Preview of the Year - 2014 - Part III: Spirits
By Jeremy Cunnington and Spiros Malandrakis at Euromonitor International | 27 January 2014
The third part of this month's management briefing, in which Euromonitor considers the year ahead for the global drinks industry, sees Jeremy Cunnington and Spiros Malandrakis look at the spirits category in 2014.
Whiskies: Beating the dram
From verification schemes to ambitious and hefty investments in increasing production capacity, and from a partial breakaway from the age statement taboo to flavour sophistication experiments, overproof extensions, ‘cocktail-forward positioning’ and the rise of Japanese varietals, whiskies will continue holding the sceptre among the key spirits categories for the foreseeable future.
Tequila/mescal: Entering the dragon
With the gates of China now finally open following legislative amendments that allow 100% blue agave varietals to be legally sold in the country, super premium Tequilas will extend their seemingly unstoppable march beyond Western metropolitan centres. Patron will lead the race, capitalising on its established pioneering position within the luxury segment, but the sipping gospel will now also be preached by the likes of DeLeón and Don Julio, both owned by Diageo. On the other hand, lower-end varietals will continue flirting with flavour sophistication at the same time that agave shortages could exert extreme pressure on the segment’s profitability and medium-term viability. Mezcal has already made the first steps from esoteric oddity to mixology essential and will continue carving its own niche in mature Tequila markets.
Vodka: A flavour of saturation
Reiterating Euromonitor International’s earlier commentary and cautionary projections, the flavoured fad appears to be stalling in the key US market. With pre-prohibition classics monopolising the upmarket cocktail arena across the West, and additional rises planned for minimum prices in the already moribund Russian market, headwinds for this most ubiquitous of spirits are expected to be severe in the short term. Vodka’s unrivalled mixability will remain its most important line of defence, but additional avenues for clawing back growth potential from the inevitable peak of the flavoured segment will prove critical; a potential revisiting of proprietary-flavoured recipes, harking back to the category’s rich Eastern European heritage, could assist in overcoming the alcopop-like hangover and saccharine fatigue.
Liqueurs: Going where no spirit has gone before
Providing a platform for playful experimentation through flavoured extensions for historically conservative, conformist and traditionalist categories like Scotch whiskies and Tequila, liqueurs will cement their fledging momentum. Premium offerings will also increasingly make an impact, both as cocktail ingredients and exotic local specialities, capitalising on the millennial generation’s adventurous palates and its pursuit of unique narratives.
Cognac: The urgency of diversification
Major Cognac houses’ monolithic focus on luxury sales to China is already casting a long shadow on their deliriously optimistic projections suggesting infinite growth. While bespoke, personalised and limited editions will continue to target the country’s nouveau riche, a sea change is already underway following the Chinese politburo’s crackdown on lavish consumption. A shift in positioning away from bling associations and into craftsmanship-driven propositions will signal the coming of age for the premium end of the category in China. On the other hand, entry-level VS offerings will be utilised as a safety net, capturing aspirational middle-class drinkers that are looking for more affordable and casual hues of Westernisation. Across the more developed markets of the West, the focus will be on embracing mixology, deconstructing the category’s traditionalist connotations and expanding sales beyond the limitations of special occasions.
Rum: Dark spice
Above and beyond the sobering top line figures reeling under the weight of the declining Indian dark rum market, the category will retain its otherwise healthy trajectory, while driven by golden and aged varietals, alongside the solid spiced rum niche. The likes of Kraken and Sailor Jerry – both interestingly boasting their own unique narratives, designs and cult following that are proving as appealing to millenials as their signature spiced flavours – will spearhead rum’s Western mainstream aspirations. On the other hand, premiumisation will continue unabated as aged expressions will increasingly jostle with whiskies for a share of mind and wallet in metropolitan centres across developed and emerging nations alike.
Gin: From lane to palace
The gin renaissance is now in full swing. It involves hipster ambassadors and adventurous mixologists, a dollop of English eccentricity and American irreverence, a cornucopia of botanicals and a new generation of mixers. A unique, surreal and edgy brand narrative will continue to be the real protagonist, while micro-distilleries that continue to pop up across the UK (and beyond) will inevitably become the category’s flag bearers and evangelists. While volume growth will remain relatively subdued, the value growth story will finally establish the category as a mainstay of the premium proposition. Whispers of a lingering juniper crisis are probably exaggerated, but should be watched closely for the potential to derail the current boom, while diversification will be essential in escaping the potential for macroeconomic headwinds in the category’s limited number of core markets.
