Drinks industry insiders are mulling over the latest takeover news and speculating on some intriguing scenarios.
French drinks group Pernod Ricard has teamed up with Fortune Brands of the US to mount a &£7bn bid for Britain’s Allied Domecq, the world’s second-largest spirits brand owner, but just how the drinks giant’s brands would be divided up is open to speculation. However, the pair may not get the chance to divide any spoils, as Bacardi is understood to be talking to rivals, such as Brown-Forman in the US, and venture capitalists with a view to mounting a rival bid for Allied.
But if Pernod and its partner are successful, then the French drinks giant is likely to cream off the best of Allied’s portfolio. However, it is unclear what would be left for Fortune Brands. The US household goods giant already owns Jim Beam whiskey along with assorted brands such as Titleist golf clubs.
If Fortune Brands is being lined up simply to take over Allied’s Dunkin Brands retailing interests, leaving the spirits brands for Pernod, the French group would leapfrog market leader Diageo to become the world’s biggest spirits business by volume share (excluding ready-to-drink products) according to figures from research company IWSR (see graph).
But there could be regulatory issues with this scenario, and Pernod may not be allowed to keep all of Allied’s brands in all markets. Fortune might retain some or they could be thrown open to the market.
Pernod would insist on keeping Ballantine’s, which sells 6 million cases a year, making it the world’s second most popular whisky after Johnnie Walker, which sold 11.7 million cases last year.
Exploiting overlapping interests between merged sales operations is a key rationale for a deal and could deliver savings of between three and six per cent of net sales according to analysts. In Spain, for instance, Pernod would be able to merge its sales team for Larios gin (which sold 1.2 million cases worldwide in 2003) with Allied’s sales force for Ballantine’s. “All it needs to do is combine the sales forces and it will have more clout,” says IWSR managing director Alastair Smith. But Smith disagrees with those who think that this would just be a cost-cutting move. “For Pernod, it would be growth enhancing; it fully intends to grow the brands,” he says. He points to the work that Pernod has done with Chivas Regal, the whisky brand it acquired when it teamed up with Diageo to buy and divide up Seagram’s portfolio in 2001. “Chivas was doing fairly badly in the US where it had been losing out to Johnnie Walker Black, but now it is performing well,” he says.
Many wonder what would happen to Allied’s wine portfolio. Tony Scouller, a former boss at IDV, now part of Diageo, believes that Pernod, being French, would want to keep hold of it.
He adds that Allied owns certain buried treasures and sees Maker’s Mark premium bourbon as a potential star. “Maker’s Mark is the sleeper in Allied’s portfolio, it is a brilliant brand with great heritage, and it could be a runner against Jack Daniel’s,” he says.
Curiously, a quirk of bylaws in Kentucky, USA, where Maker’s is based, means that the brand is obliged to use a local advertising agency rather than plugging into Allied’s global network – Publicis promotes all its brands around the world, mainly through below-the-line division Publicis Dialog. Pernod uses a mix of agencies in the UK, including G1 and Media Planning Group.
Scouller says other coveted Allied brands are Malibu, acquired from Diageo in 2002 and coffee liqueurs Tia Maria, which sells mainly in the UK, and Kahlua, which is promoted worldwide. Some believe Allied has done a good job marketing these two brands and say they present strong competition to the powerful Baileys brand.
However, Diageo says figures from AC Nielsen for GB volume sales to December 2004 (total trade) show Baileys taking nearly half of the UK’s liqueurs market with 1.16 million case sales, a 23 per cent growth on the previous year, against Tia Maria’s 203,000 case sales, which declined three per cent year on year. Even so, one source says the threat posed by Tia Maria has caused Baileys to play down its Irish origins with a label redesign that is reminiscent of its rival’s Caribbean roots.
Scouller believes Pernod will be paying over the odds for Allied, which already has an acquisition premium built into its share price. This is because in the great game of drinks industry consolidation, Allied holds key global brands and investors know that Pernod has little option but to buy it to keep on expanding.
Some believe that the certainties of consolidation have made Allied complacent, content to coast along in the knowledge that it will be bought, making its top directors rich – chief executive Philip Bowman is set to make a &£14m personal windfall if the deal goes ahead.
Critics claim Allied has allowed marketing to slip in the UK. It dominates the sherry sector, but is accused of allowing supermarkets to destroy the business by slashing prices while it has failed to build brands such as Harveys. Allied’s UK whisky Teacher’s has become a bargain-basement product.
One critic says: “They are the leaders in sherry in the UK and have some duty to try to change the category, which has done badly for years. Allied has some very good brands. Malibu has done well in the US through new flavour launches, but they have done little with it elsewhere. People buy Teacher’s because it is cheap, and not because they are attracted to it.”
Industry insiders say Allied was taken by surprise by the recent success of Courvoisier brandy, which suddenly became fashionable after featuring in gangster rap hit “Pass the Courvoisier”. Industry insiders say that Courvoisier is one brand that Pernod, which owns Martell, may pass on to Fortune for regulatory reasons.
“For a company with such big brands, you’d think it would have some ambition. But it seems it has just been waiting for consolidation,” says one critic.
However, an Allied spokesman says the reverse is true: “If you look at our published figures, they show exactly the opposite, there has been strong growth behind our brands for the past six years. We have even gained market share in declining markets such as Spain.” He says spending on advertising and promotion is up 25 per cent over the past five years. Results for the year to August 2004 show spirits and wine turnover flat at &£2.4bn with profit before tax up six per cent at &£521m.
Allied’s marketing is in flux. It is waiting for new global marketing director Peter Littlewood to join from Mars following the departure of Kim Manley, who resigned as chief marketing officer following a financial probe. In the event of a takeover, Allied’s entire centralised marketing team is likely to be subsumed under Pernod Ricard global marketing director Jean-Paul Richard.
It could be weeks before the full picture of likely scenarios begins to emerge. But one thing is certain – the global drinks industry is moving towards a final round of consolidation.