CONSOLIDATION BOLSTERS INNOVATIVE SPIRITS

Over the last several decades, businesses have shifted operating models from one based on market dominance in a specific arena to one of large corporate entities with multi-national ambitions. Consolidation coupled with the globalization of markets has become the standard ­ and it’s being seen in the beverage alcohol industry as well.


The automobile industry has changed over the last few decades, and this gives us a good example of how the game has changed. Chrysler was bailed out of fiscal disaster in the 1980s because it and the American auto industry were considered such an important component of the national economy. Twenty years later, Chrysler has been re-invented as part of a German conglomerate and both General Motors and Ford have interests in major European auto makers. At the same time, workers are building Japanese cars in the U.S. from parts produced entirely in North America.


Similar global economic forces have been at play in various other industries. Major brand names ­ in many product categories ­ have the worldwide recognition once afforded only to Coca-Cola. And as the largest beverage alcohol companies increasingly hold multi-national interests, the entire business has become much more global with distinct national markets.


IS BIGGER BETTER?

In the last twenty years, some of the most respected companies in the spirits and wine business began to disappear as they were folded into new corporate entities. Seagram, Schenley, Glenmore, Heublein and Hiram Walker, all still exist as brand names, but for a long time they were the powerhouse companies controlling major shares of the spirits and wine markets in the U.S.


When this seismic shift began, it caused great unease in the beverage alcohol business. Many observers predicted that the monolithic multi-national drink companies with their overwhelming dominance in the marketplace would mean the end of innovation and competition. It was widely believed that small, family-owned companies could not possibly compete against the new international giants. Conventional wisdom said it was just a matter of time before one or two enormous multi-national corporations controlled just about everything in the business.


In reality, while the landscape has changed radically, there hasn’t been a demise of successful independent companies or the elimination of innovation. A case can be made that the changes in the beverage alcohol arena have created a wide array of new opportunities in the U.S. for companies.


The creation of the spirits industry’s biggest company did not have the overall negative effect many feared. In 1993, Grand Metropolitan and United Distillers Glenmore, combined, accounting for 29% of overall spirits case sales and 27% of supplier dollar volume, according to Adams Liquor Handbook. These two entities were the primary components of the merger that created Diageo. The largest U.S. spirits supplier claimed 20% of industry case sales and 21% of supplier dollars in 2003. In effect, the result of the merger was that the whole was less than the sum of its parts.


DIAGEO MERGER AFTERMATH

The formation of Diageo, coupled with its divestiture of several brands and the liquidation of the spirits and wine businesses of Seagram, created opportunities for a number of other companies. Bacardi picked up the Dewar’s, Bombay and DiSaronno brands in the aftermath of the Diageo merger. As a result, the company’s case volume increased 40% in 2003 compared with ten years earlier, but the dollar value of those cases nearly doubled.


The shifting balance of power within the industry also resulted in a number of interesting, and at one time unthinkable, alliances. Two years ago, Brown-Forman and Bacardi USA, a pair of independent family-controlled companies that already had close relationships overseas, formed the Gemini Alliance to appoint and manage relationships with brokers, distributors and control boards.


A year earlier Jim Beam Brands formed an alliance with The Absolut Spirits Company to create Future Brands, which distributes both companies’ brands in the U.S. Faced with new realities and competitors, companies did not disappear but instead found new ways to stay in the game.


In some ways the new configurations of companies and brands resulted in a widening, more competitive field. In 1993, the fifteen largest spirits companies accounted for 90% of case volume and 88% of the supplier dollar sales. By the end of 2003 those figures fell to 84% and 86%, respectively.


For many of the industry’s mid-sized companies, the creation of the new corporate entities allowed them to shuffle their portfolios to considerable advantage. Heaven Hill Distilleries, for example, has judiciously added brands picked up from other suppliers and in the last ten years added almost 4 million cases to its annual volume.


The wave of mergers and consolidations has certainly not stifled innovation or inhibited the creation of new brands. Two of the most dynamic vodka brands over the last decade help to illustrate the potential opportunities in the ever-changing beverage alcohol marketplace.


FAST TRACK BRANDS

In 1993, Skyy Vodka had a volume of 20,000 cases, and the brand accounted for the entire portfolio of its parent company, Skyy Spirits USA. In that same year Grey Goose vodka was still just another idea percolating in the head of importer Sidney Frank. In 2003, Skyy — now controlled by Campari — sold nearly 1.7 million cases and Grey Goose, recently purchased by Bacardi, reached 1.4 million. Both of these products came out of nowhere and took the market by storm, and both were recently identified as Fast Track Growth Brands by Adams Beverage Group.


In fact, the majority of the 14 spirits brands named to this year’s Fast Track honors come from relatively smaller companies ­ Belvedere Vodka from Millennium Import, Svedka Vodka from Spirits Marque One, Cruzan Rum from Todhunter Importers, Fr

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