Bacardi’s US distribution tie-up with spirits company Brown Forman, announced last week, seems like a logical response to the encroaching power of giant Diageo.
But alliances and joint ventures between consumer brand companies have not always been fruitful, and often end in disaster. Last year, Coca-Cola and Procter & Gamble (P&G) announced plans to hive off Coke’s still drinks brands and P&G’s snack brands into a separate company (MW March 1, 2001). Just six months later, the two companies admitted the tie-up was dead, before the competition authorities even had the chance to determine whether the deal was anti-competitive. It was never clear what had gone wrong, but suspicions were raised that the alliance was ill-thought out and based on desperation or naive optimism, rather than cold, commercial logic.
But, according to observers, the Bacardi/Brown Forman tie up may be different. Dubbed the Gemini Alliance, it links Bacardi’s rum brand, Dewar’s Scotch, Bombay Sapphire gin, Disaronno amaretto and Drambuie with Brown Forman’s Jack Daniel’s, Southern Comfort and distribution rights to Finlandia vodka. The aim is to build distribution muscle behind the brands in the face of a challenge in the US by Diageo, which is attempting to form exclusive salesforces with wholesalers.
A statement from the companies says: “When the partnership begins operating, Brown-Forman and Bacardi expect the combination of selected delivery, marketing, and distribution functions to generate substantial savings and efficiencies for the companies, as well as for brokers, beverage alcohol control boards, distributors, retailers, and consumers. Because virtually all of their respective brands are in complementary product categories, Brown Forman and Bacardi also expect that the pooling of market resources will give consumers more information and improved access to their brands at retail stores.”
Tim Ambler, senior fellow at the London Business School, one of the first to warn of potential difficulties with the Coke/P&G deal, says: “In this case (Bacardi/Brown Forman) the elements are quite good. They are clearly threatened by the size of Diageo, and they are both large family-owned businesses.”
The companies already share distributors in 26 US states, according to reports. And in Europe, Bacardi distributes Brown Forman brands in some markets. The agreement may give the businesses the opportunity to employ salesmen in bars and clubs to promote the brands. Individually, the companies’ budgets do not stretch this far.
Strategic alliances are rife in the spirits and beer industries and according to John Murphy, the founder of brand consultancy Interbrand and chairman of Plymouth Gin, there will be more to come. He points to the four-way Maxxium joint venture outside the US – set up in 1999 between Absolut Vodka owner Vin & Sprit, Jim Beam Brands, Remy Cointreau and Highland Distillers. These alliances are being created in response to the distribution power of Diageo, he says, rather than pressures to merge production. He adds that there is industry talk about an imminent alliance between Allied Domecq and other groups, or a takeover. “It is partly because of the power of retailers, but it’s mainly because of competition in the drinks industry. It was a soft industry until 20 years ago. United Distillers was a huge whisky producer, but it ran every brand as a different company and achieved no economies of scale. They were a series of cottage industries and each had its own salesforce. Each brand would compete with every other whisky even though they were in common ownership,” he says.
But the creation of Diageo has changed that, and has forced the rest of the industry to huddle together to combat the drinks giant’s dominance. He says that last week’s news that South African Breweries may bid for Philip Morris’s Miller Brewing indicates that there is more consolidation in the drinks industry to come. He adds that there is industry talk about the combined company forging a link with Scottish & Newcastle to present a real competitive threat to Anheuser-Busch.
International business has been built on strategic alliances. Before the days of multinational companies, most international ventures were undertaken through cross-border alliances between family businesses. If anything, there are fewer alliances these days. Many of those that do exist have lacked stability and become shorter term because of the more predatory nature of multinational activity, and the need to satisfy investors. Airlines have attempted strategic alliances through the One World Alliance (including British Airways, American Airlines, Iberia) and Star Alliance (including Scandinavian Airlines, Lufthansa, Air Canada). These have been fairly stable, as legislation has prevented companies from taking the relationships on to a full-blown merger.
Bacardi and Brown Forman have also ruled out a full-blown merger.
According to Mitchell Koza, director of the Centre of International Business at the Cranfield School of Management, many alliances run into trouble not because they fail, but “because they succeed”. They are done either for the purpose of learning about new markets or sectors, or to enhance business in a new or under-served area. A partner may quit the venture once it has acquired the knowledge it came for; leaving the other partner feeling abused. Many of these alliances, he says, “can be unstable and become a learning race” and “the one that learns fastest gets out”.
Although Koza says in reality very few companies “can go it alone today”, and that even the biggest may be forced to pursue an alliance, as opposed to a merger – as such a route can be expensive. He adds: “If you are interested in dealing with a Goliath, becoming a pack hunter can be dangerous.”