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November 9, 2012

Diageo Now Undisputed World Number One Spirits Producer

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.

Size 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.

Consequences 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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