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Drinks

Feature: Keeping The Spirit Alive

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Feature: Keeping The Spirit Alive

Liquor sales in Europe were hit hard by the recession, but how have companies responded to the pressure? Gordon Hunt looks at the new European Drinks Industry. 

After the recession hit the drinks industry particularly hard, it appears that through acquisitions these innovative businesses have found a way to respond. Major operators such as Campari, Diageo and Pernod Ricard have approached global growth through acquiring local companies as, in general, liquor sales in Europe have continued to decline. However, even though the continent as a whole (Western sales fall as Eastern sales sky- rocket) appears stagnant, the volume of sales remains incredibly high.

A mature market, ignore Europe at your peril. Recent financial results from a number of major drinks companies shows just how difficult a battle it is to ensure growth, market share and profits. Within the figures, however, there often lie some surprises.

Money Talks

Diageo, for example, posted a Q1 2013 decline of 1.1% in Western Europe sales, with the same level increased in the East. “Our business in Western Europe performed in line with the slightly improving trends we saw in Q4 in F13, although I still expect a low single-digit net-sales decline for the full year,” claimed Ivan Menezes, Diageo’s CEO, when the results were released.

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It was a similar story at Pernod Ricard, whose Q1 sales in the region were also down 1%. The group reported a strong performance in Germany, Britain and France, but Spain was still difficult, hit by an increase in excise duty in July 2013, of 1%.

According to the company, while European sales fell by 1%, “on an organic basis, Western Europe sales were up 2% and Eastern Europe up 8%.” Eye-catch- ingly, in Western Europe, sales of Havana Club in the quarter were up 25%, while Absolut saw a 16% increase. Globally, the group’s top 14 spirits and brands, which account for 64% of its sales, posted a 5% sales fall and a 1% volume drop.

Jameson sales were up by 13% and volumes up by 10%, thanks to a strong performance in the US. In the first half of the French group’s financial year, Re?my Martin’s liqueurs and spirits divi- sion recorded organic growth of 10.2%, with triple-sec Cointreau delivering “good growth” in the US, Latin America and key European markets, such as the UK and France. Metaxa continued its growth in Greece and Eastern Europe. Campari’s 2013 H1 results showed that the Italian market (25.7% of total group sales) recorded an overall decline of a depressing -15.7%.

Sales in the rest of Europe (20.6% of total group sales) grew by +4.6% overall. This was driven by the good recov- ery registered in the second quarter of 2013 (+7.3%), driven by a positive performance in Germany, the UK and France. In the first half of 2013, Germany recorded an organic change of -5.7%, as the recovery regis- tered in the second quarter (+5.9%), driven by Cinzano, Campari and Ouzo 12. Russia was up +21.1%, showing strong results across the key Cinzano and Mondoro brands.

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Other European markets registered mixed results: a positive trend in the UK was more than offset by a decline in Spain. However, bucking the trend, Beam’s net sales increased by 3% in Q3 and 4% YTD. The company said it continued to deliver above-market performance, led in particular by Jim Beam’s strength in Germany and across Europe.

Acquisitions Are The Answer

Amid the swathe of results posted in the last few weeks, it’s important to dig deeper, for the sales of drinks such as Bacardi, Smirnoff and Jameson in Europe are also dependent on what these groups do in their global performance. Intrinsically linked to that, it seems, are acquisitions. Since the recession, acquisitions by major drinks companies such as Diageo, Beam, Re?my Cointreau, Campari and Pernod Ricard have reshaped the European land- scape, as more drinks companies become properties of fewer and fewer operators.

American drinks are making inroads in Europe, too, while Irish and Scotch whiskeys enjoy a renaissance of sorts, however, with certain restrictions slowing their progress. Rabobank has released an interesting piece of research, which looked at 21 major drinks operators and what their performance has been like since 2009, with some interesting results emerging from the vast collection of data.

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Eleven companies saw a decline of revenues/assets, with the majority of them suffering due to declines in EBIT, often despite improvements in assets.

