spirits: onwards and upwards - onwards and... · 2016-11-25 · australasia, as well as asia...

SPIRITS: ONWARDS AND UPWARDS

September 2013

© Euromonitor International PASSPORT 2 ALCOHOLIC DRINKS: SPIRITS – ONWARDS AND UPWARDS

Disclaimer

Much of the information in this

briefing is of a statistical nature and,

while every attempt has been made

to ensure accuracy and reliability,

Euromonitor International cannot be

held responsible for omissions or

errors.

Figures in tables and analyses are

calculated from unrounded data and

may not sum. Analyses found in the

briefings may not totally reflect the

companies‟ opinions, reader

discretion is advised.

The prospects for spirits

globally are on the upward

curve, with the category

increasing its share of throat

and spend in the alcoholic

drinks sphere over the 2007-

2017 period. The briefing looks

at why this is happening, and

examines the key dynamics

globally and the opportunities

for growth in both mature and

emerging markets.

Scope

INTRODUCTION

Alcoholic Drinks 2012 251 billion litres

Wine 29 billion litres

Beer 195 billion litres

Spirits 21 billion litres

RTDs/High- Strength Premixes

4 billion litres

Cider/Perry 2 billion litres

http://www.euromonitor.com/



INTRODUCTION

Key findings

Spirits takes greater share

of alcoholic drinks

consumption

Between 2007-2017, spirits‟ share of alcoholic drinks consumption measured

in Litres of Pure Alcohol will increase by 1.5 percentage points to nearly 39%

of all alcoholic drinks consumed globally, and share of spend by 2 percentage

points. This continuous shift is driven primarily by mature markets, as

consumers move away from traditional alcohol products, particularly beer.

Premiumisation goes on Across the globe, consumers are trading up to more premium products, which

in emerging markets includes a shift from domestic products to more premium

international spirits brands. However, in Western Europe, due to the economic

difficulties in some markets, trading down is also apparent.

Asia Pacific and its local

products drive growth

Emerging markets, led by Asia Pacific, are the key growth drivers in many

categories. This includes local spirits such as baijiu, as well as locally

produced products in categories such as rum and whiskies.

Consolidation on hold Following Diageo‟s acquisition spree to rebalance its geographic presence,

further consolidation is likely to be on a smaller scale, as international

companies all wait for the breaking up of Beam. Acquisition activity is likely to

be led by Pernod Ricard, although its debt level prevents action before 2015.

Significant opportunities for

international spirits brands

There are huge opportunities for expansion for international companies in

emerging markets, as growing wealth in these markets makes their products

more affordable. There are also opportunities in mature markets in untapped

markets or new niches, such as super-premium gin.



OVERVIEW

GEOGRAPHIC REVIEW

CORPORATE OVERVIEW

CATEGORY FOCUS

FUTURE PROSPECTS


Between 2007-2012 spirits increased its share of

both throat and spend within the alcoholic drinks

sphere.

In volume terms, based on litres of pure alcohol

(LPA) global consumption of spirits rose by 13% to

8.3 billion LPA, compared to 10% for total alcoholic

drinks. This led to an increase in its share of throat

by nearly a percentage point, to 38%.

The trend was similar in value terms, with

spending on spirits rising by 8% (at constant 2012

prices and fixed exchange rates) to US$433 billion,

compared to total alcoholic drinks growth of just

5%, thus allowing spirits to increase its share of

spend by nearly a percentage point, to 31%.

This shift towards spirits was driven by the mature

markets of Western Europe, North America and

Australasia, as well as Asia Pacific. In the first

three regions, this was due to consumers switching

away from traditional drinks, particularly beer, to

spirits. The opposite trend was seen in strong

spirits consuming markets, such as Eastern

Europe and Latin America, where consumers are

switching away from spirits to beer and wine.

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2007 2012

Vo

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Global Volume Sales of Alcohol by Category 2007/2012

Wine

Spirits

RTDs/HighStrength Premixes

Cider/Perry

Beer

Spirits increases its share of total alcoholic drinks consumption

OVERVIEW

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Global Value Sales of Alcohol by Category 2007/2012

Wine

Spirits


Cider/Perry

Beer




The key growth driver for spirits in both volume

and value terms is Asia Pacific, the world‟s largest

region for spirits consumption. This growth is

driven primarily by China and its local spirit baijiu,

although strong growth has also been seen in India

and the Philippines.

The vast majority of this growth has been driven by

low value local spirits products. This helps explain

why the global constant value growth rate was

lower than volume over 2007-12, as these cheaper

spirits took a greater share of global spirits

volumes, while growth was slower or negative in

the higher value markets of North America,

Western Europe and Australasia.

Growth picked up in volume and value terms in the

latter part of the review period as countries‟

economies recovered from the recession of 2009.

The most dynamic of these regions were Asia

Pacific and the Middle East and Africa, while there

was steady growth in all other regions except

Western Europe, mired in economic difficulties,

and Eastern Europe, which continues to be held

back by the declining Russian vodka market.

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Vo

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Global Spirits Volume Growth 2007-2012

Volume sales (bn litres) Volume growth (%)

Asia Pacific drives healthy growth

OVERVIEW

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Global Spirits Value Growth 2007-2012

Value sales (US$ billion) Value growth (%)




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2007 2012

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Global Spirits On- vs Off-Trade Volumes 2007/2012

On-Trade Off-Trade

The off-trade increased its value share by more than three percentage points between 2007-2012, to 46%,

while its volume share increased by only just over a percentage point, to 75%. This was driven by trading

up in emerging markets, as consumers switched from cheaper local brands to more premium brands,

including premium international products such as blended Scotch.

There has also been an accelerated switch from the on- to the off-trade in the high value developed

markets of Western Europe, North America and Australasia. Between 2007-2012, off-trade consumption

increased its share by four, 2.5 and almost one percentage point respectively in these regions. Western

Europe, North America and Australasia accounted for 38% of off-trade value sales globally in 2012, but

only 19% of volume sales. These three regions have been seeing this shift for a while, as consumers

increasingly prefer at-home consumption, and has been exacerbated to varying degrees by a combination

of off-trade price discounting and economic woes.

