Price cuts have not paid off for some spirits producers

Price cuts have not paid off for some spirits producers

Western spirits producers that have focussed on expanding margins to create value have been more successful than those that have pursued aggressive price cuts to grow volumes, according to a new report. 

The Rabobank study, published yesterday (10 October), says that companies have been forced to alter their strategies in light of the global recession. As a result, producers have had to choose to sacrifice either volumes or margins. 

“What we have seen from this study is that focusing on maintaining margins was generally a more effective method for creating value,” said Rabobank analyst Stephen Rannekleiv. 

Focussing on volumes to grow market share has been "counter-productive", the report said. 

The study looked at 21 spirits companies with minimum annual revenue of EUR50m (US$67.6m), looking at the evolution of their returns (operating profit) relative to total assets.

The report also concludes that acquisitions are generally value accretive to companies, although returns may be weighed down in the near-term.

However, it notes that small companies with brands focused on categories that are in decline, such as brandy, may find it “difficult to push for margin growth on an organic basis and may need to look to acquisitions of stronger brands with better margins to improve their portfolios”.