A heady cocktail

Apr 27th 2005
From The Economist Global Agenda

Big international brands drive the spirits industry. Pernod Ricard’s purchase of Allied Domecq gives it the range and reach to challenge Diageo, the world leader—and threatens to leave the competition near the bottom of the barrel. Might consumers suffer too?

TAKE a dash of Ballantine’s whisky and a splash of Beefeater gin, add a measure of Courvoisier cognac and Sauza tequila, top it with Tia Maria and finish with a shot of Malibu. Divide between Pernod Ricard and Fortune Brands and the bar bill comes to £7.4 billion ($14 billion).

On Thursday April 21st, France’s Pernod Ricard announced the acquisition of most of the assets of Allied Domecq, a British distiller. The deal blends together the big brands of the number two and three in the spirits business and puts Pernod in a position to challenge the outright leader, Diageo, another British firm. America’s Fortune Brands will chip in £2.8 billion and also walk away with some of Allied’s leading drinks. This will leave the world’s other spirit-makers, mainly family-controlled concerns, trailing far behind with fewer opportunities to restock their own drinks cabinets with big-selling tipples.

In fact, Pernod and Ricard started life as family firms making distinctively French spirits flavoured with aniseed. The pair combined in 1975 better to defend their slice of home territory from the encroachment of foreign spirits. The company made its impression on the world by participating with Diageo—itself the product of a huge merger between Guinness and Grand Metropolitan—in the $8.7 billion purchase of Seagram’s drinks business in 2001. Pernod acquired a third of the assets and now owns 12 of the world’s top 100 spirit brands, including Chivas Regal whisky and Martell brandy, as well as a substantial wine business topped with Australia’s Jacob’s Creek.

The deal with Fortune gives Pernod several more global brands, including Beefeater, Ballantines, Malibu, a popular coconut-flavoured rum, and liqueurs such as Kahlúa and Tia Maria. The French firm will also get its hands on the Perrier-Jouët and Mumm champagne houses and a range of wine businesses including New Zealand’s Montana. To allay the concerns of competition authorities, Fortune, which makes office equipment and golf balls as well as Jim Beam bourbon, will take on Courvoisier, Sauza and Canadian Club whisky. However, regulators may still have some grounds for concern, for instance over Pernod’s ownership of both Beefeater and Seagram gin.

The thirst for highly profitable global brands drives the drinks industry. Last year Allied Domecq’s nine main brands made up 32% of the volume of drink sold by the firm, but provided 44% of its net revenues of £2.6 billion and half its profits. Allied’s commitment to its premium products is clear in that it concentrated nearly 60% of its advertising and promotional budget on pushing these money-spinners. Pernod and Diageo enjoy similarly handsome returns from their worldwide brands. Diageo, which had revenues of £8.9 billion in 2004, holds nine of the 20 biggest.

All three companies also have a long tail of steady-earning but generally less profitable local brands. Some of those belonging to Pernod and Allied may now be sold as the combined firm concentrates on the global blockbusters. Allied’s fast-food outlets, including Dunkin’ Donuts and Baskin-Robbins, which sells ice-cream, may also go, bringing in perhaps £1 billion.

The takeover will help Pernod to make up ground on Diageo, doubling its size by most measures and raising its annual revenues to some €5.8 billion ($7.5 billion). It will also cut costs by over €300m a year, the French firm says, through exploiting economies of scale in distribution. And it will boost Pernod’s presence in America, the world’s biggest market for spirits, as well as adding significant businesses in Latin America and Asia. With volumes flat or falling in developed markets, future growth depends on either taking market share from rivals or making headway in emerging markets.

There has been talk of a rival offer for Allied, though some competitors are more likely to counter-bid than others. Diageo is already too big in most markets not to raise the concerns of competition watchdogs. LVMH, a French luxury-goods conglomerate that owns Hennessy cognac, has said it is not interested. Bacardi (which owns five top brands) is an old-style, family-controlled firm that would have trouble raising large sums of cash to bid. The most likely white knights are Brown-Forman (owner of Jack Daniels whiskey) and Constellation Brands (Hardy wine, Corona beer). On Wednesday, Allied announced that it had received a preliminary joint offer from the two American companies, in conjunction with two private-equity groups, but said it was too early to tell whether this would develop into a full offer.

The smart money is still on victory for Pernod. If the French firm does indeed win, a new competitor will soon be breathing down the neck of Diageo, looking to overtake its 30% share of the world market for strong drinks. That will worry the British giant, but might it also be bad news for consumers? A $150-billion-a-year industry largely split between two corporate giants is, some fear, more likely to promote oligopolistic behaviour than price-squeezing competition. The world’s drinker may have to wait before unscrewing a celebratory bottle or two.

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