Consumers still heading to the off-trade

OVERVIEW

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2007 2012

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Global Spirits On- vs Off-Trade Value Sales 2007/2012

On-Trade Off-Trade




In both mature and developing markets,

consumers have continued to trade up to higher

value products. This has not just taken place in

terms of switching from local spirits products to

international ones such as blended Scotch, but

also within categories.

In the core 54 markets, which account for 90% of

total volume sales of spirits, the trend has been to

trade up to premium and super-premium products,

with the two segments increasing their shares by

two and 0.5 percentage points, respectively, in

these markets between 2007 and 2012. The same

trend is evident in other categories, such as vodka,

gin, and dark and white rum.

Nor is the trend only evident in international spirits

categories. The same can be seen for the largest

spirits category in the world by volume – Chinese

baijiu – as well as in many of the local spirits

categories in India.

0%

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100%

2007 2012

% V

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Chinese Local Spirits (Baijiu) Volume Sales by Price Band 2007/2012

Premium Upper Mid-Range Lower Mid Range Economy

0%

20%

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100%

2007 2012

% v

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Other Blended Scotch by Price Band 2007/2012

Super-Premum Premium Standard Economy

Premiumisation drives spirits growth

OVERVIEW



OVERVIEW

GEOGRAPHIC REVIEW

CORPORATE OVERVIEW

CATEGORY FOCUS

FUTURE PROSPECTS


Asia Pacific saw its share of global spirits sales

rise from 48% to 56% in volume terms between

2007-2012 thanks to the region seeing volumes

rise 2.5 times faster than the 12% global volume

growth over the period. This was further aided by

declines in the next three biggest regions in volume

terms (in 2007), Eastern Europe, Latin America

and Western Europe.

Asia Pacific also saw its share of value sales rise

between 2007-2012, by five percentage points, to

38%. The slower increase in share than in volume

due to the dominance in volume growth terms of

cheaper local spirits, notably baijiu in China and

local Indian spirits brands of whisky, rum, vodka

and brandy. The dominance of cheap spirits also

explains why Asia Pacific‟s share is much lower in

value than in volume.

In contrast, due to the more premium nature of the

spirits sold in North America and Western Europe,

these regions accounted for only 19% of global

volume in 2012, but 38% of value.

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2007 2012

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Global Spirits Volume Sales by Region 2007/2012

Western Europe

North America

Middle East and Africa

Latin America

Eastern Europe

Australasia

Asia Pacific

Asia Pacific the driving force in spirits

GEOGRAPHIC REVIEW

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2007 2012

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Global Spirits Value Sales by Region 2007/2012

Western Europe

North America

Middle East and Africa

Latin America

Eastern Europe

Australasia

Asia Pacific




Emerging markets (Asia Pacific minus Japan and

South Korea, Eastern Europe, Latin America, the

Middle East and Africa, and Turkey) have been,

and will continue to be the key growth drivers for

spirits. Sales in developed markets are forecast

grow by 300,000 litres between 2007 and 2017,

while emerging markets will grow by 6 billion litres.

Much of the emerging market growth in volumes

has been, and will continue to be in locally

produced products, such as Indian whiskies, baijiu,

Filipino gin and brandy. However, emerging

markets will also become key growth areas for

international spirits categories and brands.

This can be clearly seen in blended Scotch.

Emerging markets have been the key growth driver

for the category since the mid 2000s. This

continuing and accelerating trend mean that

volume sales in emerging markets will exceed

those in developed ones by 2015.

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600

800

1,000

2012 2013 2014 2015 2016 2017

Vo

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mn

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Forecast Growth for Blended Scotch Whisky 2012-2017

Developed Emerging Emerging Markets

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2007 2012 2017

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Global Spirits Volume Sales Split Developed vs Emerging 2007/2012/2017

Emerging Developed

Emerging markets key growth driver

GEOGRAPHIC REVIEW




Between 2007-2012, spirits consumption fell by an annual average of 3% (395 million litres) in Eastern

Europe and 1% (104 million litres) in Latin America. There have been changing dynamics within the two

regions, with consumers switching from traditional spirits categories, such as vodka in Eastern Europe and

other spirits in Latin America, to international spirits categories, such as Scotch and cognac, as well as to

other alcoholic drinks categories such as beer and wine.

These historic declines will ease between 2012-2017, with the Eastern Europe spirits category declining by

an annual average of only 1% (183 million litres) while Latin America will grow by a 1% CAGR (139 million

litres), due in part to increases in sales of local spirits categories, but also as consumers trade up to

international spirits categories, such as blended Scotch in both regions, and vodka in Latin America

Changing consumption habits in mature emerging markets

GEOGRAPHIC REVIEW

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2007 2012 2017

% T

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International Spirits Categories (White Spirits, Whiskies (excl others) and

Cognac) Performance 2007/2012/2017 in Latin America

Volume sales of international spirits categories (mn litres)

% Total regional spirits volumes

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International Spirits Categories (Gin, Rum, Tequila, Whiskies (excl others) and Cognac) Performance 2007/2012/2017

in Eastern Europe

Volume sales of international spirits categories (mn litres)

% Total regional spirits volumes




The Middle East and Africa remains comfortably the most underdeveloped region in terms of spirits

consumption. In 2012, consumers in the region drank only 0.3 litres per head, or 324,000 litres in total. 43%

of that total was in just one market, South Africa.

Spirits consumption potential is limited. A large proportion of the region, notably most consumers in North

Africa and most of the Middle East, eschew alcohol for religious reasons. There are also other factors

holding back consumption, notably low disposable incomes, combined with high taxes and, perhaps more

importantly, a lack of spirits /cocktail drinking culture, which other emerging market regions have.

However, rising disposable incomes have led many of the major international spirits companies to increase

their investment in the region, especially in sub-Saharan Africa, as they aim to enter the markets at the

beginning. Diageo, with its brewing operations, and South African company Distell are among the most

advanced. However, a large numbers of other companies, led by Pernod Ricard and including Rémy

Cointreau, LVMH, Edrington and William Grant, are all increasing their investment in the region. This

investment, combined with growing wealth, should help spur stronger spirits volume growth in the future.

