Spirits sector ripe for merger activity

A study by market analyst Standard and Poor's (S&P) has highlighted the unusual characteristics of the global beverage industry as a sector highly fragmented yet financially stable.

The top firms, Diageo and Pernod Ricard, are rated A- and BB respectively - lower than might be expected in a sector with a safe customer base and solid cash flow generation.

Although infrequent acquisitions may be due to an overall reluctance to expand or lack of vision within the industry, the report suggests financial policies within the major firms underpins such activity.

Currently the purse-string handlers are holding consolidation back.

Companies seem to be purchasing product lines on an "opportunistic basis" rather than aggressively extending their business empire and taking hold across many key categories, such as whisky, rum and vodka.

S&P credit analyst Vincent Allilaire explained that "a company's commitment to using discretionary cash flow primarily to reduce debt, or to suspend a share repurchase policy, will have significant implications for a rating decision."​

"In this context, a company's rating level will depend, to a large extent, on how it defines and implements its financial policy - particularly through the funding and execution of its acquisition strategy,"​ he added.

But to excel in the spirits industry further consolidation may be beneficial, allowing companies to leverage scale to their best advantage.

At present none of the top players own a full complement of leading brands in all major categories. So the full potential of existing distribution and supplier networks may not be fully realised.

Mounting commodity, energy, distribution and advertising costs, coupled with changing consumer preferences will force firms to adapt, and those with the broadest range will do best.

In Europe, rising disposable incomes and higher consumer aspirations have led to the premiumisation of alcohol, according to a recent Mintel report on EU drinking habits.

People are drinking less, but spending more on quality products. As such, companies diversifying into complementary markets such as premium wines will gain a foothold over others.

Overall S&P indicates the favorable trends that support a positive outlook for the global branded spirits industry look set to persist in the medium term, maintaining a healthy climate for consolidation within the industry. This should encourage more firms to scrutinise current fiscal policies and take the plunge.