The spirits category in 2016 - just-drinks' Review of the Year, Part II
2016 - The year of Millennials and moderation for the spirits category
With 2016 drawing to a close, just-drinks looks back at the stories that have made the headlines across the global drinks industry. Here, deputy editor Lucy Britner picks out the highs and lows for the spirits category.
This year's M&A
While the beer category was lining up one of the largest deals in corporate history, the spirits world has enjoyed its fair share of M&A - albeit on a smaller scale. The year kicked off with The Sazerac Co agreeing to purchase Southern Comfort and Tuaca from Brown-Forman, in a deal worth US$544m. For Brown-Forman, the divestment marked a streamlining of its portfolio as it nailed its colours to whiskey. For New Orleans-based Sazerac, it marked a homecoming for Southern Comfort.
Next out of the blocks was Gruppo Campari and its move for Grand Marnier owner Marnier-Lapostolle. By the end of June, the $761m deal had closed, breaking Campari's Italian shackles and moving the US into position as the company's largest individual market.
In late April, Brown-Forman signalled its intention to re-enter the single malt Scotch whisky segment through the purchase of The BenRiach Distillery Co. The company had sold its 10% stake in Glenmorangie back in 2004. The move added more fuel to the premium whisk(e)y fire.
Sazerac appeared on the acquisition trail once again in May, as it was revealed the company planned to acquire Pernod Ricard's Paddy Irish whiskey brand. The deal closed just a few weeks later. Then, in September, the company snapped up UK-based spirits bottler The Last Drop Distillers. Sazerac rounded off the month with the acquisition of the Fris Vodka brand, again from Pernod, for an undisclosed sum.
Lucas Bols and Remy Cointreau were next to do a deal, as Remy lined up the divestment of its Passoã liqueur to Bols. The two companies initially set up a joint-venture to handle the brand's global activities. Remy later entered exclusive talks to buy French distillery Domaine des Hautes Glaces. This wouldn't be the last time the company got its wallet out in 2016.
Towards the end of the year, there was a flurry of activity in American whiskey. First, Pernod was linked to a move for Utah-based High West Distillery. The French company later lost out to Constellation Brands, which secured High West for US$160m. Next up was Remy, who snapped up Seattle's Westland Distillery for an undisclosed fee. Meanwhile, Pernod, which offloaded its Domecq brandies and wines at the start of December, finally made its American whiskey move with an agreement to purchase a majority share in West Virginia-based Smooth Ambler Spirits Co. Be prepared for American whiskey to enjoy a bumper 2017, thanks to the increased marketing and distribution might of the global drinks groups.
The American dream
As tumult and unpredictability continue to batter the emerging markets, the US retained its status as the land of hope for just about every major drinks company. Accounting for around 50% of Diageo's total profits, the country is crucial to the group, although CEO Ivan Menezes told just-drinks that this reliance is less of a concern and more of a benefit. In its full-year 2015 results, the Americas shone for Campari, with big gains coming from the US. The financial world also hailed the country as an ongoing growth opportunity. In March, notes following the Impact Spirits conference said the outlook for the US in 2016 was more positive, with industry growth expected to be 4% to 5%. Then, in April, Pernod became the latest company to praise the US, as a strong performance in the country drove YTD sales growth.
As the major players flocked to the States to reap their rewards, it was inevitable that there would be increased competition: Following confident remarks from major Cognac houses on the US, it was clear that the fight was on to rule to roost. Cognac wasn't the only category in the American consumer's glass - IWSR figures released in June highlighted the past decade's roaring spirits growth in the the country, with Bourbon adding 56% in volumes and Irish whiskey jumping by 409%. Bernstein analyst Trevor Stirling offered some insight into US spirits success - hailing Millennials, female consumers and the "burgeoning of the Baby-Boomers who over-index on spirits". The Beverage Information Group added "experimentation" to that list, as its research found the consumer's willingness to try new things was propelling spirits sales in the market.
Global Travel Retail in trouble?
Once a shop window for limited editions, special packs and experiential marketing to a captive audience, 2016 saw a cloud appear over the Global Travel Retail channel. At the start of the year, GTR expert Joe Bates considered whether the bubble had burst for the channel. Hope sprang somewhat, however, thanks to reports of rising passenger numbers and more airports. This optimism was fuelled later in the year by Bacardi, as its Travel Retail MD asserted that premium rum was "yet to maximise its potential" in the segment. By August, though, figures released by The IWSR showed the channel had become a struggle for the spirits category as volumes fell. In September, Pernod CFO Gilles Bogaert forecast another difficult year, calling Travel Retail one of the company's most volatile units. In Cannes, at the sector's annual show, TFWA president Erik Juul-Mortensen told us that new European Union regulations on nutritional labelling could put an end to alcohol exclusives in GTR. On his return from the exhibition, news & insights editor Andy Morton saw the writing was on the wall, accusing those predicting a healthy future for GTR of having their heads in the clouds.
Following a turbulent few years thanks to China's anti-extravagance laws, 2016 saw a return to form for Cognac. Remy started strong, with Cognac sales helping to boost its figures - but the Remy Martin-owner's CFO, Luca Marotta, warned that 2016 "wouldn't be a cheap year" for the segment, as renewed interest would push up the price of eau de vie. Meanwhile, in China, a new generation of Cognac drinkers emerged - keen to actually drink the liquid (rather than gift it) - which led producers to look below the XO level to more widely-affordable expressions. Indeed, in April, LVMH's CEO, Jean-Jacques Guiony, gave the first official confirmation of a Chinese New Year rebound for Cognac, revealing at least mid single-digit growth during the critical selling period. Later in the year, LVMH confirmed that a strong performance in the US by its Hennessy brand had bolstered sales and profits at the company, for the first half of the year.