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World Asia Pacific Australasia Eastern Europe Latin America Middle East andAfrica

South Africa North America Western Europe

Litre

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Per Capita Consumption of Spirits by Region 2012

Middle East and Africa the underdeveloped spirits region

GEOGRAPHIC REVIEW




Emerging markets offer great volume growth potential over the 2012-2017 period. This is not always the

case in value terms, with growth in a number of these markets driven by cheaper local brands, especially in

vodka in India and Turkey. However, this will gradually change as growing prosperity in these markets

allows consumers to trade up.

A large number of other markets offer growth potential, such as blended Scotch in Poland, South Africa

and China, tequila, cognac and whiskies in Russia, to name but a few.

In addition, there are increasing opportunities in local spirits categories, as consumers trade up, as

witnessed in Campari‟s acquisition of the premium cachaça Sagatiba, in 2011, and Rémy Cointreau‟s joint

venture with the Sula Winery to develop a premium brandy in India.

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India, Vodka India, Rum China,Cognac

Mexico,BlendedScotch

Brazil, Vodka Russia,BlendedScotch

Brazil,BlendedScotch

India,BlendedScotch

South Africa,Vodka

Turkey,Vodka

% C

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Leading Emerging Markets for International Spirits Categories 2012-2017

Volume growth (million litres) % CAGR

Most dynamic markets in emerging countries for international spirits

GEOGRAPHIC REVIEW




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Projected Growth of Blended Scotch in China 2011-2017

Blended Scotch Forecast Volume Growth (2011)

Blended Scotch Forecast Volume Growth (2013) -

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Blended Scotch Volume Sales in Latin America 2000-2010

While the growth prospects in emerging markets are undoubtedly healthy, there are still numerous risks to growth in these markets, either through changes of government policies or economic conditions.

In China, the decision of the Chinese government to cut back on conspicuous consumption and gift giving in the latter part of 2012 has halved the forecast growth rate from a double digit CAGR to mid single digit growth. Nor is China unique, as legislation passed in Turkey in June 2013 restricting the sale and promotion of alcohol is likely to dampen rates of growth for international spirits categories.

The other major danger is economic turmoil. International spirits brands, while increasingly affordable to consumers, are a discretionary item and thus volumes suffer when turmoil hits. This is what happened to blended Scotch in Latin America during the Argentinean economic crisis of 2001-2002, with volumes not recovering peak until 2005. The region was also impacted by the financial crisis of 2008, but less so, as it was not so exposed (unlike Eastern Europe which suffered a double digit decline in 2009). Nevertheless it saw volume growth slow in 2008, then sales decline slightly in 2009, before returning to healthy growth.

Dangers remain in emerging markets for international spirits

GEOGRAPHIC REVIEW




While emerging markets offer the greatest growth opportunities, the developed markets of North America,

Western Europe and Australasia still offer scope for growth. Many of the biggest growth markets remain in

the US, but not uniquely, as vodka in both Canada and the UK, offers healthy growth, as does

bourbon/other US whiskey in Germany.

In addition, there are a number of other categories which will perform well in particular markets. These

include single malt Scotch and cognac in the US, Irish whiskey in Germany, Canada and Australia, and

bourbon/other US whiskies in France and Australia

There are also opportunities in categories. This include niches within categories, such as super-premium

English gin, or specific brands in categories, such as in bitters, where brands Aperol and Jägermiester

continue to perform well, despite minimal overall category growth.

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US, Vodka US, Rum US, tequila US, IrishWhiskey

US,Bourbon/other

US whiskey

UK, Vodka Canada, Vodka Germany,Bourbon/other

US whiskey

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Leading Growth Categories in Developed Markets 2012-2017

Volume sales growth (million litres) % CAGR

Most dynamic markets in developed markets

GEOGRAPHIC REVIEW




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US Vodka Volume Sales Flavoured vs Non-Flavoured 2007-2012

Non-Flavoured Vodka Flavoured Vodka0%

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US Vodka Volume Sales by Price Band 2007-2012

Super-Premium

Premium

Standard

Economy

US vodka has shown the way forward for driving growth in mature markets. The category‟s 5% CAGR (140 million litres) between 2007-2012 would have been smaller if not for new flavours and premiumisation.

Flavoured vodka variants more than doubled their share of the US vodka market between 2007-2012, to reach 26% of volumes, and in 2012 drove category growth, as non-flavoured variants declined. This growth was driven by constant innovation; however, with flavours becoming increasingly extreme this driver might well be reaching its peak.

In terms of sales by price points, there is an element of polarisation, aided by the economic difficulties during the review period. With the economy improving in 2012, premiumisation took hold.

Other categories, such as bourbon/other US whiskey and, more recently, rum have benefited from these innovations in the US but also in other mature markets. Flavours have been particularly successful in bourbon/other US whiskey, as they have encouraged new consumers to enter the category, notably women and younger drinkers.

US vodka, a paradigm for mature market growth

GEOGRAPHIC REVIEW




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Volume Sales of Hendrick‟s Gin 2007-2012

ROW

Australia

Germany

Canada

UK

Spain

US

Companies can generate growth in a mature market either through developing an underdeveloped brand in

a region, or through innovation.

Diageo has had great success in driving sales in Western Europe of the previously rather underdeveloped

Captain Morgan rum brand. Diageo managed to double the brand‟s volumes (15% CAGR) between 2007

and 2012 in a category that was largely static over the same period. Growth was driven by its core UK

market, as well as the previously non-focus markets of Germany, Austria and the Nordic countries.

William Grant has successfully created growth out of a moribund category – gin – by developing a super-

premium gin brand, Hendrick‟s, which has driven the super-premium gin category. Its focus has been on

the three biggest mature gin markets, the US, Spain and the UK, and the brand seen very strong growth

even in recession hit markets such as Spain, through innovative and quirky promotional activity.

Growth in sluggish mature categories

GEOGRAPHIC REVIEW

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Captain Morgan Rum‟s Performance in Western Europe 2007-2012

Volume sales, '000 litres % volume share of rum




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Other Blended Scotch in Spain Volume Split by Price Band 2007-2012

Economy Standard Premium Super-Premium

Economic difficulties in a number of Western European markets have led to falling volumes and consumers trading down in spirits. This has been particularly apparent in the markets of southern Europe.

In Spain, other blended Scotch volumes fell by 32% between 2007 and 2012, while at the same time consumers increasingly traded down, with economy products increasing their share of volumes by over two percentage points.

