Focus - Size not the whole story in search for spirits growth

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Recent results suggest all spirits companies are feeling the effects of the downturn but some are better equipped for long-term growth than others. Jeremy Cunnington of Euromonitor International assesses which companies look strong and which appear vulnerable.

Among the large companies with a bright future is Diageo, which has breadth and depth to its portfolio and products to suit all price points. This makes it well positioned for consumers in markets with lower disposable income as well as those trading down during the recession. However, it is less well positioned in emerging markets, despite major efforts in recent years.

That said, for a company with cash in reserve the economic downturn could offer opportunities. This is most notable in India where UB Group's financial weakness could give Diageo the opportunity to buy a major share of UB Group's dominant spirits division, United Spirits.

With the acquisition of V&S and its Absolut brand, Pernod Ricard has a more complete portfolio. It also has a developed presence in emerging markets and a strong presence in other categories with which to capitalise on future global growth. Equally important, it gives the company extra distributional weight in core markets, notably the US, which should help drive growth of its other brands, such as Jameson. The one black spot could be its high level of debts from the acquisition of V&S which reduces room for manoeuvre in the short and medium term. Despite this, Pernod Ricard's long-term outlook is good.

Companies that appear least well equipped for the long term seem to be those with a weak portfolio and those overly focused on the more Western European and North American markets. Prime among these is Bacardi, whose volumes are overly focused on North America and Western Europe. Equally significant, it has limited growth potential, especially in emerging markets, due to its lack of a major presence in brown spirits sectors which are expected to drive growth in markets such as Russia and China.

Bacardi's existing portfolio is also weakened by the maturity of its rum brands, which account for 60% of its global volumes. Its other major focus category, vodka, also suffered in 2007, as its attempt to push the Grey Goose brand internationally suffered a setback, with volumes declining outside the US. This meant it underperformed its major rivals, Diageo and Pernod Ricard, in its three major categories - rum, vodka and blended Scotch - between 2002 and 2007.

Beam Global is also a company in long-term difficulty. While its new distribution arrangements with Edrington will give it a strong international presence, much of its portfolio is made up of mature local brands such as DYC whisky and Larios Gin in Spain, with fewer brands of international appeal like Jim Beam and Sauza Tequila.

In addition, there are gaps in its portfolio, most notably in vodka. A vodka brand would allow Beam to capitalise on the dynamic growth of vodka in most regions, with the uplift that would also give other brands in its portfolio. However, the acquisition of any regional vodka brand will require long-term investment to grow it internationally, as Bacardi has found with Grey Goose.

Brown-Forman also faces a difficult future. Like Bacardi and Beam Global it is still very reliant on North America and Western Europe. Although it has a relatively broad portfolio, like Bacardi, it is pretty shallow, leaving it vulnerable to any poor performance of those brands.

One mid-sized company that looks to have a bright future is William Grant & Sons. The company is an example of how a mid-sized company with a limited portfolio can develop. The company's decision to invest in emerging markets in the early part of this decade and capitalise on the growing popularity of Scotch has started to pay off with its brands seeing strong growth in countries like Russia and Ecuador.

The company has also enhanced its position in core markets by agreeing to distribute major brands, such as Stolichnaya in the US and Rémy Cointreau's brands in the UK. This should greatly boost its existing brands such as Glenfiddich and Sailor Jerry's rum, especially in the US. The company is likely to suffer in the short term due to its exposure to the fragile Eastern European economies but the long-term growth prospects look good.

Campari is another mid-sized company that is in a strong position to carry on developing its presence in key markets with incremental acquisitions, as witnessed by the most recent - Sabia, an Argentine distributor. The strengthening of its presence there will support its Old Smuggler blended Scotch brand for which Argentina is a core market and assist its bitters brands in the country's booming bitters category. However, further work is needed, especially in developing its whisky portfolio. Hence (like William Grant) it could further strengthen its positions, especially in the US with the acquisition of an Irish whiskey or possibly a small-batch Bourbon or other US whiskey brand.

For other mid-sized companies, such as Edrington Group and Rémy Cointreau, the position is less secure. Rémy Cointreau, which will strike out on its own after leaving Maxxium at the start of April, is vulnerable in the short term with its limited, premium portfolio and high levels of long-term debt. If it can get over the potentially large short-term hurdle of consumer down-trading it could have a long-term independent future.

Edrington is in a slightly stronger position than Rémy Cointreau, thanks to its distribution relationship with Beam Global. Yet the lack of a vodka brand in either of their portfolios is a weakness. Edrington too faces interesting times as it tries to develop its first non-Scotch acquisition, Brugal rum.

As we can see, the size of a company does not necessarily equate to long-term health. While Pernod Ricard and Diageo should continue to grow, Bacardi, Beam Global and Brown-Forman face an uncertain long-term future unless they make radical changes. In addition, mid-sized companies such as William Grant and Campari have shown that size is not vital to growth if the strategy is sufficiently focused.

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