Former analyst Ian Shackleton has joined just-drinks bank of industry commentators

Former analyst Ian Shackleton has joined just-drinks' bank of industry commentators

just-drinks is thrilled to welcome a new industry commentator to the fold. Until earlier this year, Ian Shackleton spent over 25 years as a beverages analyst with several major banks, including Credit Suisse, Lehman Brothers and Nomura. Now a principal at financial communications company Bell Pottinger, Ian will cast an analyst's eye each month over developments and issues affecting the drinks industry. This month, he looks at what the Trump effect could be, the prospects for the local spirits sector and the importance of the IR point-of-contact.

  • What Donald Trump may mean for the world of spirits

I was interested to read a recent article in just-drinks in which the CEO of Remy-Cointreau, Valerie Chapoulaud-Floquet, suggested that Donald Trump's plans to lower corporation tax in the US could benefit the luxury brands category in the country, and hence be a positive for her company's business. Certainly, I can't dispute her logic that lower taxes should help affluent shoppers in the US (including those presumably in Trump Tower).

However, what will be the long-term implications of the world according to Trump for the spirits category? For almost all of my 25+ years as an analyst, I have seen the world grow increasingly comfortable with globalisation, where it was more a case of when tariff barriers would come down, rather than if. In the last quarter-century, there were some seismic moves; the UK joined the single European market in 1973; Eastern Europe opened up after the Berlin Wall came down in 1989, and China joined the WTO in 2001. For the last few years, analysts have been second-guessing when India will follow suit and bring down import tariffs. However, this already looks to have been pushed back to at least a ten-year time horizon, as the importance of spirits tax revenues to the individual states continues to prove a hurdle to change.

And now, we have a UK Brexit, an isolationist Trump, increasing pressure on the rest of the European Union to split… and the world looks a very different place.

It certainly looks as if the US will become more isolationist under its new regime, and I wonder whether this could be a catalyst for tariff barriers to start being erected around the world, rather than being removed. Interestingly, in the same article, Remy's CEO does acknowledge the threat from higher import tariffs, a change that would impact a category like Cognac, which can only be produced in France's Cognac region.

So, what does this mean for the wines and spirits categories? In theory, we could see a rolling back of the clock to the 1970's, when local production was very much the norm. Could Absolut be produced outside Sweden? This is possible, in theory, but I know Pernod Ricard wouldn't consider this lightly, given the group's preference for local heritage in production. Indeed, for categories like Scotch whisky, Cognac and Bourbon, the local production option is not viable; I do remember, however, when a fair proportion of Scotch was locally-bottled rather than "bottled in Scotland", in order to save on duty costs. In some cases, then, there are moves companies could make to reduce the potential impact.

This would be a major change, though, for most of the international spirits companies, which often have over half of their business in categories with geographical limitations on production (for a company like Remy, this accounts for most of its business). And, I guess there could be less Champagne being drunk in Trump Tower.

  • Local spirits - back on investors' radars?

A few years back, investors got very excited once they'd realised that local spirits were about five times the size in volume of Western-style spirits, traditionally the bread and butter for companies like Diageo. There were opportunities aplenty to invest in new vehicles, such as Stock Spirits' IPO in 2013; in addition, Diageo made several acquisitions of local spirits in markets as diverse as Turkey, Vietnam, China, Brazil and India. Historically, investors had considered cheaply-priced local spirits as a very different business to international/global spirits brands, which were all about premium products that could cross continents and produce high margins (30%+). The borderlines were now being blurred, with talk of premiumisation opportunities in local spirits and the distribution advantage that a large, local spirits business could bring to international spirit brands, particularly in emerging markets.

However, for a few years now, investor appetite has been on the wane. Stock Spirits, battered both by duty increases as well as competitive activity, has not proved capable of the 'Steady Eddie' performance investors usually expect from a business such as spirits, and is trading well below its IPO price of 235p. This is not what investors had expected as they often refer to spirits as "slow-moving" rather than "fast-moving consumer goods" because of the brand longevity. A review of Diageo's local spirits acquisitions would be mixed at best, with the purchased Baiju business in China having dramatically reduced due to the country's economic downturn. Even in India,  the undoubted long-term potential in the United Spirits acquisition has been overshadowed by the longer-than-expected period of cleaning-up the acquisition.

Against this background, it is very pleasing to see Arcus-Gruppen, the local spirits operator in Scandinavia, announcing its IPO last month. This was done in a low-key way, focusing mainly on local investors. It is not surprising that those investors appreciated some of the attractions of the region, such as the tight regulation in many Scandinavian markets, which provides strong protection for market shares and profitability. I wonder whether this successful IPO may open the door for other local spirits operators to come to market: We may start to see more M&A interest from the large spirits companies in local spirits again. Or, has the Stock hangover left too many investors feeling queasy?

Journalists often focus on a change of senior management bringing about a new era for a company, either for better or for worse. For analysts and investors, however, their day-to-day contact with a company is more likely to be with the investor relations director, who can become highly representative of how a company is perceived. How often have I heard the comment "IR has no idea what is going on", suggesting that the company is totally at sea? Equally, analysts and investors will draw the conclusion of "good IR, good company".

As the year draws to a close, we are seeing the end of not just one, but two eras, with the IR directors of both the world's largest spirits company and of the world's largest brewer announcing their intentions to step down in the coming months.

At Diageo, Catherine James has become the doyen of IR directors in the UK Stock Market, with nearly 20 years in her role (and 32 years in total at the company). During her time, I often heard investors and analysts saying they would rather have a meeting with Catherine than with senior management, as she really knew what was going on. Graham Staley at AB InBev, meanwhile, looks a comparative newcomer, having only been IR director for eight years. However, his is an encyclopaedic knowledge of the industry, thanks to his length of beer service - he has been CFO of Ambev in Brazil, CFO of Labatt in Canada and CEO of Prague Breweries, when it was bought by Bass.

Their combined knowledge base and experience will be difficult to replace. I feel investors and analysts will miss their presence, particularly when there is a new story to be told at AB Inbev after the SABMiller takeover, and when Diageo still has to prove that it can grow consistently after a few mixed years.

Theirs are big shoes to fill, although it is reassuring that Graham will be succeeded by another beer industry veteran, Henry Rudd, an SAB-lifer who can boast huge experience across Africa and Asia, as well as a stint in investor relations. Henry has an even greater responsibility, as he will have to fly the flag as one of the few SAB executives staying on after the takeover.