Comment - Spirits - Beam Suntory's Big White Spaces

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It's been three months since Suntory Holdings completed its purchase of Beam Inc. What better time that the summer lull for Richard Woodard to take a long, hard look at just what the Japanese group got for its US$16bn.

Richard Woodard has spotted some possible problems for Beam Suntory in its white spirits portfolio

Richard Woodard has spotted some possible problems for Beam Suntory in its white spirits portfolio

Creating a group that claims the number three spot in the global spirits industry behind Diageo and Pernod Ricard, with combined annual sales in 2013 of about US$6.4bn, is an impressive starting-point, but, for Beam Suntory Inc, it's just that: a beginning. Suntory has already made it clear that it wants more - much more - from its new toy, looking for the new Beam Suntory business to account for one-quarter of group sales by 2020.

Where will this revenue boost come from? However bullish the organic growth forecasts emanating from the boardroom in Illinois, acquisitions will be key. And, that’s just fine, because I reckon the existing Beam Suntory business has some serious weaknesses.

It’s not for me to comment in detail on the brown spirits side of thingsthis is a white spirits column, after all – but as it happens, I don’t think this is where the new group’s most pressing concerns lie.

After all, it has one of the 'big four' Cognac brands in Courvoisier, and its prowess in non-Scotch whisky is unrivalled, spanning as it does the Bourbon, Canadian, Irish and Japanese segments. Single malt? Tick. Blended Scotch? Well, Teacher’s needs some work, but that’s a story for another day.

Meanwhile, Sauza is a sound Tequila brand with higher-end spin-offs such as Hornitos and Tres Generaciones to add gloss and margin. Rum, on the other hand, needs work, but Cruzan can keep things ticking over for now.

Let’s focus instead on white spirits and, in particular, vodka and gin. Pinnacle and Larios as brands are chalk and cheese - one a young upstart with a penchant for outlandish flavour variants, the other produced in Spain since pre-Franco times - but, in my view, they have one thing in common: they don’t quite cut it.

It’s easier to see this with Larios. Acquired by Beam as part of the Allied Domecq carve-up in 2005, it was, even then, on the way down from its halcyon days of driving the gin category forward in its native Spain in the 1980s and 1990s. According to IWSR figures, the brand’s volumes have halved since 2003, despite the introduction of a premium version, Larios 12.

The galling thing about Larios is that it’s the wrong brand in the right market at the right time: Gin in Spain has bucked the recessionary trend and has been booming for the past few years, built on innovative new ways of serving the gin-and-tonic and rising premium and super-premium sales. Pernod's Beefeater brand - which the French company also inherited from Allied Domecq - rules the market now by some distance.

Moving outside Spain, across Europe and the US premiumisation is the name of the game for the gin category, and it’s hard to see how Larios can possibly do the job required by the new Beam Suntory.

But, what can they buy? There isn’t an obvious marquee, off-the-peg gin brand available, so smaller, value-led acquisitions could be the way forward – a similar strategy to Diageo’s post-Cuervo Tequila buys of Peligroso and DeLeon.

Would Pernod still sell Plymouth? Which of the plethora of premium and super-premium gin launches of recent times might suit Beam’s needs? One thing’s for sure: it needs more than just Larios.

Now for Pinnacle. At first glance, nothing’s wrong here. Beam paid $605m to acquire the brand back in 2012, a year after Pinnacle rode the dessert-flavoured-vodka wave to nearly double sales to well over 2.5m cases.

And growth continued, with Impact figures suggesting a volume gain of 14% to over 3m cases in 2012. This was followed by a 7% rise in 2013 to about 3.3m cases, although other sources suggest more modest growth. More importantly, value in 2013 was flat.

This stalling of growth is hardly surprising. Despite a healthy presence in the unflavoured segment, the secret to Pinnacle’s success has been flavours – about 39 of them at last count, from peppermint bark to cucumber watermelon. But, evidence over the past year suggests that the flavours bubble has all but burst, with retailers and brand owners alike slashing the number of variants they’re selling, and on-trade flavoured vodka sales in steady decline.

Strip out the flavours trend and you see the US vodka market for what it is: Enormous, but also super-saturated and hugely competitive on price, particularly in the $10-$15 segment in which Pinnacle plays. In this environment, is Pinnacle the vodka flagship Beam Suntory needs to drive growth? I don’t think so.

Again, finding a big-money signing is the tricky bit. After on-off relationships with Allied Domecq and Pernod Ricard, the SPI Group appears content to go it alone with Stolichnaya now, but it’s one of the few brands which could offer the scale and consumer recognition needed.

Amid the back-slapping in Illinois and Tokyo, the mutual opening up of new routes-to-market and the lucrative synergies, these are thorny issues that should bring a mood of sobriety to the new group’s senior executives. Meanwhile, the way in which they are resolved will be vital to the future health and dynamism of the industry’s new number three player.

The party’s over – and the hard work starts here.

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