FTSE Global Equity Index Series

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