Other spirits: Niche appeal
From consolidation initiatives bringing local specialities into the limelight, to the nostalgia-inspired revisiting of categories once exiled to the furthest shelves of the drinks cabinet, 'other spirits' continue to hold huge potential. Euromonitor International’s previous assertions, highlighting baiju, cachaça, pisco, raki, and absinthe as niches to watch out for, have all been proven correct. Now, it is time for moonshine. Capitalising on the romanticised view of the Prohibition era still sweeping the US and the 'a priori' embrace of the localisation and micro-distilling trends by such once vilified products, along with a uniquely controversial narrative, premium versions of moonshine could finally enter the mainstream. Centerview Capital’s recent investment in Ole Smokey Tennessee Moonshine and Short Mountain Distillery’s recreation of a 100-year-old bootlegger’s recipe are merely the first signs of the trend to come.
The corporate outlook: Beam acquisition to dominate headlines
Until the middle of January, 2014 was expected to be a quiet time in terms of corporate activity. Suntory’s announcement that it had an offer accepted to buy Beam Inc has changed all that. The general consensus now is that, due to the very high price Suntory has bid, there is little chance of a counterbid. Euromonitor International differs from this view, believing that international companies, as well as local/regional companies in North America and Spain, will not want to miss out on this rare opportunity to boost their portfolios.
Any counterbid is likely to be led by Pernod Ricard. While its debts are higher than it would like, the French company would rather not miss out on Beam’s key brands, notably Jim Beam, Sauza and, if possible, Maker’s Mark. Pernod has continued to state that it wants to be the world’s leading spirits player. Without taking on Beam’s key brands, it has little chance of doing this. Leading a bid for Beam would go against what it has said about getting its debt level down, but, in this case, needs must.
Additionally, thanks to its effective paying down and refinancing of debt, as well as a lack of high rates of returns for banks from other sources, it should have the funds and thus room to launch a bid. The only problem it will have is that, by having to counter a high bid and move earlier than it would have liked, it may not have all the funds needed to keep all the brands it would like, such as Maker’s Mark.
Pernod would find support from a number of cash-rich companies for its bid, such as Diageo, Brown-Forman, William Grant, Rémy Cointreau and possibly Edrington. There are also less well-off companies, such as Campari and Bacardi, which might want to join in. Brands like Maker’s Mark, Courvoiser, Knob’s Creek and the Cooley Distillery, along with Beam’s Scotch portfolio, all offer appealing opportunities for the aforementioned companies.
At a more local level, Beam’s large, low-growth local brands, such as Larios, Dyc, Canadian Club, Fundador and Alberta Vodka, all offer great opportunities for interested companies to boost their local or regional presences. In Spain, companies such as Varma, Diego Zamora and La Martiniquaise might be interested, while in North America/Mexico, companies such as Sazerac, Constellation Brands, McCormick and Heaven Hill could all be interested in the brands mentioned above, as well as others.
These companies could also see if Pernod might be interested in selling some of its lower-priority brands, such as Seagram’s Gin, as a way of boosting Pernod’s bid.
What now for Whyte & Mackay?
Such manoeuvrings mean that the one big expected deal of 2014, the sell-off of Whyte & Mackay by Diageo, has been put in the shade. While Diageo is hoping to keep some of the assets, it seems as though the company is now prepared to sell off all of it, as that is what will fetch the highest price.
There are likely to be a number of contenders for whatever is sold off. In an increasingly consolidating industry, this will be the last opportunity to gain a major Scotch asset. In one way, this makes Suntory’s rumoured bid for the company not a surprise, except in terms of affordability.
Chief contenders for acquiring Whyte & Mackay are likely to be those companies that are already present in Scotch, but lack production scale and a grain whisky distillery. Despite the possibility of gaining Beam’s Scotch assets, Suntory would still be weak in the category. Yet, as with Beam, it is unlikely to get a free ride, as companies such as Bacardi, Campari, La Martiniquaise and (more of an outsider) Thai Beverage, could benefit from the extra capacity.
Big players may make small additions
If Pernod decides not to make a bid for Beam, then it could look for smaller assets to boost its presence in North America. The company has talked about the need to do this and could boost its presence in super-premium vodka, spiced rum (such as The Kraken) and small batch Bourbon/other US whiskey.
Diageo will also be looking to expand its Tequila operations. Its recent move with Tequila León will do little to fill the volume gap left after the end of the Grupo Cuervo relationship and so it will be looking for a smaller Tequila player, such as Tequila Centinela, which it can build up using its distribution strength.
Whatever happens now, thanks to Suntory, 2014 looks likely to be an exciting year for spirits companies, which is a nice change from the recent past.
Companies: Diageo, Brown-Forman, Pernod Ricard, Constellation Brands, Suntory, Cointreau, Campari, Bacardi Ltd, The Edrington Group, William Grant & Sons, Thai Beverage, Whyte and Mackay, Heaven Hill Distilleries, Cooley Distillery, Beam Global Spirits & Wine, Sazerac Co
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