Market research
This month, former beverage analyst Ian Shackleton takes a long, hard look at marketing spend in the digital world, a better-than-expected results season and the return of green shoots for local spirits.
Have drinks companies got carried away with digital marketing?
Digital marketing – taking a more balanced approach
For many years now, every drinks - and consumer - company I've come across has claimed to be on top of new technologies, boasting also that it is increasing its spend on digital marketing. You could almost come away with the sense that the historical quote from Unilever founder Lord Leverhulme - "Half the money I spend on advertising is wasted; the problem is, I don't know which half" - evolved to a belief that while digital spend was worthwhile, the return on old-style marketing was questionable. Online advertising promised a more effective way to reach consumers, whilst advertising on TV and radio and in newspapers and magazines was viewed as inefficient.
Are we now facing an 'emperor's new clothes' moment? The chief brand officer at household products group Procter & Gamble has come out and cut his spending on digital adverts. In Q2, the company decided "to temporarily restrict spending in digital forums where our ads were not being placed according to our standards and specifications". Organic revenues still grew well in Q2, and the company saw this as proof that some of its digital spending was ineffective.
There has been some commentary that half of online adverts are viewed by hacked devices to generate "false clicks". And the Snap (Snapchat) results earlier this month, which prompted a dramatic fall in the share price, have given rise to further debate about how one values the service that messaging apps actually bring.
This isn't to say that the end is nigh for the large internet-based companies; in Q2, both Facebook and Google saw very healthy overall revenue growth. However, perhaps we can start to see a more balanced view on the merits of different forms of marketing that companies undertake.
For alcoholic beverages, I always thought digital marketing offered potentially greater upside than for other consumer industries. In many markets, access to traditional advertising can be restricted - or even banned in some 'dark markets' - and digital could provide an alternative route to the consumer. In addition, digital lends itself to global campaigns, which should be helpful for international brands in spirits, beer and even soft drinks. Indeed, only last week, just-drinks ran an interview with SharpEnd, a UK agency focusing on Internet of Things technology that has been appointed as Pernod Ricard's global partner. Certainly, some of the innovations discussed look fascinating, from digitally connected bottles, through to using technology at the bar.
I think digital will remain an important way of accessing the consumer for beverages companies, but perhaps it will be seen increasingly as one tool in the marketing kit-box, rather than being accorded Holy Grail status.
Beverages surprises on the upside
You may recall last month that I was feeling cautious on the beverages companies' share prices ahead of calendar-Q2 reporting. I admit this has proved the wrong call, so far.
At the end of last month, Diageo delivered everything the analyst with a 'Buy' rating could have wanted – an earnings beat, a buyback announcement and some upbeat commentary. It's little wonder, then, that the shares have taken off since then.
On the same day, Anheuser-Busch Inbev came out with better-than-expected reporting, with the message on Brazil moving more positive – the brewer's shares also moved up.
There were also beats from Coca-Cola HBC and Stock Spirits, both of which drove up share prices. Elsewhere, it was not quite so dramatic but there were few disappointments - Heineken was more 'steady as she goes', Britvic produced a great Q3 but sounded a note of caution on Q4, Gruppo Campari was a bit cautious on its full-year margin, Remy Cointreau was strong, but the group's sales numbers were already 'in the market'. There are still a few laggards to report, like Carlsberg (NB, Carlsberg reported a 2% lift in H1 sales earlier this week) and Pernod Ricard, but the odds on either having a shocker are looking small.
To be fair, the stock markets, both in Europe and in the US, are still near all-time highs. There has already been commentary about a strong earnings season, especially in the US, so it's not just a drinks phenomenon that we are experiencing.
When I started out in stockbroking many moons ago - certainly in the pre-email and pre-internet era. How did we manage? - I was always told that markets didn't like uncertainty. Today, considering the issues around the world - the Trump administration in the US appearing to lose momentum, the Brexit process in the UK, potential volatility (still) in the Middle East, North Korea - it does seem strange that world stock markets continue to be so bullish.
We hear the arguments that equities is still the asset class that offers the best returns, compared with bond markets with low returns and property in markets like the UK looking highly priced. At least for beverages, and the other consumer sectors, there is a bit of a safety net; if companies do disappoint with their earnings, they are at risk of a bid - that is certainly spurring on corporate action from companies like Unilever, which had the approach from Kraft Heinz earlier in the year. The possible threat from the Brazilians may also have acted as a spur for Diageo to put more good news in its shop-window last month.
I just hope the good news can last a bit longer.
Local spirits - may be looking up
At the end of last year, I suggested local spirits companies were on the brink of returning to investors' radar screens. Previously. local spirits had lost their allure following several acquisitions of local brands by Diageo that produced mixed results, and Stock Spirits' IPO in 2013, after which the company performed poorly for a few years, battered by duty increases and competitive activity.
In last year's article, I flagged Arcus-Gruppen's IPO, which was launched in a low-key way, focusing mainly on local investors. I can certainly see the attraction of Arcus, including the tight regulations in many Scandinavian markets that provide strong protection for market shares and profitability. So far, the shares are nicely up against the IPO price.
Now, Stock Spirits has reported some good interim results, suggesting stability has returned to its key Polish market. The company appears to be suggesting some upside to analysts' expectations for the full-year, and the share price has responded well as a result.
I'm not sure that this is going to lead to an uptick in the acquisition of local spirits brands by international spirits companies. In both the beer and spirits worlds, local ownership of local spirits often appears to provide some protection against regulatory change. Once the brands are owned by an international operator, this protection often disappears. Think what happened in Russia's beer market once the international brewers bought out the main producers a decade or so ago (I would see last week's announcement of a merger of AB InBev and Anadolu Efes' Russian beer businesses as an attempt to create value in a market where the profit pool has substantially disappeared).
We've seen similar regulation-tightening in spirits, in India since Diageo bought control of United Spirits, and in Turkey since the Diageo/Mey Içki deal.
Despite this, I believe the door is open now for more public listings of local spirit companies, such as Stock and Arcus. In theory, local spirits should have some strong attractions to investors: They should offer a 'Steady Eddie' trading performance, with strong cash generation, especially where there is no requirement for maturing stocks. Granted, the valuations that the markets put on these businesses won't match those of international spirits companies, with their global brands and footprints - Stock currently trades on estimated 15x 2017 PER compared to 20+x for Diageo.
I can also see a few IPO candidates waiting in the wings, such as Altia Oyj in Finland, which, like Arcus, was previously a state-owned spirits supplier, or the Russian-based Roust Inc, which has recently completed a debt for equity swap, giving the business a longer-term viability.
Of course, more IPOs mean more fees for beverages bankers and more market capitalisation for beverages analysts to research. So, that's good news all round!
Ian Shackleton spent 25 years working as a beverages analyst at Nomura, Lehman Brothers and Credit Suisse. He is now a principal at financial communications company Bell Pottinger.
