Before the ink had dried on the deal giving Bacardi Ltd ownership of the Dewar’s Scotch and Bombay gin brands, the company’s president Chip Reid was planning his next acquisition.
Dewar’s and Bombay, purchased from Diageo for 1.15bn, go only part of the way to shoring up Bacardi’s spirits portfolio. When Reid took over stewardship of the company in 1995, he was charged with making Bacardi “the number one spirits company in the world.” He is still a long way from that goal. And with global spirits sales flat, there is little room for organic growth. Successful acquisitions are key to the company’s future.
With pre-acquisition sales of about $2.5bn (1.5bn) and profits of some $370m (224m), Bacardi needed to triple sales to reach Diageo’s 9bn and increase profits eightfold to match its UDV spirits division’s 703m profits. Bacardi is number four after Diageo, Allied Domecq and Seagram in profitability. One of Reid’s more easily achievable stated goals was to increase the company’s sales to $3bn (1.8bn) by 2000. The purchase of Bombay and Dewar’s mean the company will achieve this next year, as they add up to a further $1.6bn (970m) of extra sales.
Reid says Bacardi is looking to buy a vodka brand – Finlandia or Absolut are thought to be possible candidates, with Finlandia the favourite – and a tequila brand to complete its portfolio, which consists of the world’s best-selling rum (Bacardi) and best-selling Vermouth (Martini), and now the top-selling US whisky (Dewar’s), and a fast-growing, prestigious gin brand (Bombay).
Reid said of the acquisitions: “In an industry that is consolidating rapidly into a few, very powerful players, it became clear to us that Bacardi had a unique opportunity to acquire two world class brands. As Bacardi’s second major acquisition in less than five years, it demonstrates our ambition to remain a major player in the spirits industry.”
But the acquisitions are a leap into the unknown for the company, presenting a new challenge to Bacardi’s marketers. It has built its business through marketing the Bacardi rum brand, and since its 1992 acquisition of a majority stake in Martini & Rossi has had the unenviable job of maintaining sales in the stagnant Vermouth category.
The company now faces the task of making two brands – virtually unknown in most world markets – into star performers and recouping the 1.15bn it paid for them. It is entering the arena of major brand launches for the first time, and will have to look at branding in a new way. New products such as Bacardi Limon, Bacardi Spice and Martini Metz have been offshoots of its existing, established brands. It is not simply a question of building on an established platform and relaunching brands, but launching them anew in world markets.
Bacardi faces flat sales in its main categories – in 1996, rum sales fell two per cent, though the decline was arrested in 1997, largely thanks to Limon – so the acquisitions will determine whether it can move towards its goal of becoming “the world’s number one spirits company”.
This aim of being number one may be put down to a president’s natural penchant for finding ways of claiming his company is the best. But for the family-owned Bacardi, it is also a means of galvanising the 400 or so family members who own the company to achieve a common goal.
Bacardi does not need to satisfy the needs of Wall Street shareholders, but it does have to avoid creating dissident factions, which have the potential to damage family-owned businesses. Factional strife among the clan has arisen before, with one faction voicing fears that the executive was planning to take the company public. The delicate politics involved in balancing the family interests may be one reason Bacardi prefers not to divulge too much information about its finances.
However, that will have to change, not least because of the increasing interest of the competition authorities as the company makes more acquisitions. In 1992, it paid $1.4bn (848m) for a majority stake in another family-owned concern, Martini & Rossi. This provided a bridgehead into European markets and a way to expand its portfolio beyond the rum category. As the worldwide spirits market began to stagnate through the Eighties, it launched the Bacardi Limon variant, in an effort to pull in younger consumers. But the gaps in its portfolio were holding it back in the spirits market.
Consequently when US and European competition authorities made the sale of Dewar’s and Bombay a condition for the merger of Grand Metropolitan and Guinness and the creation of Diageo in March, Bacardi joined the queue of some 20 companies bidding for the brands.
The sale price of 1.15bn – thought to be about 300m for Bombay Sapphire and 800m for Dewar’s – took the City by surprise. Analysts had initially expected a price of about 600m, expressing a multiple of estimated profits on the two brands of about 12 times. They got the multiple right, but they had seriously underestimated the brands’ combined profitability, which was later revealed at 95m.
Diageo chairman Tony Greener was understood to have been deeply disappointed when the authorities ordered him to sell the Bombay gin brand. One source says: “Sapphire is a very good gin with considerable potential for growth. Diageo would have liked to have held onto it. In comparison, Dewar’s was an irrelevance.”