2016 will go down as a seminal year for Pernod's Absolut vodka brand. At the start of 2016, the company confirmed it was to discontinue the Absolut Amber expression and replace it with Oak by Absolut. Two months later, white spirits columnist Richard Woodard asked if the brand was dying in the US - Absolut may be "the wrong brand in the wrong place at the wrong time and the wrong price", he argued. Pernod followed the argument with news that the brand's sales were improving, thanks to a stronger focus on Absolut's original flavour expression. By June, analysts hailed a US turnaround for the brand, saying it was helping Pernod return to robust sales growth. Their praise was echoed after the company's full-year results, with analysts predicting growth for the group in fiscal-2017, "driven by the new branding expected to emphasise the quality and heritage of the product". The notion was reinforced by Pernod's US head, Paul Duffy, in December, who said that Absolut's "fantastic credentials" would be mobilised to attract Millennial consumers in the country.
Move over Millennials
Speaking of last year's buzzword, 2016 saw a marked shift in the industry's approach to the consumer group. While our year started with this comment piece from an actual Millennial as well as our very own management briefing on this most hallowed demographic group, it didn't end in the same vein. A report from Tetra Pak in October made a compelling case for food and beverage companies to review their strategy for attracting consumers aged 60 and over, leading our consumer trends columnist, Ben Cooper, to ask if Millennial-mania has drowned out other consumers. Then, in December, Diageo's North America president, Deirdre Mahlan, said that Smirnoff had been too focused on Millennials, asserting that future work would centre on "recruiting and re-recruiting multicultural consumers as well as Generation X and Baby Boomers".
Last year's health & wellness trend continued apace in 2016, and the spirits industry began to look at how to market moderation. By June, Diageo had unveiled labelling of per-serving nutritional facts on its Johnnie Walker Red Label packs. Then, shortly afterwards, the group made its first play in the world of non-alcoholic spirit products, with the acquisition of a minority stake in Seedlip through its incubator fund Distill Ventures. Later in the year, Diageo's Australian unit rolled out a range of healthier RTDs in the country. The 3.5% abv products had been designed to exploit the growing trend towards moderation. While moderation and health & wellness are trends that will continue into 2017, analysts at Mintel warned that functional alcoholic drinks were proving a "very hard sell". Striking the balance between indulgence and health will be on the 'to-do' list of many brand managers next year.
The world of craft moved well beyond small start-ups this year. Several major players cottoned on to the popularity of craft credentials in what has been a stellar year for big spirits companies who can 'do' craft. In April, Brown-Forman launched its first new Bourbon brand in 20 years. While Brown-Forman might not be fit the definition of a craft producer, the Coopers' Craft brand certainly has all the relevant cues - provenance, heritage and craftsmanship. Bacardi followed in May, as it announced plans to remove its own name from the Oakheart rum brand. "Oakheart has its own strong identity and proposition built off of learnings from the overtly masculine craft spirit world, along with a robust campaign celebrating brotherhood and camaraderie," the firm said. "It can stand on its own." Next up was Pernod's Jameson with several new whiskeys - emphasising the "people behind the craft".
Not everyone is sold on the idea of large companies creating craft brands, though. Analyst Trevor Stirling still thinks it is a better idea to buy them.
It's fair to say that 2016 was not the best year for Stock Spirits. In March, the firm reported a 46% drop in net profits for 2015. Shortly after the announcement, its largest shareholder, Western Gate Private Investments, called for the company to remove its CEO. Then, a second shareholder added its weight to the demand. Just four days later, Chris Heath stepped down. In August, the company used its H1 results announcement to name a new full-time CEO as things looked to be getting back on track. While Mirek Stachowicz reported an improved first half, he also warned that there was still plenty of work to be done. Towards the end of October, shareholder Western Gate hit out at the company's latest board changes - an attack which was later countered by Stock.
Brexit, then Trump
Before that fateful day in late-June, the big two spirits companies spoke out about their concerns over the UK referendum on EU membership. Both Diageo and Pernod said 'no' to Brexit. The Scotch Whisky Association also added its weight to the remain campaign. The UK's subsequent decision to leave the EU left the spirits industry braced for impact. The following month, however, Diageo's CEO Menezes maintained that Brexit would "not (be) a big deal" for Scotch. This was swiftly followed by a warning from the SWA that Brexit puts the UK's tariff-free access to important global markets, including South Korea and South Africa, at risk. Following the UK's annual Wine & Spirit Trade Association conference in September, which naturally focused on the topic, just-drinks editor Olly Wehring drew the only logical conclusion: What is certain is that nothing is certain.
The run-up to the US presidential election in November stirred similar speculation, with concerns expressed about the future of Mexican products as well as potential tax changes. The CEO of Remy, Valerie Chapoulaud-Floquet, saw optimism, though, suggesting that luxury goods could gain from a Donald Trump presidency as plans to lower corporation tax would mean more money for wealthy homes to spend on luxuries. Diageo's Mahlan, meanwhile, was more circumspect on the matter.
One thing is certain: The US will not have to wait as long as the UK to find out how these major changes will affect the spirits category - Donald Trump will reside in the White House from next month.
Companies: Absolut, Bacardi Ltd, Brown-Forman, Campari, Cointreau, Constellation Brands, Diageo, LVMH Group, Ian Macleod Distillers, Jameson, Johnnie Walker, Lucas Bols, Pernod Ricard, Sazerac Co, Scotch Whisky Association, Smirnoff, Southern Comfort
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