Preview of the Year 2012 – Part III: Spirits
The spirits category is up next in this, the third part of just-drinks' first management briefing of 2012. Here, Spiros Malandrakis and Jeremy Cunnington, alcoholics drinks analysts at Euromonitor International, ponder the future for the stronger stuff.
David versus Goliath
While mainstream brands can - and will - flex their financial muscle in a flurry of diversification initiatives, promotional activities and special discounts, small batch varietals will make waves that will be disproportionally greater than their respective size.
Following in the footsteps of the surging, irreverent and ground-breaking craft beer segment, micro-distilleries will gain momentum and secure strong sales amidst the general gloom overshadowing the majority of Western markets. Craftsmanship, heritage and a convincing narrative will also be increasingly highlighted in revamped mainstream brands.
A Flavour of Controversy
Products like Tennessee Honey and Red Stag have infused the spirits category with much more than subtly sweet and accessible flavours. They have provided an irreverent take on traditionally conservative product positioning, while expanding consumer appeal beyond a typically loyal yet inevitably stagnant core consumer following.
Quirky, experimental and increasingly more premium minded takes on the tried and tested proposition for flavour sophistication stand to subversively infect more key categories beyond vodka, the usual suspect. Spiced rum, Bourbon and gin can all spearhead the offensive.
Beam Inc - The Centre of Attention?
2012 is likely to be a busy year in the world of spirits. How busy will depend on what happens to Beam Inc now that it is a separate entity listed on the stock market and highly vulnerable to takeover. If a takeover and break-up of the company does occur, it will not happen until the latter part of 2012 at the earliest as the two companies that would most likely initiate the acquisition, Diageo and Pernod Ricard, will not be ready until then.
There is, however, a very good chance that any such acquisition would not happen until at least 2013. Pernod Ricard is the company most likely to acquire Beam’s two major brands, Jim Beam and Sauza Tequila. Diageo is likely to come to some arrangement with Grupo Cuervo regarding tequila, while it is unlikely to acquire Jim Beam as the company would face anti-trust issues in Australia and the brand would not help it with its goal of developing its emerging market revenues. Thus, Pernod Ricard, with its still very high level of debt, may gamble and decide to wait until 2013 to pay down more of its debt, particularly if the economic climate continues to remain uncertain.
Whenever the break-up of Beam happens, there will be a plethora of international and local companies looking to pick up unwanted brands. The main international companies are likely to be Bacardi, Campari, William Grant & Sons, Brown-Forman and Rémy Cointreau. At a local level, companies such as Sazerac in North America and Varma in Spain could be beneficiaries.
Plenty Going on, if Beam Remains Independent
Even if nothing happens to Beam in 2012, there could still be plenty of other corporate activity. Mergers and acquisitions will be limited as companies prepare their positions for when a move for Beam Inc is made, but companies will be making continued efforts to push into emerging markets to reduce their reliance on struggling Western markets, with both Bacardi and Diageo making further moves in India and Pernod Ricard in Latin America.
One possible exception to the limit on acquisitions could be the resolution of the relationship between Diageo and Grupo Cuervo. Diageo’s distribution deal with the world’s largest tequila producer ends in June 2013 and negotiations have been ongoing, with Diageo at the very least wanting an equity stake in Grupo Cuervo. With Diageo able to use the leverage of its possible acquisition of Sauza Tequila, one would expect at least a deal similar to that struck with Nolet Spirits for Ketel One (a 50:50 joint venture).
Another possible exception to the waiting could be Rémy Cointreau which mentioned in its half-year results in November 2011 that it was looking for acquisitions of up to €800 million.
On a more regional level, there could be activity with Roust Inc acquiring Eastern Europe’s biggest and the world’s eighth largest spirits producer by volume, CEDC, which despite its size has been struggling recently. Roust bought a 10% stake in the troubled company in November 2011 and has submitted a plan to CEDC to take up to a 30% stake in the company, which at the time of writing was being considered by the Polish-based company.
In addition to this, French-based Belvédère, which is still in huge financial difficulty, is likely to sell off some of its brands in order to repay creditors. Those most likely to go are its French-focused brands, led by William Peel blended Scotch. These brands would most likely appeal to those emerging market companies looking to expand into higher-value mature markets and also gain more premium brands.
The category to watch is Irish whiskey and its three major brands, Pernod’s Jameson, William Grant’s Tullamore Dew and Diageo’s Bushmills. Beam’s acquisition of Cooley Distillery at the end of 2011 will not have any impact on these three major brands due to the Irish company’s minor share in the category and the time it will take Beam to get to grips with the acquisition.
Historically, the category has been driven by the Jameson brand, but with William Grant owning Tullamore Dew and Diageo making Bushmills one of its key strategic brands, Pernod Ricard could face some tougher competition. William Grant has already started pushing Tullamore Dew in key markets via its Irish True campaign in 2011. It will be interesting to see what Diageo does with Bushmills in 2012. We can also then perhaps begin to answer the question as to whether there is more to the Irish whiskey category than just Jameson.
Companies: Diageo, Pernod Ricard, Ricard, Beam Global Spirits & Wine, Bacardi Ltd, William Grant & Sons, Cointreau, Central European Distribution Corporation, Campari, Brown-Forman, Jameson, Cooley Distillery
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