In Greece, where the economic woes have been deeper and longer, vodka volumes fell by 26% between 2007 and 2012. Economy products more than doubled their share of volume sales to over 23%, primarily at the expense of standard brands.

However, in these and other markets, the scale of trading down has been masked by heavy discounting by retailers and manufacturers. This has been particularly apparent in other blended Scotch in France. Brands which have not discounted heavily (eg Grant‟s) , have seen steep declines in share, while others more prone to discounting, such as Label Five, William Lawson and Clan Campbell, have increased their share.

Western European woes cause trading down

GEOGRAPHIC REVIEW

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Vodka in Greece Volume Split by Price Band 2007-2012




OVERVIEW

REGIONAL FOCUS

CORPORATE OVERVIEW

CATEGORY FOCUS

FUTURE PROSPECTS


In 2012, Diageo strengthened its position as the

world‟s leading spirits company by volume. This was

through a combination of acquisitions (eg Ypióca)

and organic growth.

UB Group remained second, thanks to its focus on

the Indian spirits market. However, with Diageo‟s

acquisition of the group likely to go ahead, this

position is temporary. This will mean number three

player, Pernod Ricard, will become the second

biggest player, having grown more slowly in previous

years, as growth slowed for a number of its key

brands, such as Ballantine‟s and Havana Club.

Of the remaining top 10 companies, five are local

companies based in Asian markets, whose growth is

dependent on their performance domestically. This

includes new entrant Alliance Global, a Filipino

company whose Emperador brand product has

continued to grow strongly.

The other two international companies, Bacardi and

Beam, saw differing fortunes. Bacardi continued to

stagnate due to still being too focused on developed

markets, while Beam increased its share thanks to

its acquisition of Pinnacle vodka in 2012.

Diageo stretches lead

CORPORATE OVERVIEW

Spirits: Top 10 Global Companies by Volume

2011-2012

Rank Company

2011

% volume

share

2012

% volume

share

1 Diageo 4.6 4.9

2 UB Group 4.6 4.7

3 Pernod

Ricard 4.5 4.5

4 Hite Jinro 2.8 3.0

5 Thai

Beverage 2.6 2.7

6 Bacardi 1.6 1.6

7 Beam 1.3 1.4

8 San Miguel

Brewery 1.3 1.3

9 Alliance

Global 1.1 1.2

10 Lotte

Chilsung 1.2 1.1




The global spirits industry has continued to become

more consolidated over 2007-2012, despite global

spirits volumes growing by 10% over the same

period.

The top 10 spirits producers accounted for 26% of

global volumes in 2012, up by three percentage

points on 2007. The leading 10 companies grew at

over twice the rate of the market over 2007-2012, at

24%.

Growth has been driven by a mixture of organic

growth and acquisitions. Key acquisitions that have

helped drive consolidation include Pernod Ricard's

purchase of V&S and Diageo's acquisitions of Mey

Içki and Ypióca.

Two of the fastest growing companies organically are

local, Alliance Global (Philippines) and UB Group

(India). Alliance doubled its global share over 2007-

2012, to over 1%.

The market will consolidate further in 2013 or 2014,

with the Diageo acquisition of UB Group‟s spirits

division. Based on 2012 volumes, the share of the

top 10 players will increase by a further percentage

point.

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Spirits: Global Consolidation 2007/2012

Top 10 spirits companies Others

Growing consolidation in spirits

CORPORATE OVERVIEW




Beam Inc is likely to be the next big company that loses

its independence. The publicly listed company is weakly

positioned in terms of geographic spread, as 88% of its

volume sales are in mature markets – a factor

exacerbated by its 2012 acquisition of US-focused

Pinnacle Vodka.

Beam‟s portfolio of brands could be best described as

good in parts. It has some very strong brands which have

good growth potential in core mature, as well as

emerging markets. These brands include Jim Beam,

Sauza Tequila, Teacher‟s, Courvoisier and Maker‟s Mark.

However, the company has a large proportion of brands

which offer at best good routes to market but are

struggling to maintain, let alone increase volumes. These

include a number of local North American vodkas and

bourbon/other US whiskies, as well as a some Spanish

ones, such as Dyc whisky and Larios Gin.

The whole portfolio will be of interest to one or more

parties, with the strong brands of interest to international

players, while even the local low growth ones will offer

opportunities for local and regional players looking to

expand.

Beam Inc: Volume Sales by Brand 2012

Jim Beam

Sauza Tequila

Teacher's

Courvoisier

Other growth brands

Local Low GrowthBrands

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Beam Mature vs Emerging Market Volume Split in 2012

Emerging markets Mature markets

Limited portfolio and public listing leaves Beam vulnerable

CORPORATE OVERVIEW




The Big Two: Diageo and Pernod Ricard

Due to its relative weakness in North America, Pernod Ricard will have the most to gain and least problems

with competition issues with brands such as Jim Beam and Sauza Tequila. The key issue for Pernod Ricard

is its high debt level, which will limit what it could acquire and when.

Diageo, in contrast, is limited by competition problems with Jim Beam in Australia and LVMH in cognac. In

addition, the company is overly focused on mature markets, where Beam is also strong. Anything other

than the acquisition of a small brand, such as Maker‟s Mark, would greatly hinder its target of achieving

50% of its revenues from emerging markets by 2015.

Other Players

While Bacardi is potentially large enough to acquire one of Beam‟s major brands, the company has already

said that it will not be a major player in any Beam acquisition, and will focus instead on picking up some key

brands. Chief amongst these are likely to be Teacher‟s blended Scotch and Courvoisier.

These two brands are expected to be the most heavily fought over, in the case of Teacher‟s due to its

leading positions in blended Scotch in both India and Brazil. Courvoisier offers a rare chance to enter the

consolidated and premium cognac category. Rivals for Bacardi for Teacher‟s could include Campari, while

Brown-Forman and William Grant could compete for Courvoisier.

Companies that could benefit most relative to their sizes are local North American and Spanish companies,

such as Sazerac or Varma, due to the large number of local brands Beam has.

Conclusion: Any movement on the acquisition of Beam is dependent on Pernod Ricard, which will lead any acquisition of the company. However, with its very high levels of debt, the French company has stated it will not make a major acquisition until 2015.

