The past year has been a busy one in both the spirits and wine markets. Chris Brook-Carter and Chris Losh report on the ups and downs in the international wine market and a year in the global spirits sector which saw Diageo consolidate its position as the world's number one producer, in a market environment continually overshadowed by the threat of more regulation.

This review is made up of exerts from this month's management briefing, 'just-drink's 2004 review and predicitons to 2010'. Members can download a free copy at: /membersclub/index.asp  , when it is published later this week.

SPIRITS

The message from authorities around the world to the spirits industry was clear throughout 2004: "Do something about binge drinking, or we will." The pressure has brought about a sea change in the attitude of the spirits industry towards social responsibility as the threat of legislation hangs over it. Anti-binge drinking messages and promises to clean up advertising practices now abound.

It doesn't appear to have had a negative affect on sales yet, though, with spirits continuing to take market share from beer and wine in their traditional Western markets.

The slide of the RTD continues, with big markets like the UK and the US in what looks like terminal (and rapid) decline, and, blockbuster names such as Smirnoff Ice and Bacardi Breezer apparently unable to halt it. But the continued success of Hypnotiq in the US and the recent acquisition by Diageo of Ursus Roter - a red vodka drink blended with sloe berries - may point to the kind of product innovation that could fill this growing gap in sales.

All the major spirits companies benefited from a strong year, though negative currency trends meant they were unable to take full advantage of a healthy US market.

Cardhu aside, this was a good year for industry leader Diageo, which is finally the fully focused drinks operation CEO Paul Walsh has aimed for, and it is fine-tuning its portfolio to impressive effect. There were solid figures all year and the promise of better to come.

Pernod Ricard too benefited from a strong US performance and continues to prove the doubters, who felt it had bitten off more than it could chew in Seagram, wrong. That acquisition is now well and truly digested and, though the French group pulled out of buying Glenmorangie at the eleventh hour, it is now once more a serious contender for further consolidation.

The Glenmorangie sale produced two winners in the end, the Scotch whisky distiller itself and the winning bidder LVMH. Following a painless sale, Glenmorangie fell to LVMH for a fair amount, with jobs guaranteed and the likelihood of significant amounts of investment in the near future. Meanwhile, LVMH bolstered its impressive premium portfolio and stepped into the niche but fast-growing malt category.

The other deal that set tongues wagging during 2004 was the sale of Grey Goose vodka to Bacardi-Martini. Sidney Frank must still be wondering how he did it. But his US$2bn sale of Grey Goose to Bacardi must go down as the sale of the century so far. Have Bacardi paid over the odds? Almost certainly. Have they got a great brand? Definitely yes. Will it make them money? Yes, but only so long as the ultra-premium vodka boom continues in the US.

It was all part of a strange year for the privately-run Bermudan giant.
Figures that came out in June showed that Bacardi had seen a 21% fall in net profit to US$331m in the year up to 31 March. However, the company was hit by a weakness in the RTD market and a number of one-off items. Growth in its core brands and cash flow remained strong. The real uncertainty surrounds the corporate future of the group.

Rumours at the start of the year were of an imminent IPO, but the year closed with the resignation of CEO Javier Ferran. Ferran is not the first Bacardi boss to leave unexpectedly - Chip Read threw in the towel when he found his plans to take Bacardi public had run aground on the vested interests of family shareholders.

Read's departure was a victory for those Bacardi family members who argued that there was no need to go public in order to compete against the likes of Diageo and Allied Domecq. Though his reasons for leaving may be personal, Ferran's decision also favours the private camp. It will certainly put any plans for an IPO on ice while the company searches for a successor.

WINE

Supply and demand the world over finally started to come back into balance in 2004, reflected in the growing confidence amongst the Australian and US wine groups, particularly Southcorp.

The Australian winemaker could hardly have plunged to the depths it did in 2003, but the solid year Southcorp turned in still surprised a number of observers. Its restructuring and cost-cutting programme has been reaping rewards, and CEO John Ballard has a head start over rivals, such as Beringer Blass and Mondavi, who are having to make similar efforts now.

Mondavi's chances of survival are all but guaranteed now after a horrible start to the year, where falling sales and infighting threatened to see the historic company literally torn to pieces.

Constellation has stepped in and, in swallowing Mondavi whole, has at least thrown a protective blanket over some important brand names - not to mention jobs. Despite the final outcome, and the fact that shareholders will doubtless be laughing all the way to the bank, the sight of such a proud company being ripped apart was still an unpleasant one, akin to some kind of drinks industry blood sport.

From Constellation's point of view, paying US$1.2bn for Mondavi was maybe over the odds, but it gives the company a critical mass that is threatening to rewrite the rule book on quite how big a wine company can become. And it's not unreasonable to expect more acquisitions in the future.

Political infighting may still rarely reach dangerous levels within the Californian wine industry, but it is almost second nature to the French. The scale of ill-feeling within the world's largest wine producing nation is reaching critical point. Could things get much worse? The Loi Evin remains immovable, with both Bordeaux and Burgundy's generic bodies feeling its bureaucratic sting when they fell foul of its draconian rules on advertising. The situation at home is hardly helped by stringent drink-driving laws that have seen consumption tumble, and abroad the French continue to lose market share to the New World. Meanwhile, no effective rescue plan has materialised and desperate winemakers continue to take to the streets in order to bully the authorities for more aid rather than looking for a commercial solution to their woes. Dark days indeed.

Whilst one national disaster raged, another was largely averted in 2004, when the vast majority of South African winemakers were cleared of adding flavourants to their Sauvignon Blancs. Of course there were still casualties. South Africa's reputation has not escaped unscathed. Despite the general "not guilty" verdict, there were many who accused the investigations of being toothless. Though no one is seriously suggesting a cover-up many believe authorities could have delved much deeper if they had really wanted to uncover wrongdoing.

The real casualty though was KWV. Having worked hard to shed its sluggish image and paint itself instead as a modern, go-ahead company, the news that two of its winemakers had been adding flavourants to Sauvignon Blanc wines undid a lot of that good work and will not be easily repaired.

By contrast South Africa's leading export brand, Kumala, had a bumper year when it was purchased by Canadian giant Vincor. The deal will open up not just Canada but also the US to what is becoming one of the biggest wine brands in the world.

This review is taken from exerts of this month's management briefing, just-drink's 2004 review and predicitons to 2010. Members can download a free copy at: /membersclub/index.asp