Diageo Now Undisputed World Number One Spirits Producer

November 9th, 2012

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

Diageo’s acquisition of a majority stake in
United Spirits will make it the world's undisputed top spirits company by
volume, with more than 9% of the 20.2 billion litres (2011 volumes). It will be
bigger than the next four international companies combined (Pernod Ricard,
Beam, Brown-Forman and Campari) in volume terms.

The deal also shows Diageo tactical acumen
but historic strategic short comings. It showed the ability to play the tactical
long game, and rather than strike a deal three years ago, wait until UB
Group’s and United Spirits’ debts became too much of a burden. Nevertheless, it
has had the good fortune for this opportunity to arise following its strategic
blunder in pulling back from India.

In 2002, as part of its retrenchment from
Asia to focus more on its core North American and Western European markets,
Diageo sold its Indian spirits operations. Prior to the sale, it was the
leading international player in India ahead of its rival Pernod Ricard, who
acquired Seagram’s Indian business in 2002.

Pernod Ricard continued to invest in
developing its local Indian spirits brands, increasing its volumes 10 fold
making it India’s second biggest spirits player in 2011.

and Scale Key to Booming India

Size and scale is vital in India due the
poor infrastructure and very complex taxation system. While profits are
relatively low compared to international spirits they offer a fantastic
platform for when international spirits products, especially blended Scotch
become more affordable to India consumers.

By gaining control of the country’s largest
spirits producer, United Spirits, and the only one with a national distribution
and production network, Diageo will be in a great position to exploit the large
and fast growing Indian spirits markets.

Indians are huge spirits, and in particular, whisky consumers, with Indian whisky accounting for 1.3 billion of a 2.2
billion litre spirits market in 2011, and expecting to see a 9% and 10% CAGR
between 2011 and 2016 respectively.

Blended Scotch in 2011 accounted for only
9 million litres, but with such a large appetite for whisky, the growth
potential is huge if, in conjunction with rising consumer income, taxation on
imported spirits is reduced.

Beyond India

The knock on effect will also be huge. Due
to Diageo’s strength in Scotch production, it will require the selling off of
United Spirits’ Whyte and Mackay Scotch operations, giving the opportunity for
other smaller Scotch producers such as La Martiniquaise to bulk up their
production capacity.

It also all but rules out Diageo of being
a major player in the likely break up of Beam, due to its high debt levels. Recent
deals to acquire Mey Icki of Turkey, Ypioca of Brazil combined with this
acquisition and a possible deal to gain control of José Cuervo will mean its
finances will not be sufficient to do anything with Beam but possibly buy a
secondary brand, leaving Pernod Ricard in a prime position to take the lead.

That in itself will probably not greatly
concern Diageo, with strong positions now in all key emerging markets the
company is well placed to grow in the medium to long term. Whether it can, and
how its competitors react will make the global spirits industry very interesting.



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Lydia Gordon

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