Pernod Ricard the most likely to benefit from any Beam break-up

CORPORATE OVERVIEW




Following its acquisitive phase, and with Grupo Cuervo negotiations broken off, Diageo‟s M&A activity is

likely to be at an end for the foreseeable future, as it looks to get to grips with its acquisitions. This is

especially the case with United Spirits, which it will control in de facto terms due to its dominance of the

board even if not in actual holding of equity.

Small bolt-on acquisitions

Most, if not all international companies are waiting for the Beam break-up to happen. As that will be reliant

on Pernod Ricard making the first move, and its focus on paying down debt until 2015, most M&A activity is

likely to be small scale, with companies making bolt-on acquisitions, such as Bacardi‟s acquisition of the US

focused St-Germain liqueur, or acquiring smaller companies in particular categories to boost production

capacity, as Rémy Cointreau did in acquiring Larsen Cognac.

Additionally, there are still the opportunities to pick up assets from companies brought down by the

economic crisis – Belvedere and CL WorldBrands. The latter has already sold its rum operations, Wray &

Nephew, to Campari, and Distell has picked up the Scotch whisky division Burns Stewart. This leaves the

Hine cognac brand, which could appeal to existing cognac producers to boost production capacity, or give

smaller international companies, such as Edrington or William Grant, an opportunity to enter the category.

Belvedere, with its focus on the Polish and French markets, is of less appeal to companies, except those

looking to get a route into those markets. One exception might be its international brand Sobieski vodka.

Another opportunity could be United Spirits‟ Whyte & Mackay Scotch whisky operations. When Diageo

gains complete control of United Spirits, it would have 56% of all Scotch grain whisky production and 35%

of malt whisky production, and thus will at least have to sell the Whyte & Mackay‟s grain distillery, which

would offer opportunities for smaller producers in the category, such as Pernod Ricard, Campari and

Bacardi, to enhance their capacity.

Local and regional M&A focus for near future

CORPORATE OVERVIEW



OVERVIEW

REGIONAL FOCUS

CORPORATE OVERVIEW

CATEGORY FOCUS

FUTURE PROSPECTS


Other spirits, a category that consists of local

spirits products such as baijiu, cachaça and anis,

continued to be the key volume growth driver

between 2007-2012, with baijiu in China being the

key factor in this growth. Many other categories

within other spirits, such as cachaça, anis and

pisco, suffered a decline as consumers switched

away from them to international spirits products or

to other alcoholic drinks, such as beer.

Cheaper local brands are also the main volume

growth drivers in other fast growing categories,

such as whiskies (Indian whisky), brandy and rum,

alongside more premium international products,

especially in whiskies.

It is the more premium international brands that

lead to whiskies, in particular, having a far bigger

value share of global sales than in volume terms.

Conversely, due to their local generally low value

character, other spirits have a lower value share

than volume.

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Global Spirits Volume Sales by Category 2007/2012

Brandy and cognac

Liqueurs

Rum

Tequila (and mezcal)

Whiskies

White spirits

Other spirits

Other spirits drive volume but not value growth

CATEGORY FOCUS

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Global Spirits Value Sales by Category 2007/2012

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Whiskies

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Other spirits




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Brazil: Other Whiskies Volume Sales 20007/2012/2017

Other whiskies accounted for more than half the

2.9 billion litres of whiskies sold in 2012. Other

whiskies are cheaper locally produced whiskies.

Sales are dominated by India, which will continue

to see rapid growth.

Indian whiskies benefit from a tradition of spirits

and whisky drinking, Rising disposable incomes

are allowing Indians trade up from illegal “country

liquor” to local brands, as well as more premium

products in the category.

Indian whisky also benefits from the high tariffs on

imported whiskies, notably Scotch, which makes

these products unaffordable to most Indians.

In other markets where disposable incomes have

risen, these local whiskies have suffered declines

as consumers use their extra spending power to

buy more premium international brands and have

thus traded up and out of the category. This has

been particularly noticeable in Brazil, where

volumes fell by other 30% between 2007 and 2012,

and will stagnate during the forecast period.

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India: Whisky Volume Sales 2007/2012/2017

Other whisky: Mixed prospects

CATEGORY FOCUS




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Leading Growth Markets for Blended Scotch 2012-2017

Volume growth 2012-2017 % CAGR

Both blended and single malt Scotch are expected to continue to see growth over 2012-2017. Single malts

are expected to grow by a 2% CAGR (4.7 million litres) and blended Scotch to by a 3% CAGR (115 million

litres). The two categories have slightly different dynamics.

Blended Scotch growth is being driven almost entirely by emerging markets, led by Mexico and Russia, as

aspirational consumers look to trade up to premium international spirits. These markets are driven primarily

by economy products (using malt Scotch aged 3-5 years) and standard products (malt whisky aged 8+

years). These products are also the key growth driver in France.

Single malt Scotch has a broader growth base, with mature markets, led by the US, Canada and Australia,

being key growth drivers, benefiting from consumers willingness to trade up to more premium products.

However, emerging markets are also contributing, as wealthier consumers trade up.

Booming Scotch

CATEGORY FOCUS

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Leading Growth Markets for Single Malt Scotch 2012-2017

Volume growth 2012-2017 % CAGR




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Malt Whisky Production Capacity 2005-2012

Malt Whisky Production Capacity to be added2013+

Malt Whisky Distlling Capacity

Source: Malt Whisky Yearbooks, various, and desk

research

The strong outlook for both blended and single malt Scotch products has led to companies investing heavily in boosting production capacity. This has taken a number of different forms, from increasing production capacity at existing distilleries (Pernod‟s Glenlivet in 2011), re-opening mothballed ones (eg Pernod Ricard reopening Glen Keith in 2013) and building new ones (Diageo at Roseisle in 2007).

There is also further unspecified capacity, not included on this chart, which will come on line, with Edrington in its 2013 results announcing plans to increase capacity in the next few years, while Pernod has a new distillery planned at its existing Imperial distillery site.

However, it should be noted that due to the long lead times, most of the extra liquid produced will not be available during the forecast period. For example, the malt whisky produced in 2005 will not be able to be used in single malts or premium blended Scotch until 2017, while the same applies to the malt whisky produced in 2009 for standard blended Scotch.

