trends - Heritage and authenticity fuel high spirits
Spirits will increasingly utilise claims supporting their quality propositions as ‘bling’ in 2011, and conspicuous consumption will become an obsolete take on premiumisation, at least in mature markets. Meanwhile, historic references, signature drinks and a focus on convincing brand narratives will also influence choices in emerging markets emulating Western drinking habits. Evocative bottle designs, and promotional campaigns explicitly referencing the founder’s name and date of launch will spearhead the trend.
Austerity cocktails: The RTD proposition
The latest incarnation of the eternally evolving RTD/high-strength premixes category is intricately linked to the fortunes of the spirits industry by default. Using established spirits brands as its base and escaping the fluorescent, binge-inducing associations of the past, the category made giant leaps during 2010 and is expected to surf the post-recessionary clutter with ease. With on-trade sales still suffering, cocooning becoming a necessity rather than a lifestyle choice in a large number of Western markets and consistently improving ingredient mixes available, RTDs/high-strength premixes are set to have an ever wider impact. The much-maligned category will allow spirits companies to continue to enjoy high profit margins and rising shelf visibility while the avalanche of new product launches will retain consumer interest. Not forgetting that a number of major markets are yet to be convinced by the RTD proposition, recession cocktails or austerity cocktails, the segment can - and will – play an active role in providing one of the industry’s answers to the zeitgeist.
Other spirits have long been constrained to the sidelines of the alcoholic drinks industry and the nature of the consumption shifts instigated by the still volatile socio-economic environment will bring them to the forefront once more. Domestic specialities will continue to provide a nostalgic twist to tradition in their attempt to reposition themselves while expanding their audiences. Premium lines and economy propositions will be the vehicles for the category’s next push and a stepping stone in key players’ attempts to enter respective lucrative markets. The skyrocketing performance of tsipouro in Greece at the same time as virtually all other major spirits categories are falling off a cliff makes it a poster child of the massive untapped potential still held by the segment.
Irish whiskey and Japanese whisky breaking the mould
While Scotch whisky will return to its healthy growth trajectory following the sobering performance of 2010, it is Irish and Japanese varietals which will establish themselves as the star performers over the short- to medium-term. At the same time as the US market is increasingly embracing casual, entry-level Irish offerings, Japanese consumers will acknowledge the pull of nostalgia and return to their roots. However, developments will truly be interesting when both segments start to expand beyond their core markets, a move that is more likely over the medium- rather than the short-term.
Companies to watch
Fortune Brands’ announcement that it plans to spin/sell off its home and securities and golf divisions to focus on its spirits operations is likely to lead to significant acquisition activity. The publicly-listed spirits operation will gain a large amount of money from its spin- or sell-offs, giving it extra funds and thus potential to expand. Yet, shorn of its non-drinks operations, it will be a tempting target for the larger producers. Fortune Brands may have money to spend to enhance its category and geographical presence but it will lack the time and protection of private ownership to carry out these changes.
Any such acquisition of Beam Global is unlikely to happen before 2012 due to the time it will probably take for corporate restructuring to be undertaken. However, it will have a knock-on effect in 2011 by restricting the two most likely lead bidders for Beam Global, Bacardi and Pernod Ricard, from making any major moves. In addition, Pernod has a self-imposed acquisition ban in place until 2012. The same is also likely to apply to other companies, such as Diageo, Brown-Forman and Campari, who could be looking to pick up some choice brands that the lead bidders cannot take.
The biggest likely deal in 2011 will be the sale of Turkey’s dominant spirits producer Mey Icki from its private equity owners TPG. The acquisition would put any international company in a prime position to exploit the gradual lowering of duties on imported spirits in Turkey, starting in 2012 and finishing in 2018. Diageo has apparently been interested and, with Bacardi and Pernod likely to be preparing for a Beam Global bid, it would have a good chance and would be a much-needed boost to its emerging market presence. If Diageo does not go for it, the most likely acquirer will be another private equity company.
Diageo’s potential acquisition of a majority stake in Moët Hennessy is likely to remain just that; potential. While LVMH is looking to acquire the Hermès fashion house, the deal is likely to take some time, with the current family owners determined to resist. The longer such a deal takes, the less chance there is of LVMH needing, let alone wanting, to sell off what in the past has been its most profitable division as it could gain sufficient funds with its low debts and profits from its current operations, without selling off the drinks division.
On a smaller scale, Bacardi could at long last be doing something about its over-reliance on the mature Western European and North American markets by making a move either in terms of a joint venture with, or an acquisition of, an Indian whiskey producer. India has become an increasingly important market for the company and such a deal or acquisition would give it a strong route to market for its international brands.
As for other deals from smaller companies, with Rémy Cointreau looking to sell off its Champagne division it will have funds to invest in its spirits portfolio. The best strategic fit would be a single malt Scotch brand, which would fit nicely with the Rémy Martin Cognac brand in Asia.
More of an outside possibility for acquisition activity would be Mast-Jägermeister. The company’s eponymous bitters brand has seen volume growth slow, especially in its core US market. Thus, it would make sense for the firm to acquire another brand or possibly a small company to give it diversity and be able to use the strength of the Jägermeister brand to help drive growth of any additional brand.
Spirits brand to watch
One brand worth keeping an eye on is Campari’s Aperol bitters brand. Having broken the 1m nine-litre case mark in 2006, the brand could break the 2m-case mark in 2010, and if it does not do it then, it will in 2011. This performance is all the more remarkable due to the stagnant nature of Aperol’s core markets - Italy, Germany and Austria. Growth has been driven by promoting the Aperol Spritz cocktail (Aperol, Prosecco and soda water) which has caught consumers’ imagination. It has also been backed by the company’s strong distribution in these markets. With no sign of growth slowing in these core markets and planned expansion into markets such as France, Spain and Croatia, and further down the line the US, the brand’s dynamic growth looks set to continue in 2011 and beyond.
France's competition authority is set to investigate the proposed takeover of Quartier Français Spiritueux (QFS) by COFEPP-owned French spirits group La Martiniquaise....
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