March 18, 2010 / 6:42 PM / 10 years ago

Drinks companies gear up for recovery

CHICAGO (Reuters) - The world’s biggest spirits groups such as Britain’s Diageo Plc (DGE.L) and U.S.-based Fortune Brands Inc FO.N are ramping up spending ahead of an anticipated pick-up in global demand.

Smirnoff Ice drinks bottles are displayed on a shelf in an off-licence shop in south London, August 28, 2008. REUTERS/Suzanne Plunkett

Neither has spotted the first clear signs of a recovery. But both distillers, which make products like Smirnoff vodka and Jim Beam bourbon, are gearing up for better times ahead by identifying key brands and geographies for future growth.

“We believe there is going to be recovery here. It may ramp up a little more slowly than it has in the past, but there will be recovery here,” Fortune’s Chief Financial Officer Craig Omtvedt said at the Reuters Food and Agriculture Summit in Chicago on Thursday. Omtvedt said the company is raising its marketing spending by a double-digit percentage rate this year.

Diageo’s North American head Ivan Menezes said timing of an eventual uptick in his regional $10 billion spirits market is hard to pinpoint, but his company’s marketing spending will rise over 10 percent in the first half of 2010 as it seeks to gain when the recovery arrives.

“While you’re seeing GDP in better growth in the U.S., I’d say the consumer metrics are still pretty mixed. I think we have clearly hit bottom, but when we see the uptick we expect our outperformance of the market to continue,” he said.

Fortune’s Omtvedt says his group has also been preparing for the upturn by taking control of up to 75 percent of its global sales distribution and adding distilling capacity.

“In the spirits business we said we’ll be ramping up ... It’s going to be very targeted on what we see as the opportunities for both core growth as well as emerging products,” he added.

Omtvedt is focusing on reinforcing the group’s core positions, such as Jim Beam in the U.S. and Courvoisier cognac in Britain, but also on growth areas such as Maker’s Mark bourbon in Australia and Teachers scotch whisky in Brazil.

Fortune, the world’s No 4 spirits group after Diageo, Pernod Ricard (PERP.PA) and privately owned Bacardi, has less exposure to emerging markets than its rivals, but is now focused on growing its scotch whisky business in Brazil and India.

The U.S. distiller sells 80 percent of its volume in the U.S., Europe and Australia, with only 5 percent in emerging markets, where many analysts expect recovery may come first.

In 2009, three-quarters of Fortune’s earnings came from its spirits side. Its other divisions — especially its home products unit which makes Moen faucets, and also its Titleist golf equipment business — suffered in the economic downturn.

Diageo in North America has seen the ultra and super premium segments, where its Ciroc and Ketel One vodka are positioned, suffer. It is focusing its hopes for recovery on its premium brands of Captain Morgan rum, Johnnie Walker scotch and Jose Cuervo tequila, where it has the biggest presence and has seen the best growth.


The spirits industry has clearly suffered in the downturn, but not as much as beer, with the chief executive of North American brewer Molson Coors Brewing Co (TAP.N). Peter Swinburn, saying sales remain sluggish in the early months of 2010.

In the brewer’s three main markets of the U.S., Canada and Britain, Swinburn says the premium sector, which includes its Coors Light brand, remains under pressure. Demand in its home market of the U.S. closely is linked to high unemployment levels.

“The available and public data in the U.S. shows that from a volume perspective, the first quarter that we’re going through currently is pretty similar to the last quarter of last year. So no real change there; still sluggish,” he said.

“Within that, the dynamics are that the craft beer sector still continues to do well. The below-premium is not as buoyant as it was early last year — that’s sort of flattened out a little bit. And the premium sector is the one that’s probably under pressure,” he said.

Analyst Mark Swartzberg at Stifel Nicolaus was hopeful of seeing signs that the beer market in the U.S. would improve later in the year, especially if the unemployment rate fell.

“You’re actually going to see beer get less bad as we get to the latter part of this year ... If indeed unemployment has peaked, that should particularly benefit beer,” Swartzberg said.

He pointed out that the wine and spirits industry has not suffered as badly as beer through the downturn.

“Wine and spirits share has picked up. They’re on a secular trend of taking share from beer and the pace of share-taking increased over the last year because beer got weaker. They all weakened but beer weakened the most,” he added.

Reporting by David Jones and Martinne Geller; Editing by Gerald E. McCormick

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