Review of the Year 2009 - Spirits
Like the other sectors of our industry, the economy cast a shadow over the spirits category in 2009. The aftershocks of the downturn spread around the world, with Scotland appearing to be the epicentre. Olly Wehring looks at the last 12 months for Diageo, Pernod Ricard et al.
There would be little point denying that the poor global economic climate was the major story of 2009 in the spirits industry - much as it has been for all the other sectors in our industry. In the US, one of - if not the - biggest market for spirits producers, it was clear as early as January that 2009 was going to be tough. As the impact of the financial crisis spilled over into the consumer goods sector in the country, growth for the major players Diageo and Pernod Ricard had started to slow before 2008 had ended.
How's that for scene-setting?
The main upshot of the grim operating environment globally was a polarisation of consumption for spirits, with trading down benefiting the cheaper end while ultra-premium products - particularly those with a good track record - managing to hold their own. The middle ground - widely known as the premium spirits category - had it particularly tough. In February, research group Frost & Sullivan warned: "The economic slowdown is expected to temporarily constrain consumer spending on food and beverages that employ premium pricing strategies
As the year progressed, however, optimism returned to a degree, when a report by Standar & Poor's in August forecast that the demand for premium beverages in the US is expected to rise in the long-term.
The less developed so-called BRIC markets also offered a glimmer of hope for spirits firms in 2009, with Brazil, Russia, India and China expected to "realise their undoubted potential in the longer term, even the worst affected of the four - Russia," said drinks market consultancy Canadean.
This upbeat prognosis for the future was tempered somewhat by warnings that emerging markets such as Eastern Europe looked particularly vulnerable, with a reliance on foreign investment leading to shaky foundations in the region. Consumers in Czech Republic, for example, were found in July to be buying less expensive spirits and drinking more at home due to the recession.
The word of the year for spirits companies in 2009 has to be 'de-stocking'. Almost every company used the term in its results releases throughout the 12 months, with the squeeze on credit meaning stockists looked to reduce their stock-holding, most notably in the US and Russia.
Turning more specifically to spirits producers, Constellation Brands kick-started the sector's news presence in January, when it announced the sale of what it called its "value" spirits portfolio to Sazerac Company for US$334m. Whilst the transaction did not strictly adhere to the consumer trend of trading down, it was very much an indicator of Constellation's preference for concentrating on its wine business going forward.
Later on in the year, French drinks group Belvédère, which owns the Sobieski vodka brand, was battling to emerge from bankruptcy protection. The firm, which was placed under bankruptcy protection in France in July 2008 and had EUR579m (US$842.4m) net debt at the end of June, appeared to be venturing out of the woods in November, when approval was given to a relaunch plan that will reschedule the group's debt over ten years.
In India, United Spirits, part of the United Breweries empire, appeared to be struggling with the debt it had accrued when it bought Scotch whisky firm Whyte & Mackay in 2007 for US$1.18bn. Regular stories out of the country earlier in the year suggested the unit was looking to sell a stake in W&M. Whilst this did not materialise, a clearer indication of the division's travails this year came in June, when it began a deleveraging process, raising INR11bn (US$180m) in two deals to help pay off debt. Then, in October, United Spirits said it was looking to raise $350m via a share issue after talks with private equity firms on an equity stake sale broke down.
Meanwhile, shareholders in United Breweries were watching the talks between United Spirits and Diageo - about a possible distribution tie-up in India - with great interest. The discussions, confirmed back in November 2008, offered hope to both sides - United Spirits for a healthy cash injection, Diageo for use of United's distribution dominance in the country. Neither side was to see its hopes realised, however, when, in August, Diageo confirmed that the talks had come to nought.