Due to the long lead times, though producers will be increasingly well positioned in the medium to long term, in the short term they are struggling for enough liquid to meet demand. This has led to rationing of Scotch, with Edrington producing non-aged statements on its Macallan brand ie allowing it to use Scotch of any age, and producers pulling out of blended malt Scotch, led by Diageo withdrawing its Johnnie Walker Green Label brand in all markets bar Taiwan.

Supply struggling to keep up with demand for Scotch

CATEGORY FOCUS




Bourbon/other US whiskey continues to be centred on domestic sales. In 2007, 70% of the category‟s global volumes were sold in the US. This is predicted to decrease slightly by 2017, to 66%.

One reason for the slow internationalisation of the category has been the almost continuous growth of sales in the US, where growth is being driven by premium small batch products, led by Beam‟s Maker‟s Mark, and flavoured variants, led by Beam‟s Red Stag, which has attracted younger and women drinkers.

The key players, Brown-Forman and Beam, have historically tended to ignore international markets by; however, this has changed since 2007, with Brown-Forman being particularly ambitious in pushing into new markets, especially since 2009, when it set up its own distribution operations in Russia and Brazil.

The strong domestic focus also means that there is still potential in markets that would in general be perceived as mature, such as Germany, as well as a plethora of emerging markets.

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Global Bourbon/Other US Whiskey Volumes 2007/2012/2017

Rest of the World US

Bourbon/other US whiskey becoming more global

CATEGORY FOCUS

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Bourbon/Other US Whiskey: Fastest Growing Markets by Volume 2012-2017

Volume growth 2012-2017 % CAGR 2012-2017




Excluding other/Indian whisky, Irish whiskey saw the fastest rate of volume growth of all whisky categories between 2007 and 2012, with a 7% CAGR, and is forecast an 8% CAGR between 2012 and 2017, making it the fastest growing whisky and spirits category globally.

Growth will continue to be driven by the US. One brand, Pernod Ricard‟s Jameson, accounted for 62% of global volumes in 2012. In most markets, Jameson is the leading if not the dominant brand, having had the benefit of first mover advantage, strong promotional support and a lack of well-resourced competitors. Thus in many countries, Irish whiskey is synonymous with Jameson. There are some notable exceptions where Tullamore Dew gained first mover advantage in markets Pernod did not focus on, such as Germany, Denmark and Latvia, and it is the dominant brand as a consequence.

Pernod Ricard, with Jameson, is in the best position for growth, but with other well-resourced owners now focusing on the category – William Grant, with the world number two brand Tullamore Dew, and Diageo, with Bushmills, the number three brand – it will be interesting to see if they can take share, especially in less established markets, such as Russia, Poland and Mexico.

First mover advantage key to growth prospects in Irish whiskey

CATEGORY FOCUS

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Irish Whiskey: Fastest Growing Markets by Volume 2012-2017

Volume growth 2012-2017 % Volume share of leading brand




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Projected Growth of Canadian Whisky Globally 2011-2017

2011 Forecast 2013 Forecast

Flavour Launches Vitalise Canadian Whisky

Canadian whisky, nearly 95% of which was consumed in North America in 2012, has suffered for a number of years from maturity in its core markets and a low value image.

The category‟s prospects have improved greatly through both Diageo and Constellation Brands launching flavoured variants of their Crown Royal and Black Velvet brands in 2012. Brown-Forman joined them with four Canadian Mist variants in mid 2013 and more are expected, which should mean the category maintains growth.

Short Highball Boost for Japanese Whisky

Japanese whisky volumes are very reliant on domestic sales, which until 2008 were static. Then, helped by recession conditions, the category benefited from the popularity of the 1950s austerity themed highball cocktail, which boosted the category‟s volumes in 2009 and 2010, before consumers moved onto using other whisky categories in 2011. Volumes will remain stagnant to 2017, meaning producers should focus more on exports of premium single malt variants. 0

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Japanese Whisky Sales in Japan 2007-2012/2017

Revitalised stagnant whisky categories

CATEGORY FOCUS




Following a decline in volumes during the 2009

recession, the outlook for cognac is healthy, with the

category expected to see a volume CAGR of 6% (34

million litres) between 2012 and 2017. Most of the major

companies have been making plans to meet rising

demand by boosting production capacity, eg Rémy

Cointreau‟s acquisition of Larsen in 2012. This was

followed by Pernod Ricard‟s acquisition of Le Maine au

Bois, an independent cognac producer, and LVMH‟s

announcing a new bottling plant in the first half of 2013 –

the latest stage in its bid to double capacity by 2025-30.

However, growth is very reliant on just one market,

China. Category potential is huge in China and the

effects of the crackdown on conspicuous consumption

will have little impact on cognac (unlike Scotch) due to its

established nature. However, if things were to go wrong,

it would leave producers highly vulnerable.

While markets such as Nigeria and Vietnam are

expected to grow rapidly to 2017 and will move into the

top 10 markets, many of the leading markets will still be

declining Western European markets. Cognac producers

thus need to do more to develop the category in new

markets. -

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Cognac Volume Sales 2007/2012/2017

ROW

Malaysia

Finland

Norway

Taiwan

Russia

France

Germany

UK

China

US

Cognac‟s reliance on China

CATEGORY FOCUS




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Brandy Volume Sales 2007/2012/2017

ROW

Brazil

Germany

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Emperador Brandy Volume Sales 2007-2012

Brandy is an intrinsically local product, with no global brands and few regional ones. Volumes are

dominated by cheap local products in both mature and emerging markets. Mature markets are struggling

for growth, as the category is often perceived as being old fashioned. It is the emerging markets that are

driving growth, led by India, in particular South India. Volumes grew particularly strongly in the country in

2012 as consumers switched over from rum.

The Philippines will continue to be the other key growth engine, driven by the world‟s leading brand,

Emperador, from the Philippines. The brand has benefited from strong economic growth and a number of

elections (drinks are offered to voters at rallies to persuade them to attend), as well as strong innovation

and marketing activity for the brand, with a key factor being the launch of a light variant in late 2010. This

allowed it to more than triple its volumes between 2007-2012, and increase its share to 72%.

