Management Briefing

Review of the Year 2011 - Spirits

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Part three of our final management briefing of the year looks back at how 2011 has treated the spirits industry.


“Calmingly predictable.” That's how one spirits insider described 2011. Like the year before, 2011 will be considered by those working in spirits as a calm after a storm. Indeed, figures released in January showed rises in both volumes and value in the US in 2010, suggesting that the toughest times had passed. The runes lay favourably for the year ahead.

Also amidst the runes were predictions of increased consolidation within the spirits industry. While 'consolidation' might be an over-generous description of 2011's M&A activity, there were still plenty of transactions to write home about.

Diageo led the way with a trio of purchases in the more emerging markets of the spirits world. In January, the drinks giant lined up a 24% stake in Hanoi Liquor Joint Stock Co – or Halico, as the company is better known - for GBP33m (US$52.2m). Seven months later, the company upped its holding to 30%, as it looked to exploit the shift from informal to formal spirits consumption in Vietnam, where consumers are now more susceptible to brands.

Over in Turkey, meanwhile, Diageo agreed the acquisition of raki market-leader Mey Içki in February, for $2.1bn. Like the Halico move, Diageo was keen to boast of securing a local spirits producer with a healthy distribution footprint. Diageo's president for Europe, Andrew Morgan, was “delighted” with the buy, and well he might be: where else would he have been able to turn for any marked growth in a region as troubled as Europe this year?

The 'big one' for Diageo, however, dropped in June, when it was finally given a clear run at ShuiJingFang in China. The plan to buy a controlling stake in one of ShuiJingFang's stakeholders was initially announced back in March 2010. It took a lot of delicate manoeuvring to get regulatory approval, considering the hard line previously taken by the Chinese government against foreign ownership. But, now that Diageo is a player in the country's baiju category, expect to see the white spirit on sale in an airport near you in the coming years.

Other Diageo headlines this year included the future for the Jose Cuervo Tequila brand, the purchase of a controlling stake in the ultra-premium Zacapa rum brand, and a major marketing tie-up with Facebook. The spirits giant stayed true to type in 2011, then, with a wealth of activity around the world.

Conversely, Diageo's leading rival on the global spirits stage had a far quieter year. Once the thrill of being interviewed by just-drinks had worn off, Pernod CEO Pierre Pringuet led the firm along a steady, scenery-lite path in 2011. While wanting to be seen as a consolidator in the medium-term, Pernod had little to declare in the M&A column, beyond the creation of a joint-venture with US-based Tequila Avión. This aside, the French company only hit the headlines when it announced in May that it will double capacity at its Midleton Distillery in Ireland. As Jameson continues its upward trajectory, and Pernod looks to corner the newly-named single pot still Irish whiskey category, expect the firm to push the Irish, going forward.

The creation of Beam Inc out of the embers of Fortune Brands was one of the biggest spirits stories of the year, if only for the amount of takeover speculation the move generated. When Fortune Brands confirmed late last year that it would spin off its home & security and golf products units, but hold on to Beam Global, the talk began about how long the division would survive on its own before the spirits behemoths began circling. While Diageo hinted that it would be interested, the likes of William Grant & Sons and The UB Group offered their services as bit-part players, should a carve-up ensue.

Over in Illinois, however, it was business as usual for Beam. March's acquisition of US RTD brand Skinnygirl suggested there was still some fun to be had for the company. Last week's purchase of Cooley Distillery, meanwhile, for $95m, indicated that Beam is in it for the long-run. Observers may maintain that it is still a case of when and not if for Beam to be the subject of an auction, but a time-scale has become far harder to predict.

In the east, meanwhile, a raft of drinks companies busied themselves in 2011, to varying degrees of success. The most notable struggler was Central European Distribution Corporation, which started the year a step behind everyone else: In March, the US-based firm, which operates mainly in Central & Eastern Europe and Russia, posted full-year losses for 2010. This year offered no respite, with a revision of full-year forecasts being issued last month. So, the arrival of Russian Standard as a potential strategic partner earlier this month was, therefore, welcomed by CEDC, which will hope for a less turbulent year next year.

Staying east, both SPI Group and Russian Standard positioned themselves on the grid for what both expect will be a fruitful race for the wine palates of Russia. In April, SPI, which owns the Stolichnaya vodka brand, took majority control of Argentina's Achaval-Ferrer. Following suit, earlier this month, Russian Standard bought into Italy-based wine group Gancia. International drinks firms, take note: For 2012, when you think of Russia, think not of beer or spirits, think of wine.

Looking more broadly, 2011 was a year in which the spirits industry saw some new sub-categories take shape, and some old ones return. Back in March, Brown-Forman launched Jack Daniel's Tennessee Honey, a mix of Jack Daniel's and honey liqueur. Fast forward to December, and the company was trumpeting the variant for helping drive its half-year performance to the end of October.

Two further examples are the aforementioned low-calorie cocktail RTD Skinnygirl, owned by Beam, and Pernod's single pot still Irish whiskey offerings, Powers John’s Lane Release and Midleton Barry Crockett Legacy. Finally, of course, welcome back to absinthe, which has finally returned to the fold in France after the Senate lifted the 100-year ban in April.

Looking to next year, the trade landscape for the spirits industry is in a state of flux. In South Korea, US spirits firms will be hoping to see the tills rattle after Congress approved a free trade agreement with the country in October. The Philippines should also prove a happier stomping ground, since the WTO sided with the US and the EU over tax on imported spirits in August. That said, an appeal is pending, so we may have to wait a little while longer.

In Russia, spirits producers have a plus and a minus. The country's accession to the WTO, which took place last week after an 18-year wait, will see the global spirits firms rubbing their hands at the prospect of the removal of a range import tariffs on the likes of Scotch. The vodka producers among us, however, will have a headache over the festive period as they come to terms with the prospect of a duty ladder that kicks in in January. Little wonder, then, that the forecasts for vodka in Russia make for grim reading.

Finally, hope remains that India could prove to be the promised land that so many international spirits firms believe it is. With a complicated and oft-prohibitive duty structure for imported spirits, fingers will be crossed that negotiations on a free trade agreement between the European Union and India will prove beneficial, when they conclude next year. Especially when the market offers such lucrative potential for the future.

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