One month earlier, in Scotland, Diageo began the ball rolling on what would become one of the biggest, longest-running - and bitterest - stories of 2009. When, in March, the company said that it would temporarily close its packaging site in Kilmarnock for one week, and for one week in April, alarm bells began to sound. At the beginning of July, Diageo confirmed that it was cutting more than 10% of its workforce in the country with the facility's permanent closure. The ensuing storm surprised everyone - Diageo included. First the trade unions threw in their worth, only to be followed by the country's politicians, who pressured the company into considering alternative proposals.
The sides were drawn, between those accusing Diageo of betraying its workers, and those who felt that Diageo's plans, which amounted to around 500 job losses, were being used as a political brickbat. Speaking to just-drinks in August, the company's CEO, Paul Walsh, expressed surprise at the way the announcement had gone down in the corridors of power. "(In hindsight), I would have found a way to engage with the politicians earlier in the process," he said. "We deliberately took the decision to inform our employees first and politicians separately. Therefore, part of the initial backlash, I think, was anger at being snubbed."
The saga finally came to a close in early December, six months after the initial announcement. Diageo's discussions with affected employees concluded, with the workers gaining far healthier pay-offs - albeit "within (Diageo's) financial business case laid out in the original announcement" - than initially proposed.
In April, Diageo's path crossed with Pernod Ricard's in Japan, when the former announced the creation of a joint venture with Kirin Holdings in the country. Kirin, which had previously handled Japanese distribution for Pernod, subsequently ended its partnership with the French firm in October, then sold its 3.74% stake in Pernod for EUR378m.
This has been a lively year for Pernod, which has spent the most part divesting a slew of non-core brands, following its successful acquisition last year of Vin & Sprit, owner of Absolut vodka, for EUR5.69bn. In January, Pernod signed a deal to sell Lubuski Gin to a subsidiary of German firm Henkell & Co. Sektkellerei for an undisclosed sum. Later the same month, the company sold its Serkova Vodka brand to Amvyx, again for an undisclosed fee.
Three months later, Pernod completed the sale of three ex-Vin & Sprit brands to Norway-based Arcus Gruppen, but removed Gronstedt Cognac from the deal due to competition concerns and sold it to Altia instead.
Also in April, the firm's divestment programme claimed a higher profile scalp. The acquisition of the Wild Turkey Bourbon brand by Gruppo Campari for $575m also represented the largest purchase in Campari's history. The programme appeared to come to an end in July, when the Italian owner of Disaronno Originale liqueur brand, Illva Saronno, bought coffee liqueur Tia Maria from Pernod for EUR125m.
The French company finished the year on a high note, posting a lower-than-expected sales slip in its fiscal first-quarter in October, with CEO Pierre Pringuet saying he was "confident" about the year ahead, while the group declared its intention to raise advertising and promotion spend.
The long-running row between Pernod and Bacardi over the Havana Club trademark hit what Bacardi claimed was a "watershed moment" this year. In March, the US District Court dismissed a lawsuit by the Cuban co-owners of Havana Club International - Pernod and state-owned Cubaexport - claiming the country acted illegally in terminating its US trademark rights for the rum brand. Reacting to the ruling, Pernod said it was "disappointed",and warned that it would "aggressively prevent any unauthorised use" of the Havana Club trademark.
On a more upbeat note, many were happy to see the global sales and distribution alliance, Maxxium, get a new lease of life this year. Maxxium's days appeared numbered, when Rémy Cointreau and Vin & Sprit exited the partnership, leaving the two remaining partners, Beam Global Spirits & Wine and the Edrington Group, seemingly high and dry. But, in April, the two re-launched Maxxium, which today spans 24 international markets and generates combined sales of around US$1.5bn.
What has been a particularly grim year for many spirits firms, then, still managed to retain the odd slim occasion for optimism in 2009.
Companies: Diageo, Pernod Ricard, United Spirits Limited, Ricard, Constellation Brands, United Breweries Limited, Belvédère Group, Kirin Brewery Co., Whyte and Mackay, Campari, Havana Club, Absolut, Bacardi Ltd, Disaronno, Maxxium, Cointreau, Beam Global Spirits & Wine, The Edrington Group
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