There are, however, signs of more premium products coming into markets, especially in India, where

United Spirits launched a VSOP variant of the McDowell‟s brand in 2009, and, more recently, Rémy

Cointreau signing a joint venture with Sula Wineries in 2012 to starting producing local premium brandies.

Local products rule in brandy

CATEGORY FOCUS




Between 2007-2012, vodka saw volume growth in six out of seven regions globally, a trend that is expected

to continue in the 2012-2017 period. The only region seeing a decline was Eastern Europe, particularly

Russia. In Eastern Europe, the category suffers from being the traditional spirit and, more importantly,

alcoholic drink, which consumers have moved away from.

Vodka‟s broad geographic growth is due its mixability and popularity across most demographics, especially

women and younger drinkers.

Another noticeable trend between 2007 and 2012 was trading up. Across Euromonitor International‟s 54

core markets, economy products saw their share of volumes fall by four percentage points, to 39%. This

was primarily to the benefit of standard brands, but both premium and super-premium products increased

their combined volume share by over a percentage point, to 18%.

Volume sales in the mature regions will growth at a slower rate between 2012 and 2017, than between

2007 and 2012, as the category matures in these markets.

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Volume Sales of Vodka by Region 2007/2012 and 2012/2017

2007-2012 Volume growth 2012-2017 Volume growth

Vodka‟s global appeal

CATEGORY FOCUS




Gin Volumes Sales by Geography in 2012

Philippines

USA

Spain

United Kingdom

India

Netherlands

ROW

The 560 million litre global gin market continued to be dominated in 2012 by the Philippines, with its local

economy focused Dutch style San Miguel dominating the category. The Philippines will be the key growth

driver of the category in volume terms, but offers little opportunities for outside players.

It is the world‟s next three biggest markets, the US, Spain and the UK, where there is great interest lies, in

what previously was a declining category. Since 2009, these markets have seen rapid growth in premium

and super-premium products, which has helped gin in these markets return to growth, particularly in Spain

and the UK. The key driver within these markets has been William Grant‟s Hendrick‟s brand, alongside

premium and super-premium variants of major brands such as Diageo‟s Tanqueray and Pernod‟s

Beefeater, as well as a plethora of small boutique brands.

Super-premium and premium products are also increasingly being seeded in new markets with little

tradition of gin consumption, such as in Western Europe and Asia, with the focus being on the products

being premium or super-premium white spirits rather than being gins specifically, and thus potentially

broadening the category‟s limited geographic spread.

Premiumisation drives key gin markets

CATEGORY FOCUS

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US, Spain and UK: Gin Volume Sales by Price Band 2007-2012





Dark rum the universal growth driver

CATEGORY FOCUS

Between 2007 and 2012, rum growth was driven by dark

rum, and this is predicted to continue over the forecast

period. In 2012, dark rum accounted for 72% of global

volumes, a share that is predicted to rise by a

percentage point by 2017.

The key growth driver for the category continues to be

Asia-Pacific – in particular India and, to a lesser extent,

the Philippines. Here, cheap local brands (McDowell‟s in

India and Tanduay in the Philippines) drive growth.

Growth in dark rum is less strong in mature markets,

held back in part by maturity and decline in certain key

markets, such as Spain and Australia. However, there

are opportunities to grow with spiced and flavoured

variants. This is particularly the case in the US, where

brands such as Sailor Jerry, Admiral Nelson and the

Bacardi Oakheart variant have grown well.

Flavoured variants are also helping drive growth in white

rum in North America (Cruzan Rum), where, as a whole,

the category suffers from its over-reliance on Bacardi‟s

eponymous brand, which has reached maturity. The

category also suffers from its maturity in its largest

regional market, Latin America, where, as a traditional

product, it offers little growth potential.

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Rum Volume Sales 2007/2012/2017

White Rum Dark Rum




Tequila (and mezcal) continues to still suffer from its reliance on its domestic Mexican and the US market. In 2012, 86% of the category‟s volumes were sold in these two markets, and will account for 79% of the 28 million litres category growth between 2012 and 2017. The category suffers in part from a lack of major global players willing to push sales. Categories such as tequila need the backing of big players to help educate consumers in new markets not used to such products to start drinking them.

This has been exacerbated by the breaking off of negotiations between Grupo Cuervo – owner of the world‟s leading brand, José Cuervo – and Diageo, in which the British company hoped to buy at least an equity stake. Instead of having the world‟s leading company as José Cuervo‟s distributor in most markets, Grupo Cuervo will rely on generally weaker players. With the world‟s number two brand, Sauza, owned by the narrowly geographically focused Beam, prospects remain bleak for volume growth.

Value growth still offers potential, especially in the US, with the continued strong performance of super-premium brands, such as Patron, but also more internationally, with the emergence of mezcal. Still very much a niche segment in volume terms it is becoming increasingly fashionable in cities around the world such as New York and London.

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Tequila (Mezcal): Leading Growth Markets by Volume 2012-2017

Volume growth % CAGR

Tequila (and mezcal) still too local for its own good

CATEGORY FOCUS




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Liqueur Volumes by Category 2007/2012/2017

Other Liqueurs Cream-based Liqueurs Bitters

Global Consolidation of Liqueurs in 2012 (% Volume Share)

Top 5 Brands

Brands 5-10

Other Brands

Of the three liqueur categories, only bitters will see its volumes in 2017 exceed those of 2007. Globally,

liqueurs suffers from its overreliance on mature markets, which in 2012 accounted for over 70% of global

volumes. Sales in mature markets continue to suffer from the current tough economic conditions in these

regions.

Additionally, liqueurs is a fragmented category, thus growth relies on the performance of individual brands

in individual markets. This partly explains the stronger performance of bitters which is more consolidated,

with the top five brands accounting for 44% of category volumes in 2012 (compared to 21% for total

liqueurs) but also because it has a number of brands, led by Jägermeister, the world‟s largest liqueur, along

with Fernet Branca and Aperol, which have managed to see strong growth by developing appealing unique

selling points (Jägerbombs, Aperol Spritz) in a number of markets and have seen rapid growth.

In contrast, in other liqueurs (De Kuyper, Southern Comfort) and in cream-based liqueurs (Baileys), a

number of the key brands are mature and lack new growth markets.

