The PIGS Markets - Part II: Ireland
The second part of this month's management briefing, looking at the markets of Greece, Ireland, Portugal and Spain, sees RIchard Woodard look at the situation in Ireland.
As the first economy in western Europe to slide into recession, the Irish Republic might have harboured some expectations that it would be among the first to recover and see its economic fortunes restored.
Not a bit of it. A long, slow, painful period of recovery, punctuated by soaring unemployment, a property crash and eye-watering austerity measures, has deteriorated into a banking crisis that stubbornly refuses to go away.
The taint of commercial property speculation, which necessitated an EUR85bn bailout from the EU and IMF last November, has spread to the residential sector, with some parts of the country enduring a crash in house prices of more than 60%, and with 5.7% of homeowners at least three months behind with mortgage payments.
At the end of March, the Irish Central Bank revealed the results of bank “stress tests”, which found that EUR24bn – cash set aside from the bailout – was needed to give the banks commercial and financial credibility. As a result, Allied Irish Banks, Bank of Ireland, Educational Building Society (EBS) and the Irish Life & Permanent are all now under majority State ownership.
The crisis has left the “Celtic tiger” economy barely able to muster a faint miaow, a new generation set to emigrate to escape the misery, and what was a vibrant consumer sector on its knees.
The drinks market
For the Irish on-trade sector, the past few years have engineered what might be termed a “perfect storm” of conspiring negativity: first of all, the general consumer trend, observed in many other western markets, of increased at-home consumption, bringing about a decline in on-trade revenues.
This creeping effect was accelerated by the smoking ban introduced in the mid-noughties – leaving the sector in poor shape to react with any robustness when the recession hit in 2008.
The scale of the slump in the on-trade is staggering: out of 100,000 employees in 2008, 22,000 people have lost their jobs in just three years, while per capita alcohol consumption fell by 16% over the same period. All of this despite a 20% cut in excise duty which has done much to reduce the impact of cross-border shopping and consumers heading into Northern Ireland to buy their alcohol.
An under-pressure Irish government was unable to repeat the dose of duty cuts for 2011, despite a reported revival on cross-border shopping and the continued decline of the on-trade; nonetheless, the freeze on duty was still welcomed by Irish drinks trade association the Drinks Industry Group of Ireland (DIGI).
An already bad situation has been exacerbated by a slump in numbers of visiting tourists, down 16% in the first nine months of 2010 following a decline also in 2009 – another blow not just to pubs in Dublin, but even more so to those rural hostelries far from the capital, who tend to rely on summer visitors to enable them to stay in business.
The effects on drinks companies have been both general and particular. None has been immune to such a devastating downturn in trade, but one or two in particular have been particularly exposed to its effects.
Cider producer C&C Group, owner of the Bulmers and Magners brands, axed 144 jobs from its operations in spring 2009, but was forced to announce another 50 redundancies in October 2010, saying that it needed to cut the workforce at its base in Clonmel by 220 before the end of 2010.
Even though Magners sales in the UK had staged a recovery, the perpetual gloom in the Republic had led to continuing declines in Bulmers’ fortunes, with sales down 3.4% in volume and 4.4% in value in the six months to the end of August 2010.
The job losses reflect the disproportionate effect of the downturn on the beer and cider sector. Guinness brand owner Diageo has found itself similarly vulnerable, since more than 80% of Diageo Ireland’s net sales is accounted for by beer.
“Net sales of total beer declined 6% and Guinness net sales declined 8% as the economic conditions continued to impact the market,” reveals a company spokesperson.
“Core consumers reduced their consumption frequency, and the shift to the off-trade accelerated, resulting in a share loss on Guinness of 0.2%. However, spirits performed better as volume grew 2% and three percentage points of price/mix drove net sales growth to 5%. This was driven by share gains in a declining spirits market and a reduction in cross-border trade.”
The star of this compensatory growth in spirits was Captain Morgan rum, which showed a double-digit sales increase and gained more than 10 percentage points of market share, cementing its position as Ireland’s fastest-growing spirit brand.
Despite the overall decline in the market, Diageo broadly maintained investment: marketing spend fell 3% thanks to “procurement efficiencies”, and reinvestment was flat.
But, within this broad context, investment behind Captain Morgan and Smirnoff actually fell, while Guinness marketing spend rose as the business focused on fewer, bigger events such as 'Arthur’s Day'.
On the surface, this might seem strange – upping investment in a declining category while reducing the spend on a growing spirits market – but it reflects Diageo’s determination to maintain its beer business in Ireland, simply because of its scale, which makes it still a high priority despite recent declines.
The big question for beer/Guinness in Ireland – and for the wider on-trade sector – is how far it still has to fall. With austerity measure in place and set to continue, coupled with further question marks about the Irish economy, the drinks sector may not have reached the bottom just yet.
For part one of this management briefing, click here.
The third, and final, part can be found here.
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