Diageo’s spirits division UDV can do without Dewar’s – it has two other strong whisky brands, J&B and Johnnie Walker, which it can easily use to fill the gap left by Dewar’s. If anything, turning Dewar’s into a global brand would have been hard for Diageo, as it conflicted with its other whisky brands in many markets. Getting rid of Dewar’s makes UDV’s task simpler, giving it a smaller portfolio to manage.
But Sapphire is different. It may only sell 600,000 cases a year and bring in profits of about 10m. But it was launched only twelve years ago, and is growing at 28 per cent a year. It is brands like Bombay – new, premium and burgeoning – that will drive forward the stagnating spirits market over the next decade. While sales of mass market spirit brands go flat, drinks companies are increasingly looking to premium and super premium brands to keep profit margins healthy.
Sapphire and Dewar’s will be distributed in the UK by Westbay, which is owned by Bacardi-Martini. Westbay marketing director Stella David, who was involved in assessing the brands’ potential during the bid says: “The biggest opportunity in the UK is clearly for Bombay Sapphire. We want to keep it premium, we will not target massive distribution. There are not many brands in this position that come up for sale. UDV was sad to lose it. It didn’t sell it by choice.
“It is a big challenge – the organisation has paid a lot for the brand because it believes in its long-term potential.”
Last week Bacardi appointed Banks Hoggins O’Shea as the international advertising agency for Sapphire – BHO had worked on the brand for five years while it was owned by GrandMet. Dewar’s agency Leo Burnett announced it was resigning from the 15m account, as it clashes with the other Diageo brands its handles, Gordon’s and Johnnie Walker (MW June 25). In the US, media buying for the brands has been handed to Ammirati Puris Lintas in New York. This may indicate the destination of the creative work for Dewar’s. APL is part of the Interpublic Group, which includes McCann-Erickson, agency for Bacardi rum.
Bacardi is in the process of establishing marketing and distribution networks around the world. It has handed the job of marketing Sapphire to Paul Murphy, a director at Westbay Distributors, one of its UK distribution divisions that includes the main Bacardi and Martini brands and their offshoots.
The company is reluctant to talk about its plans for the newly-acquired brands, saying it is “too early to comment”.
But one source estimates that it could take Bacardi up to 16 years to reap the investment it has put into the brands, given the increased marketing budgets they will need. Building spirits brands is a long-term process, and it can take three years at least before a marketing campaign makes a mark on sales.
Dewar’s sells about 3 million cases a year, with over half of those recorded in the US. The rest are split between Greece and Spain, where it is the third-rated brand, and the Lebanon, where it has been marketed during the war. In the UK, it is a small brand, with a market share of about one or two per cent by volume
But freed from the conflicts of the Guinness spirits portfolio, which included the UK’s number one whisky brand Bell’s, Dewar’s can now go global. Analyst Mark Puleikis at Merrill Lynch says: “Bacardi will look to Europe for aggressive growth with Dewar’s. Outside the US and a handful of other markets, it is a tiny brand.” In this sense, the brand could provide stiff competition for Diageo, as it will compete with J&B and Johnnie Walker across Europe, and the US.
But the whisky market is notoriously difficult in Europe, and nowhere more so than in the UK, where retailers indulge in widespread price-cutting on whisky brands. Whether Bacardi can improve on the brand’s 80m profits will depend on its ability to come up with a new positioning, and to endow it with youth appeal.
In the US, Dewar’s is positioned around “older young people” – those in their late 20s. The idea of capturing a true youth market was too difficult even to contemplate.
Piecemeal acquisitions will do much to strengthen Bacardi’s position in distribution – a broader portfolio gives it a stronger bargaining position with retailers and bars and clubs. But as for its goal of being number one, it would take many such acquisitions before even overtaking number two Allied-Domecq, let alone Diageo. Another plank in Reid’s strategy is to develop strategic alliances.
This would mean entering a patchwork of sales and marketing alliances in markets around the world. By pooling portfolios, the smaller companies such as Pernod-Ricard, the Japanese Suntory and possibly Bacardi too could carve up the world’s regions between them.
The company has changed much in the past five years, with two rounds of acquisitions and a push into brand extensions. After being chased out of Cuba by Fidel Castro’s regime in 1960, it set up base in Bermuda and has exploited the Bacardi name for all it is worth, leading it to become the world’s best-known spirits brand by the Seventies.
The purchase of Dewar’s and Sapphire may not be quite as momentous an episode in the company’s history as its expulsion from Cuba. Building the brands in new markets will be a measure of its ability to adapt to stagnating spirits sales, and to take a greater share of a decreasing market.