Analysis

Scotch's mid-sized face up to consolidation whirlwind

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Already overshadowed by the blockbuster brands of their larger rivals, consolidation and a squeeze on margins are conspiring against Scotch's mid-sized companies. Dave Broom talks to the sector's players about niche marketing and the opportunities of globalisation.

In these globalised times the Scotch whisky industry is behaving much like any other business. There is increased consolidation at the top end of the market (the big getting bigger) while niche marketing is ensuring that small firms are thriving.

Bowmore 17 Year Old

Let's face it, many of us like to think we're supporting the little guy. What though happens in the middle? Here there are firms that, on paper at least, haven't the resources or financial clout of the giants or the feel-good factor of the small player. Are they exposed? Under pressure? Or able to survive in a shrinking world?

The initial response to that question is, perhaps unsurprisingly, a bullish one. "We've not been adversely affected by the consolidation at the top end of the market," claims Morrison-Bowmore's Kenneth Mackay. "In fact Bowmore continues to grow strongly."

Paul Neep at Glenmorangie plc is equally upbeat pointing out that his firm's brands are growing faster than the category. One source suggested that the changes at the top-end of the market could benefit the small and medium-sized firms as the consolidation process opens up opportunities for them with disgruntled ex-distributors, or even consumers. The spurned lover theory if you like.

Patrick Thomas, group managing director at Wm. Grant & Sons puts a slightly different spin on this. "When big groups consolidate they tend to focus on a smaller number of brands and reduce their support on other brands, like Guinness/UDV with J&B. This creates an opportunity for the brands positioned 3rd or 4th in the market. If anything, the recent changes have consolidated our position."

Thomas also sees positive developments emerging from Pernod Ricard's anticipated acquisition of Seagram's whisky portfolio. "We're expecting a new strategy at the premium end of the market by Pernod Ricard/Seagram," he says. "This should help to redevelop the premium category to the benefit of premium brands like Glenfiddich and The Balvenie."

That said, it's widely believed that while medium-sized firms have to behave like the giants, they haven't the economies of scale to compete on equal terms with them, leaving publicly-listed whisky firms exposed to constant takeover rumours. Still, the fact that the mid-sized must compete with fewer resources doesn't bother Neep.

Johnnie Walker Red Label

"We compete against the big guys by taking a focused/niche strategy, by concentrating on a specific category and building a strong position within it," he says. "Our competitive advantage comes from being a focused player. Malt whisky is No. 1 for Glenmorangie plc."

"What's important is the size of the brand, not the size of the company," argues Thomas. "We're fortunate to have the No.1 malt brand and the No4 blended Scotch. We can compete against the top brands, providing that we focus on these leading two brands."

But surely then medium-sized firms are just behaving like their larger rivals by putting their resources behind relatively few brands? The end result is fewer brands on-shelf and less choice for the consumer.

Ultimately it still comes down to economies of scale. Both the giants and the medium-sized companies are embarking on the same tightly focussed strategy, but the larger firms can afford to throw more money (and manpower) behind their brands. Can Highland, Grant's or Whyte & Mackay really compete with Johnnie Walker and Chivas? Thomas thinks so, yet the fact remains that retailers prefer to deal with as few suppliers as possible. How can you get your brands on-shelf when the big players can offer what they claim is the complete package?

"It may be true that supermarkets like to deal with as few suppliers as possible however (as far as malt is concerned) range and offering are very important," says Mackay. "Also, the biggest companies can't claim a monopoly in single malt. Supermarkets value Bowmore in their range, and we continue to invest 'through the line'."


"So far, we've managed to protect brands in a sensible way from the pressures of distribution, but it's a daily fight"
Patrick Thomas

That may be the case with malt, but in the bigger but more price sensitive blended sector surely medium-sized firms are in danger of being squeezed on price just to get the listings? It's one thing to get the brand on-shelf, quite another to be able to make a decent margin. "So far, we've managed to protect brands in a sensible way from the pressures of distribution, but it's a daily fight," admits Thomas.

"However, this pressure isn't only focussed on companies our size, but also applies to the big boys."

A solution could be to avoid competing with the majors head on and for medium-sized firms to become increasingly specialised. "Tackling the majors head-on isn't an option given our portfolio," says Mackay. "We have to continue to develop our brand and the category, using the focus that our size allows, to better understand our markets and our consumers.

"In addition, consolidation among the majors will inevitably require them to focus on core international brands. Given the size of the malt category relative to their portfolios it may be difficult for them to provide sufficient focus on all of their malt brands. This in turn might lead to opportunities for smaller firms - either to fill the gaps they're vacating or possibly to acquire some of the smaller brands."

The same thing is happening in blends. As another source pointed out, the giants have already pulled the plug on many of their 'middle-of-the-road' brands such as Black and White, Ye Monks, White Horse, Hundred Pipers and Passport.

Glenmorangie

His point was that as these brands disappeared so opportunities for 'new' brands, backed with some marketing, were created. Examples include Label 5 and William Peel in France. Yet, he admits, these opportunities really only exist in single markets. The chances of building a world brand without a world major distributor are slim. And there's the crunch for the medium-sized firms.

Global player with global brands, or nimble, niche marketeer? As Neep points out the key to Glenmorangie's success lies in being innovative and "making our (small) size an advantage. We work with short lines of decision making, are fast to move, and are a lower cost operator."

As he suggests, medium-sized firms can take risks and work faster than often cumbersome management top-heavy majors. Does that mean that, to survive, a medium-sized has to specialise, be flexible and work round the fringes?

Taking on UDV/Diageo head on may not exactly be the best way to survive. Thomas reads it differently, intriguingly seeing globalisation as a fashion and not an inevitability. "Medium-sized companies will have the best opportunities in the future because globalisation will not always be the trend," he says, which is good news for the No Logo generation.

"We're totally convinced that consumers and individuals are going to discover one day that globalisation is not such a wonderful thing and that the world becomes a very boring place because of it," he continues.


"We'd expect medium-sized firm's to get squeezed unless they become more focused, build strong brands and join up with other players"
Paul Neep

"Globalisation may not last forever. Consumers will look for esoteric brands and employees for companies that display entrepreneurial behaviour. The role of the middle-sized company is to promote this entrepreneurial spirit, personal initiative and happiness in the work place."

It's an intriguing argument but how many of those mid-sized firms can afford to hang on in the medium term and provide these 'esoteric', specialised brands? Can Grant's for example compete head on with the big boys and be niche/specialised at the same time? "We can, but in different markets," Thomas responds. "In the mainstream markets for blends it's about category domination and how big/strong/global the brand is. In the premium/luxury category, small has always been beautiful. You can be sophisticated and global (e.g. Hermes), you can also be cheap, regional and successful (Label 5 whisky in France)."

Interestingly, all the firms questioned agreed that there would be fewer players in five years time though, inevitably, none thought the axe would fall on them. There will, however, be casualties.

"We'd expect medium-sized firm's to get squeezed unless they become more focused, build strong brands and join up with other players," says Neep.

"I'd expect to see even further consolidation at the top end, consolidations around brand distribution networks and more niche players."

Thomas wouldn't be drawn on specifics but did say that Grants is "likely" to have a tighter control over its distribution networks worldwide and would have a larger portfolio than today, "maybe resulting" from internal growth or acquisition.

The face of the industry will continue to change for a long time yet.


Global Spirit Trends 2000
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