Management Briefing

The PIGS Markets - Introduction

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In this month's management briefing, Richard Woodard turns the spotlight on to the troublesome European markets of Greece, Ireland, Portugal and Spain. Coined unflatteringly the PIGS, these four markets have all seen better days, and are hitting the headlines for the headaches they are causing.

Representing the four European countries experiencing the worst impact of the global economic downturn, PIGS is an apt acronym, although not entirely precise: for, while Greece, Ireland and now Portugal have all had to request external financial help to restructure their national debt, the same has not happened to Spain. 

Also, many would argue that Italy – and even the UK – is just as fragile economically and financially as Spain. However, apart from the fact that this would ruin a memorable abbreviation, it’s fair to say that Spain deserves its place in the PIGS line-up, not least because of the risk of debt contamination crossing the border from nearby Portugal, with which there are strong trade and banking connections. 

The debt problems experienced by these countries are well enough known, but how has this economic fragility and reduced consumer confidence affected drinks companies? And what has their response to this been?

First of all, it’s fair to say that everyone has been impacted to some extent by the problems. Greece, Ireland and Spain in particular have traditionally shared a vibrant and, for drinks companies, generally profitable on-trade sector, and all three have seen that sector decimated by the downturn, accelerating a long-term trend of increasing retail sales and at-home consumption (which generally generates lower profits thanks to retail competition and discounting).

But, the impact is not the same across the board. Some businesses, such as Gruppo Campari, are of considerable size, but are not so exposed in these particular markets (of the four, only Spain represents even 1% of Campari sales). That’s not to say they haven’t been impacted in other markets – Italy in particular – but the effects of the PIGS market woes have been less pronounced.

You can’t say that about Diageo, however. The drinks giant experienced a 13% decline in net sales in the PIGS markets during the last six months of 2010, paying the price for historically strong performers such as Johnnie Walker and Jose Cuervo in Greece, J&B in Spain and, of course, Guinness in Ireland.

The effects of the downturn are fairly predictable; more interest lies in analysing the company’s response to the economic woes. Do you shift focus to more promising markets, or carry on or even increase marketing investment, reasoning that this will place you in a stronger position than your rivals when the recovery arrives? 

For Diageo, the answer – apart from the isolated example of Guinness in Ireland – is generally the former. Marketing spend in Portugal, Greece and Spain was cut by 21% in the second half of 2010, compared with a slight increase in spend across the rest of Europe, with a focus on particular brands – and, in Russia and Eastern Europe, an increase in marketing investment of more than 50%.

The strategic backdrop to the woes of the PIGS markets is an acceleration of Diageo’s more long-term shift towards investing in emerging markets in Eastern Europe, Asia, Africa and Latin America.

Speaking last October, Diageo's head of global supply, David Gosnell, said the company would continue to strip cost out of its businesses in Europe and North Africa, rerouting resources to emerging and increasingly attractive markets, such as Latin America’s spirits sector and Africa’s vibrant beer market.

The downturn has prompted a general raft of cost-cutting measures and adaptation of product offerings, which in turn have had a human cost: Some 200 jobs in Diageo’s European beer supply business as part of current cost-cutting measures; a total workforce reduction of 246 in the company’s European businesses by the end of the last fiscal year, and 643 job losses in North America (partly due to a shift of US wine supply activities to its global division).

By contrast, Diageo has added about 150 jobs to its international division in the year to June 2010, and has broadly maintained staffing levels in Asia Pacific. And, in expenditure terms, the company is spending GBP100m (US$163.3m) on its African beer business in the current fiscal year, adding to the GBP300m it has spent on the division in the last four years.

There’s little doubt that the PIGS crisis has sharpened Diageo’s focus on emerging markets – also evidenced by its acquisition of the Turkish Mey Içki business and its reported interest in Stock Spirits.

But, in common with other drinks companies, the sharp decline in the markets’ traditionally robust on-trade sectors has necessitated another strategic shift for Diageo towards at-home consumption. 

The company has cemented stronger links with key retail customers such as Metro, Tesco and Carrefour, reasoning that “at-home drinking is something that we can own in a much bigger way”, to quote Diageo Europe president Andrew Morgan. 

The approach from Pernod Ricard-owned Chivas Brothers has, however, been subtly different. Acknowledging that conditions have been “very tough for everyone”, Robin Johnston, the company’s regional director for Africa & Europe, also agrees that the result has been that “we have all had to ‘up our game’ in the off-trade market in terms of category management and our approach to promotional activity”. 

But, he believes each of the company’s major brands has needed a different response linked to consumer occasions, dynamics and on/off-trade splits, and believes it is a mistake to cut spending too drastically in difficult times. 

“The bottom line is that we have continued to invest in our brands and have not panicked,” Johnston says. “History has shown that brands that gain share through a recession keep that share afterwards.”

The short-term effects of the economic downturn on these markets have been relatively severe, especially for strong multinational and local companies. But, they have also accelerated longer-term trends such as the shift to at-home consumption and increased investment in emerging economies.

How the picture changes in the future depends on how the broader economic picture evolves in the markets. At best, recovery is likely to be slow and partial, and the on-trade in Greece, Spain and Ireland in particular is unlikely fully to regain its historic strength.

But, the picture could seriously worsen if one of two events comes to pass: if the debt crisis afflicting Portugal crosses the border into the much larger Spanish economy, necessitating some form of bail-out and plunging the eurozone into crisis; and if, as many economists are already forecasting, Greece is forced to default on its debt payments. 

The saga of the PIGS markets’ economic woes, in other words, still has some way to run.

To head to part one of this mangement briefing, click here.

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