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SECTOR REPORT: DISTILLERS 64 Blithe Spirits IN A The spirit of capitalism is up and roaring – at least among the world’s distillers. The few remaining liquor giants today squint avariciously at each other’s brands, with a view to takeovers and amalgamations. Allied Domecq, the British-based company that is the world’s second largest liquor seller, having scarcely digested its spoils from the Seagram’s carve up of four years ago, is now itself on the slab awaiting the brand-hoarders’ hatchets. Its shareholders are not complaining. Like a prize bull fatted for market, the carved up company is worth far more than on the hoof. Ian Williams considers the outlook for the industry. Philip Bowman, chief executive, Allied Domecq = bull run
TODAY’S SPIRITUOUS FRENZY is a return of an older cycle of trade. In the seventeenth and eighteenth centuries, the distillation of brandy and rum helped turn the engines of world commerce, leading to the development of the modern Atlantic economy. New Englanders traded their cod for molasses from the Caribbean, which they made into rum. Apart from drinking lots of it themselves, it was a major article of trade for the slavers. Alcohol was also a major source of early trade wars since the French and Spanish tried to protect their domestic brandy producers from colonial competition by banning the rum trade, and distillers worldwide used their domestic clout to ensure that foreign rivals were taxed at a much higher rate. People have always thought that tipple from across the sea was more exotic and chic than anything produced in their hometown distilleries. Colonial Americans, for example, oft times paid a premium for Jamaica Rum over their local New England variety, while their contemporary British paid more for sometimes-smuggled French brandy rather than locally produced gin or whisky. Eventually, that led to the development of global brands recognised across the drinking world. In more recent times, World Trade Organisation rulings and free trade agreements have now cut back on the previous tariff barriers that penalised foreign spirits, creating a real world market. Countries may tax drinking heavily, but they can no longer favour local distilleries. In the last ten years, as a result of these developments, the industry has steadily grown from a relatively high population of small family-owned enterprises to a much smaller group of massive international companies. And, just as in the buccaneering Rum era, French, British and American giants are now playing a modern form of poker across the Atlantic table. So far advanced is the process of consolidation that to stay one step ahead of the regulators, recent takeovers have involved shuffling brands between rivals so that each can maintain a balanced portfolio of products without developing a monopoly in any one sector. Because this is a global business, companies have to comply with Fizz and pop in the spirit world European and US anti- 500 monopoly regulations, and 450 400 each merger and 350 acquisition results in a 300 judicious reshuffle of 250 brands as the companies 200 150 try to assemble the hands 100 they want to deal in each 50 of the big markets. 0 Driving the present barroom brawl is the growing popularity, and even faster Allied Domecq Pernod–Ricard growing profitability, of Diageo Fortune Brands premium branded spirits. Apr-00 Oct-00 FTSE GLOBAL MARKETS • JULY/AUGUST 2005 Apr-01 Oct-01 Apr-02 Oct-02 Constellation Brands A FTSE Beverages Index Data as at June 05. Source: FTSE Group/FactSet Limited (Price Index values in US Dollars) Once a heavily taxed luxury, rising affluence and declining relative prices have caused spirit consumption to soar – especially in the branded varieties where the wiles of marketers can persuade drinkers that there is enough virtue in a branded variety of pure ethanol and water to be worth five times the price of a generic equivalent. Young people in their twenties in particular are downing spirits. Sales in the US for example are rising by 4.1% a year, while beer drinking, at 0.5% annual growth, these days can hardly raise its froth above the glass. Marketers have successfully persuaded significant numbers of the bright twenties age group that only much more expensive super-premium brands have the necessary cachet. Furthermore, these days it is peer-group social death to be seen drinking lesser brands without the lore. As a result Impact Databank, the alcohol sellers’ bible, assessed the value of the world's top 100 spirits brands as rising 5% to $56bn last year. That price and worth are not necessarily identical is suggested by American Sidney Frank’s sale of the “Grey Goose”vodka brand to Bacardi for $2bn last September. It is perhaps symptomatic that Frank began his career making alcohol-based jet fuel. His “invention” of Grey Goose was based on sound economic principles. As he has explained,“A bottle of Absolut sells for $20 a bottle.Vodka is just water and alcohol, so if I sold a bottle for $30, the $10 difference is almost all profit.”He knew that there is nothing as easy as parting a snob from his money, and made Grey Goose in France, to tickle American consumers’sense of chic. There is indeed room for a little boy to do the emperor’s new clothes routine on drinks such as premium vodka. Dimitry Mendeleyev took time off from laying the Periodic table of Elements to draw up the specifications for vodka for the Tsar in 1894. It comprised 60% water and 40% ethanol. So the major difference in premium drinks is the label on the bottle – and the price. Since most of the drinkers add mixers or drink the vodka as part of a cocktail, any homeopathic differences between brands would need a gas chromatograph to identify. One envisages a world full of unscrupulous bar-owners decanting basic vodka into expensive bottles every evening. Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 But with the mysterious alchemy of branding, Grey Goose has left former premium brands behind, as mere cooking vodkas for the undiscerning. It has also triggered a chain reaction as other firms have sought to put alcohol and water in pretty bottles that attracted superpremium prices. Its very simplicity is what makes vodka perfect for this form of comodification. However, 65
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