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August 17, 2012

International Spirits Companies Going Local

CA1_136x136Analyst Insight by Jeremy Cunnington, Senior Alcoholic Drinks Analyst at Euromonitor International

Even before the recession there was a great deal of interest from international spirits companies in emerging markets due to their strong growth prospects. This has increased significantly following the economic crisis due to their core Western markets offering more limited prospects, thus encouraging these companies to look at local spirits brands.

Two companies are already relatively well established in local spirits, namely Pernod Ricard and Campari, but this marks a change in strategy for a number of other players such as Diageo, Rémy Cointreau and Bacardi.

The most active in terms of moving into local spirits has been Diageo, which in 2011 developed its own Indian whisky brand, acquired the local Turkish spirits giant Mey Içki and a majority stake in the Chinese baijiu producer Sichuan Quanxing. In 2012, it has so far launched a local Indian whisky brand, Rowson's Reserve and more recently purchased Ypióca, the Brazilian cachaça producer. It is also rumoured that the company is set to acquire at least large minority stakes in Grupo Cuervo and United Spirits, UB Group's spirits division.

Bacardi, meanwhile, has talked about acquiring a local whisky brand in India while Rémy Cointreau is considering developing a premium local Indian brandy.

Emerging markets key to growth

This strategy can be attributed to the fact that emerging markets are proving to be key growth drivers of international spirits categories such as blended Scotch and cognac. In contrast, many of the markets holding back growth are mature Western economies where players such as Diageo and Bacardi have limited room for expansion. Nine of the 10 fastest forecast growth markets for blended Scotch over 2011-2016 will be emerging economies.

The growth of international spirits categories in emerging markets stems from rising disposable incomes. In India, the number of households with an income of US$45,000 and above in purchasing power parity (PPP) terms rose from 4.8 million in 2006 to 10.8 million in 2011, and is set to rise to 28.9 million by 2016. Spirits volumes in India are expected to grow from 2.2 billion to 3.6 billion litres over 2011-2016.

Not enough profit previously

The vast majority of volumes in emerging markets have been and will continue to be accounted for by local spirits. International manufacturers had been put off entering these categories because of a lack of profitability. Margins, if not lower in actual percentage terms, will be in actual dollar terms. In Poland, in 2011, a 70cl bottle of Pernod Ricard's local economy vodka cost around US$13, while a similar sized bottle of Absolut cost US$21, and a bottle of Ballantine's nearly US$24. Assuming all brands have a similar profit margin, and if anything Luksusowa's margins will be lower than the other two, that would leave Pernod Ricard with around double the profit in actual terms with an international brand compared to a local one. Thus, why bother investing in brands with at least 60% less profit?

Hence, many international companies, especially Diageo and Bacardi, felt it better to focus on their core markets and when they did focus on emerging markets they did so with their more profitable international brands. This was particularly the case when their more premium core markets of North America and Western Europe were performing strongly and consistently, unlike a number of emerging markets, especially after the Asian financial crash.

Growing appeal of local spirits categories

The benefits of moving into local spirits categories have become more apparent. While the number of consumers who can afford international spirits is set to grow rapidly, there will still be many more who will not be able to, in the short term at least. In India, of the 229 million households in 2011, over 80% had a disposable income (in PPP terms) of less than US$25,000, while by 2016 just under 70% of the 246 million households will fall into this bracket.

Offering products which are affordable in these markets now will provide an opportunity for consumers to then trade up to international brands when their financial situation improves.

There will also be the benefit of trading up not just from local to international spirits but also within local spirits categories, from entry level to more premium products, thus offering greater profitability than even five years ago. In 2011, Pernod Ricard's fastest growing Indian whisky brand was its premium Blender's Pride with growth of 23%.

These products can also offer routes to markets that currently have not been tapped into by international spirits brands. In Brazil, Diageo's acquisition of Ypióca and its cachaça portfolio will give it greater access to on-trade establishments where cachaça is strong but categories such as blended Scotch are weak.

Entry into local emerging market spirits categories, however, will be limited and focused on specific economies, such as the major growth markets of India, Brazil and China. The number of target countries could expand as and when the business environment in countries such as the Philippines becomes more conducive to international spirits.


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