Stagnant sales of spirits fuel 24bn GMG merger

When Guinness’ proposed takeover of Grand Metropolitan was revealed last year it was dismissed as being a “fantasy boardroom” project – a fantasy going nowhere.

Today, after the biggest merger in UK history, it seems less fantastic. The key to the 24bn GMG Brands merger is the stagnant nature of the fragmented international spirits market.

The merger creates the world’s biggest spirits business, combining Guinness-owned United Distillers and GrandMet’s International Distillers & Vintners to create United Distillers Vintners (UDV). It unites seven of the world’s top 20 spirit brands including the top whisky, vodka and gin brands – Johnnie Walker, Smirnoff and Gordon’s respectively.

Guinness and GrandMet claim the package of four branded businesses – UDV, Pillsbury, Burger King and Guinness Brewing Worldwide – is a partnership “with compelling strategic logic and shared management philosophies”.

But while the three other divisions remain virtually untouched – despite persistent speculation that the merged group will sell Burger King – it is the worldwide spirits market, which has grown just 0.3 per cent since 1990, that will receive the most attention.

The international spirits market is so fragmented that the combined operation still only holds five per cent of the sector, but ten per cent of the branded sector. UD is strong in whisky, gin and, through LVMH’s 14.2 per cent stake in Guinness, cognac and champagne. IDV is strong in vodka, liqueurs and, through José Cuervo, tequila.

UDV will have new critical mass to invest in the emerging markets of Asia, Latin America and Central Europe. It will be able to make economies of scale in the mature markets of Europe and North America, where there is declining demand, over-capacity, own-label competitors and a powerful retailer base.

GrandMet is disposing of its 20 per cent share in the Laurent Perrier champagne brand and Dunhill cognac because of Guinness’ associations with Moë Hennessy.

However, the deal also throws the spotlight onto rivals Allied Domecq and Seagram to respond.

Both GrandMet and Guinness have previously been linked with deals to buy Allied Domecq. But Guinness’ chairman Tony Greener and his counterpart at GrandMet George Bull, who become joint chairmen of GMG, deny that they have had talks with Domecq, which now looks vulnerable to takeover. Seagram has responded by threatening to stall the deal as it progresses through regulatory authorities in Europe and the US.

“Even in the countries where the new company will be stronger, maximum shares in specific markets will be about 40 per cent, which may not provide ground for regulatory interventions,” says Datamonitor analyst Gianni Giacomelli.

GMG also expects UDV to contribute most of the annual 175m operating cost savings it hopes to make three years after the merger. The savings are forecast to come from integrating national sales forces and by rationalising the central and regional head offices of the two spirits businesses. There will also be savings in worldwide production and purchasing.

In the UK, six offices will be under threat of possible closure. There is UD’s UK office in Perth; its headquarters in London; Guinness plc’s offices in Portman Square, London; IDV’s UK offices in Harlow; and IDV’s headquarters and GrandMet plc offices, both in Henrietta Place, London. Job losses of 2,000 are expected from the estimated 20,000 combined workforce at UDV.

Any review of the two spirits operations will inevitably mean a review of the two marketing departments, with a question mark arising over who might be handed the top marketing job – either Andy Neal, marketing director at United Distillers, or Tony Scouller, marketing director at IDV.

Globalisation of the advertising is also at the back of the minds of some of the agencies which find themselves on the global roster. In the UK alone the combined companies employ eight agencies on business worth over 30m, ranging from Leo Burnett, which handles Gordon’s Gin, to Lowe Howard-Spink on Smirnoff and WCRS, which handles Bell’s whisky. The merged company will sell 51 per cent of the total gin sold in the UK, 41 per cent of the vodka and 21 per cent of the whisky.

“Globalisation of the advertising must be a long-term aim of GMG when you look at all the cost savings it is seeking to achieve in UDV,” says one agency source. “But nothing has been said yet.”

Agencies like Ogilvy & Mather, which handles the main Guinness brand, may be concerned about GMG’s future policy on agency conflicts, as it also works for Seagram UK, the Pillsbury rival Kraft Jacobs Suchard and Burger King rival KFC.

The merger will also create brand conflicts within the group. In the whisky market UD has Johnnie Walker, Dewar’s and Bell’s and IDV has J&B Rare, while in the gin category, UD has Gordon’s and Tanqueray, and IDV has Bombay Sapphire.

John McGrath, group chief executive of GrandMet, who will be group chief executive of GMG Brands, dismisses the possible UK clashes. “We don’t sell J&B Rare in the UK, while Bombay Sapphire is sold at a premium, above brands such as Gordon’s. Even with brands in a similar category, their positioning is not the same,” he says.

In the UK market, the merger also offers Guinness an opportunity to build on its traditional weak spot: distribution. It opens the door for Guinness brands, such as Kilkenny and Harp, to enter the 3,000-strong Inntrepreneur pub estate, which is 50 per cent owned by GrandMet.

Guinness relies on pub-owning breweries to buy the quintessential Irish beer brand on a “must stock” basis, even though they may have their own rival stouts. Last year this weakness was highlighted when it emerged that Guinness’ prominence was being reduced in about 300 Scottish & Newcastle pubs, which were either removing Guinness in favour of S&N’s Beamish and Gillespie brands or pitching them against Guinness.

Earlier this year the Inntrepreneur estate, owned by GrandMet and Foster’s Brewing Group, was released from requirements to take beer exclusively from S&N. From March 1998, when this supply contract ends, Inntrepreneur will have the opportunity to offer its pub tenants a wider portfolio of brands.

“Guinness has been aware that some of its distribution set ups have been shaky,” says one source. “This relationship with Inntrepreneur might give its smaller brands a national presence.”

Guinness and GrandMet directors say the merger combines Guinness’ key strengths in the spirits business in emerging markets, with GrandMet’s strong sales in North America, through Pillsbury and Burger King.

For some observers, the creation of GMG Brands illustrates the growth in importance of brands and their marketing. Raymond Perrier, director of branding consultancy Interbrand Group, says: “Brands have moved steadily from the marketing department, to the balance sheet, to the boardroom and now even to the name over the door.

“If the merger of GrandMet and Guinness is seen in terms of a pooling of tangible assets, it makes little sense. If, on the other hand, it is seen in terms of a merging of brand portfolios and brand management, it is a spectacular and bold decision.”

George Pitcher, page 2