Spirits brands at the crossroads
The aborted Guinness takeover bid for Grand Metropolitan is more than a revealing insight into boardroom politics: it speaks volumes about problems afflicting the drinks industry as a whole. Unless satisfactorily solved, these problems will have a serious, perhaps irreversible, impact on many of the industry’s well-known spirits brands.
The problems are complex, but a good place to start is with the Eighties. At that time there seemed no limit to the handsome margins to be generated from carefully segmented premium products. The worldwide exploitation of malt and premium blended whiskies, through duty-free outlets especially, was a good case in point.
Premium whiskies like Glenmorangie, Chivas Regal and Ballantine’s are still, of course, valuable assets. But much of the froth has gone, thanks mainly to the recession. There seems little prospect of a return to the Good Old Days and shareholders are getting impatient at the seeming lack of an alternative strategy for delivering the kind of dividends they expect.
Failure has certainly not been the result of indolence or complacency. On the contrary, the big four spirit makers – Guinness’ UD, GrandMet’s IDV, Allied Domecq and Seagram – have done everything conceivable to leverage their brands. In some cases with conspicuous success, like IDV’s Smirnoff vodka; in others more surreptitiously, as with UD’s duty-saving wheeze on Gordon’s Gin; most controversially, with the decision to advertise spirit brands on television.
Overall, however, the situation looks pretty grim. Manufacturers are caught in the jaws of a tightening vice. Their staple markets in North America and Europe are at best mature, at worst declining. Older drinkers, the sort who traditionally buy white and brown spirits, are dying off; younger ones are hard to come by. And shareholders are on the management’s back, demanding immediate results. The consequences are doubly damaging for brands. Internally, marketing budgets face the rigours of cost-shaving, as the company searches for extra margin. Externally, an increasing preoccupation with price promotion threatens to subvert brand equities.
There are, of course, longer-term solutions. For example, India and China provide the exotic allure of huge, underdeveloped markets. In the short term, however, extensive rationalisation of the industry seems likely. Not necessarily in a round of mergers and acquisitions, which are expensive and (a crucial flaw in the Guinness/GrandMet arithmetic) by no means guarantee cost savings.
More likely we will see regional collaborative ventures between the Big Four, whose brand portfolio and geographical strengths differ remarkably when viewed from a global perspective. We can expect a number of brands to change hands in the process, which should have interesting repercussions for their servicing agencies.
Cover story page 30