Brands the key in liqueurs

CATEGORY FOCUS




Diageo‟s Baileys held 43% of global cream-based

liqueurs sales in 2012, thus its performance greatly

impacts overall category performance. This is

especially so in cream-based liqueurs, as this is a

novel concept in new markets and thus it takes time

to educate consumers. The next largest players,

Distell (Amarula) and Campari (Carolan‟s) could help,

but both companies lack Diageo‟s resources for such

activity.

Diageo, historically, has pushed growth for the brand

by focusing on a number of core markets: the US,

UK, Canada, Germany and Spain. This was generally

to the detriment of developing other markets. As a

consequence, once its core markets had matured in

the early years of the review period, the brand, and

thus the category, suffered declines.

Since around 2008, Diageo has started to develop

new markets, notably China and Russia, with some

success. However, their relatively small size means

that while their growth prospects are bright, they will

not compensate for the declines in core markets for

the foreseeable future.

Cream-based liqueurs struggling for growth

CATEGORY FOCUS

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Cream-Based Liqueurs: Fastest Growing Markets by Volume 2012-2017

Volume growth % CAGR




Other spirits consists of a broad variety of local

spirits, particular to a specific country or region. As

a consequence, they are reliant on those markets

for growth.

Due to the maturity of other spirits types in their

respective countries or regions, and consumers‟

increasing ability to trade up to international spirits,

many of these markets offer little growth potential.

This is the case for cachaça, aniseed flavoured

spirits and shochu/soju. These categories‟ core

markets – Brazil, France and Turkey, and Japan

and South Korea, respectively – have reached

maturity.

While cachaça does have a presence in some

markets outside Brazil, notably Germany, its

volumes outside its core market cannot make up

for domestic maturity.

In contrast, products such as baijiu and

aguardente have seen good growth, and are

expected to continue to do so. This due to the

relatively under-developed nature of the market in

the core countries, as more consumers are able to

afford these products.

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Other Spirits Volumes by Key Categories 2012/2017

Others Aguardente/Aguardiente

Aniseed flavoured products Cachaça

Shochu/Soju Baijiu

Eclectic mix in other spirits still offers growth

CATEGORY FOCUS



OVERVIEW

REGIONAL FOCUS

CORPORATE OVERVIEW

CATEGORY FOCUS

FUTURE PROSPECTS


Between 2012-2017, spirits will continue to increase its share of both throat and spend within the alcoholic drinks market.

In volume terms, based on LPA, global consumption of spirits will rise by 18% to 9.8 billion LPA, compared to 15% for total alcoholic drinks. This will lead to it increasing its share of throat by a further percentage point, to 39%.

The trend will be similar in value sales, although less pronounced, with spending on spirits rising by 22% to US$528 billion, compared to total market growth of just 17%, thus allowing spirits to increase its share of spend marginally, to 31%, with it the only alcoholic drinks category to see an increase in share.

As in the review period, the shift towards spirits will be driven by the mature markets of Western Europe, North America and Australasia, as drinkers continue to move away from traditional alcohol products, predominantly beer but also wine in Western Europe. This trend away from traditional alcohol products will continue to hamper spirits growth in Latin America and Eastern Europe, although, as in all emerging market, the shift to more premium international spirits brands will grow in significance

-

5

10

15

20

25

30

2012 2017

Vo

lum

e s

ale

s (

LP

A b

n)

Global Volume Sales of Alcohol by Category 2012/2017

Wine

Spirits


Cider/Perry

Beer

Spirits‟ upward trend expected to continue

FUTURE PROSPECTS

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2017

Va

lue

sa

les (

US

$ b

n)

Global Value Sales of Alcohol by Category 2012/2017

Wine

Spirits


Cider/Perry

Beer




Spirits‟ 3% CAGR (3.7 billion litres) between 2012-2017

will continue to be driven by Asia Pacific and, within that,

cheaper local spirits, led by baijiu, but also local

offerings in categories such as whiskies, rum and

brandy.

Within these categories, consumers will continue to

trade up, with value sales expected to rise by a 4%

CAGR (US$94 billion). This will take place not only in

emerging, but also mature markets.

Within mature markets, growth will be driven by North

America and Australasia, as consumers continue to

trade up. Economic troubles and changing consuming

habits in Western Europe will lead to value sales falling

faster than volume.

Within emerging markets growth will be aided by trading

up to more premium local brands, as well as to

international brands and categories. As has been seen

historically, with the Latin American crisis in the early

part of the century and, more recently, with changes in

government policies in China and Turkey, these

prospects can change rapidly. However, as quickly as

these prospects darken, they can also equally brighten,

and the long-term outlook in these markets is positive.

0

5

10

15

20

25

30

2012 2017

Vo

lum

e s

ale

s (

bill

ion

litre

s)

Global Spirits Volume Sales by Region 2012/2017

Western Europe

North America

Middle East andAfricaLatin America

Eastern Europe

Australasia

Asia Pacific

Emerging markets lead the way

FUTURE PROSPECTS

-

5

10

15

20

25

30

2012 2017

Vo

lum

e s

ale

s (

bill

ion

litre

s)

Global Spirits Volume Sales by Category 2012/2017

Brandy and Cognac

Liqueurs

Rum

Tequila (Mezcal)

Whiskies

White Spirits

Other Spirits




Litres of Pure Alcohol (LPA): A method of measuring alcohol consumption taking into account the alcohol

content of each product, regardless of the number of litres of liquid consumed. To convert the various

categories of alcohol into LPA the following measurements have been used:

Beer, cider/perry, RTD/High Strength Premixes: 20 litres of beer etc = 1 LPA

Spirits: 2.5 litres of spirits = 1 LPA

Wine: 8 litres of wine = 1 LPA

Value Sales: All figures for value sales are shown in US dollars at constant 2012 prices and at fixed

exchange rates.

Mature or Developed Markets: North America, Western Europe (excluding Turkey), Australasia, Japan and

South Korea

Emerging Markets: Asia Pacific (excluding Japan and South Korea), Latin America, Eastern Europe, Middle

East and Africa and Turkey

Definitions

REPORT DEFINITIONS




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spirits: onwards and upwards - onwards and... · 2016-11-25 · australasia, as well as asia...

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