Evidence suggests that pursuing EBIT margin growth has been the more effec- tive pursuit, having a greater effect than lowering prices. ‘Clearly, pricing pressure on spirits suppliers remains intensive within the EU market, but aggressive price reductions and discounting to maintain volumes and market share appear to be counter-productive to creating real value,’ reads the report. In general, the report seems to support acquisitions (of the right kind) over the long term, but sees it as an impediment to performance early on, and it’s also affected by the high prices for acquisitions in today’s market.

‘Acquisitions are an important means of improving scale, and this appears to have a strong correlation with profitability in the current environment. A look at the percentage of companies [...] that have been able to improve profitability since the recession paints a clear picture of the growing importance of scale,’ it reads.

This scale of acquisitions is explained when we dig a little deeper and see just who is buying what. Campari has been one of the busier M&A players in recent years, acquiring Lascelles de Mercado & Co. from CL Financial last year, Sagatiba from Marcos de Moraes in 2011, and Wild Turkey from Pernod in 2009.

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Diageo has focused its M&A efforts of late on domestic spirits producers in emerging markets, including ShuiJingFang in China, Mey Icki in Turkey, Ypio?ca in Brazil and India’s United Spirits. Pernod has reduced its debt, rather than push through purchases, but did buy Cognac producer Le Maine au Bois earlier this year. Elsewhere, Beam has gone through an upheaval of sorts, acquiring the suc- cessful Cooley Distillery in Ireland in 2012, for example.

Chinese pressures have forced many drinks companies to rethink their strategy, with restrictive legislation recently passed, hurting sales out east. There was a “significant decline of Martell, primarily due to China”, where depletions have slowed and are now in slight decline in value, Pernod said. Martell sales fell 12%, while volumes dropped by 15%. Ballantine’s sales dropped by 11% as volumes remained flat, and Royal Salute dropped 21% in sales and volumes. Pernod attributed the declines to Asia, especially China.

A 10.4% decline in organic net sales for Re?my Martin in the first half of the French drinks group’s financial year is being blamed on a slowdown of premium cognacs in China.

The group said in a statement, “In the third quarter, Re?my Martin is expected to remain adversely affected by certain measures taken in China and by the level of retail inventories. Nevertheless, the group remains confident in the brand’s exceptional fundamentals in Asia, and in its long-term development in China.”

Options For Outsiders

It is clear that a number of factors affect the planning and execution of medium- and long-term strategies at major drinks companies. Spirit sales in Europe are a mixed bag at the moment: ‘mix’ being the key word. With whiskey sales seeing significant growth worldwide – with Irish whiskey, in particular, enjoying a popularity not seen since the years before Prohibition – there has been a huge shift amongst spirit retailers in general.

Diageo’s Johnnie Walker, the world’s biggest-selling spirits brand, has recently switched its focus from emerging markets in Asia and the Americas back to Europe in an attempt to capitalise on whiskey’s new, more accessible image. This makes it all the more strange that sales in Kilbeggan whiskey – formerly Cooley’s lead brand, now a Beam product – have dropped by a huge 26% (however, again, Western Europe’s decline was in and around 1%).

Following innovations by US competitors in the European spirit market, such as Beam’s cherry-flavoured Red Stag and Jack Daniel’s with Honey, Diageo is set to place emphasis on the flavour and ‘mixability’ of whiskey. Signs of a slowdown in major emerging markets may also have contributed to the return, yet even after so long away from the European market, Johnnie Walker could well be able to keep pace with competitors by committing to a dedicated period of marketing spend.

Perhaps the restrictions on Scotch whiskey (in that it cannot simply be repackaged as a pre-made Scotch & Coke mix, for example) could help it maintain its brand power and presence. What the likes of vodka and rum drinks do to com- pete with this huge increase in popularity remains to be seen, but, clearly, there will be more acquisitions along the way.

© 2013 - European Supermarket Magazine

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