Andy Morton

Review of the Year 2012 - Part V: Spirits

By | 21 December 2012

It has been a busy year for spirits

It has been a busy year for spirits

It was back to business for spirits companies in 2012 as the industry's recovery continued apace.

There was a lot to live up to, with volumes in the bell-weather US market climbing back in 2011 to pre-recessionary levels and sales rising by 4%. Some of the growth was credited to unique and high-end boutique spirits as consumers became more willing to spend on quality, a trend echoed around the world thanks in part to health concerns and a recovering economy. 

Global Tequila scored record highs as momentum in the category pushed it into new markets, while Scotch makers lined up major investments and new facilities to tap demand in the US and in Asia outside of the China stronghold.

Doing its best to boost global volumes was Diageo, which, as usual, was the main M&A driver. Deal of the year had to be the Johnnie Walker producer agreeing to take a majority stake in United Spirits.  The company's parent firm, UB Group, which has troubles over its debt-laden airline Kingfisher, agreed to give Diageo a 53.4% stake for US$2.05bn.

It was a coup for Diageo, which had been chasing the company and its huge India footprint for some years, though charismatic UB chairman Vijay Mallya was forced to defend the sale, saying he had not “sold the family silver”.

The deal is expected to close next year, but an immediate consequence is the future of Scotch producer Whyte & Mackay, which is expected to be sold off to allay competition fears. Gruppo Campari is one potential suitor

Another potential deal to watch is the acquisition of Beam by one of the bigger fishes in the spirits pond. Takeover talk has stalked the company since it was formed last year, but the chatter increased towards the end of this year, with Diageo and Suntory said to be in the reckoning. Beam, meanwhile, was silent, and some argued that a Diageo buyout of Beam is not as simple it might look.

Diageo paid $453.9m for the Ypióca cachaça brand in Brazil as it targeted middle class drinkers, but they didn't all land in the net for the company this year. This month Diageo said it was walking away from talks with Jose Cuervo. The breakdown in talks means the UK firm is not expected to renew a distribution deal with Cuervo, which expires in June. 

But even without the Tequila brand, Diageo is expected to boost sales in Latin America by 75% over the next five years.

It was a difficult year for Central European Distribution Corp (CEDC), which went with begging bowl in hand to Russian Standard and got a new chairman in return.

But against a backdrop of declining vodka volumes in Russia and pressure from the high and low ends of the sector, problems persisted, and CEDC finished the year inviting Russian Standard to complete a full takeover.

Pernod Ricard's year was overshadowed by the death of chairman and former CEO Patrick Ricard. At the age of 67, his death was a shock to those who knew him, but he leaves behind a company in rude health, despite ducking out of M&A for the time being.

The company picked up plaudits for its innovation and, perhaps cocking a snook at those who claim it lacks adventure, took full ownership of Pernod Ricard Korea Imperial. It also manoeuvred into position in its long-running chess game with Bacardi - which changed CEO this year - over the Havana Club trademark in the US, lining up new rum brand Havanista

Meanwhile, Beam snapped up Pinnacle vodka and Calico Jack rum as White Rock Distilleries completed a brand firesale and wound up operations. Beam also closed its acquisition of Ireland's Cooley Distillery at the start of the year.

Brown-Forman continued to make hay from its Jack Daniel's extension Tennessee Honey, which entered new markets. In a just-drinks interview, Brown-Forman's CEO said innovations such as Tennessee Honey came about because of a shrinking pool of available acquisitions. However, the company is keen to assure investors it's not about to launch a raft of new flavours on the back of Tennessee Honey.

The company had a quiet year in M&A, though one analyst highlighted its potential $3bn warchest ready and waiting for a whisk(e)y or vodka acquisition while another foresaw “moderate” activity to come.

Less quiet was SPI Group, which went through a distribution overhaul in a number of markets, including ending its Stolichnaya deal with William Grant & Sons in the US, while Remy Cointreau seemed pleased with its buyout of Scotch maker Bruichladdich for $90m.

Luxury demand in Asia continued to drive Cognac sales and a slowdown in China's economic growth did little to dent results.

Diageo branded the India market “incredibly important” even before its United Spirits buy, and highlighted the potential for Chinese baijiu, while in Thailand concerns were raised when the government slapped a tax hike on spirits, but not beer and wine. In Czech, batches of bootleg spirits killed an estimated 20 people and led to the government banning drinks with an abv of 20% and above. Wine sales subsequently soared in the country.

Finally, on the regulatory front, the European Union continued to push for a free-trade deal with India. But, most focus was on Scotland, where the Government recieved Royal Assent for a bill to introduce a minimum unit alcohol price. However, the industry, led by the Scotch Whisky Association, is fighting the measure in the courts at home and in Europe. Watch this space in 2013.

Expert analysis

Global Spirits

Global Spirits industry profile provides top-line qualitative and quantitative summary information including: market share, market size (value and volume 2006-10, and forecast to 2015). The profile also contains descriptions of the leading players including key financial metrics and analysis of competitive pressures within the market. Essential resource for top-line data and analysis covering the Global spirits market. Includes market size and segmentation data, textual and graphical analysis of market growth trends, leading companies and macroeconomic information.

Sectors: Spirits

Companies: Diageo, Ricard, Pernod, CEDC, Brown-Forman, Suntory, Campari, United Spirits, Bacardi, Johnnie Walker, UB Group, Whyte & Mackay, Gruppo Campari, Cooley, Stolichnaya, Havana Club, Remy, Cointreau, Jack Daniel’s, William Grant, Scotch Whisky Association

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