Global Spirits Manufacturing C1122-GL Global...IBISWorld Industry Report 23 February 2010 Global...

IBISWorld Industry Report 23 February 2010 Global Spirits Manufacturing: C1122-GL DISCLAIMER This product has been supplied by IBISWorld Inc. ('IBISWorld') solely for use by its authorized licenses strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication - in papers, reports, or opinions prepared for any other person - it is agreed that it will be sourced to: IBISWorld Inc.

Contents Industry Definition................................................................................................................................................. 3

ACTIVITIES (PRODUCTS AND SERVICES) ......................................................................................................................................3 SIMILAR INDUSTRIES ........................................................................................................................................................................3 DEMAND & SUPPLY INDUSTRIES ....................................................................................................................................................3

Key Statistics ........................................................................................................................................................ 5 CONSTANT PRICES ...........................................................................................................................................................................5 CURRENT PRICES .............................................................................................................................................................................5 REAL GROWTH...................................................................................................................................................................................6 RATIO TABLE......................................................................................................................................................................................6 GRAPHS ..............................................................................................................................................................................................6

Segmentation ....................................................................................................................................................... 8 PRODUCTS AND SERVICE SEGMENTATION..................................................................................................................................8 MAJOR MARKET SEGMENTS..........................................................................................................................................................10 INDUSTRY CONCENTRATION.........................................................................................................................................................11 GEOGRAPHIC SPREAD ...................................................................................................................................................................11

Market Characteristics........................................................................................................................................ 13 MARKET SIZE ...................................................................................................................................................................................13 LINKAGES .........................................................................................................................................................................................13 DEMAND DETERMINANTS ..............................................................................................................................................................14 DOMESTIC AND INTERNATIONAL MARKETS................................................................................................................................15 BASIS OF COMPETITION.................................................................................................................................................................16 LIFE CYCLE.......................................................................................................................................................................................17

Industry Conditions............................................................................................................................................. 19 BARRIERS TO ENTRY......................................................................................................................................................................19 TAXATION .........................................................................................................................................................................................20 INDUSTRY ASSISTANCE .................................................................................................................................................................21 REGULATION AND DEREGULATION..............................................................................................................................................22 COST STRUCTURE ..........................................................................................................................................................................23 CAPITAL AND LABOR INTENSITY...................................................................................................................................................24 TECHNOLOGY AND SYSTEMS .......................................................................................................................................................24 INDUSTRY VOLATILITY....................................................................................................................................................................25 GLOBALIZATION...............................................................................................................................................................................25

Key Factors ........................................................................................................................................................ 27 KEY SENSITIVITIES..........................................................................................................................................................................27 KEY SUCCESS FACTORS................................................................................................................................................................27

Key Competitors ................................................................................................................................................. 29 MAJOR PLAYERS .............................................................................................................................................................................29 PLAYER PERFORMANCE ................................................................................................................................................................29 OTHER PLAYERS .............................................................................................................................................................................40

Industry Performance ......................................................................................................................................... 41 CURRENT PERFORMANCE.............................................................................................................................................................41 HISTORICAL PERFORMANCE.........................................................................................................................................................46

Outlook ............................................................................................................................................................... 49

INDUSTRY DEFINITION Global Spirits Manufacturing

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© Copyright 2010, IBISWorld Inc. 3

Industry Definition The Global Spirits Manufacturing industry acquires a range of ingredients such as grains that are distilled into alcoholic spirit beverages and packaged before being sold to liquor wholesalers, bars, casinos, restaurants, hotels and retail stores. This industry comprises establishments primarily engaged in one or more of the following: distilling potable liquors (except brandies); distilling and blending liquors; and blending and mixing liquors and other ingredients.

ACTIVITIES (PRODUCTS AND SERVICES) The primary activities of this industry are: • Gin manufacturing • Liqueur manufacturing • Ready-to-drink mixed spirits (RTDs) manufacturing • Rum manufacturing • Vodka manufacturing • Whiskey manufacturing The major products and services in this industry are: • Whiskey • Vodka • Rum • Liqueur • Asian white spirits • Other spirits • Gin • Tequila

SIMILAR INDUSTRIES Industry: C1121-GL - Global Beer Manufacturing Description: The Beer Manufacturing industry is a close competitor to the spirits industry. Industry: C1123-GL - Global Wine Manufacturing Description: The Wine Manufacturing industry includes establishments that make table wines, and distilled wines such as brandy and cognac. Industry: C1922-GL - Global Basic Organic Chemicals Manufacturing Description: This industry produces non-potable ethyl alcohol for industrial use.

DEMAND & SUPPLY INDUSTRIES A0119-GL - Other Global Agriculture C1512-GL - Global Cardboard Container Manufacturing C2111-GL - Global Glass and Glass Products Manufacturing C2513-GL - Global Commercial and Service Machinery Manufacturing F-GL - Global Wholesale and Retail Trade F4311-GL - Global Wholesale Trade

INDUSTRY DEFINITION Global Spirits Manufacturing

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F4513-GL - Global Supermarkets G-GL - Global Hotels and Restaurants

KEY STATISTICS Global Spirits Manufacturing

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Key Statistics CONSTANT PRICES 2006 2007 2008 2009 2010 Industry Revenue *69,230.4 *78,335.6 *88,451.2 *88,908.8 *91,446.3 $Mill Industry Gross Product *18,139.0 *20,736.3 *23,642.0 *24,425.3 *25,145.1 $Mill Number of Establishments *8,050 *8,010 *7,930 *7,851 *7,840 Units Number of Enterprises *7,450 *7,410 *7,336 *7,263 *7,252 Units Employment *457,970 *439,650 *422,060 *413,620 *405,350 Units Exports *18,792.3 *22,375.6 *24,507.0 *21,718.2 *23,427.1 $Mill Imports *18,792.3 *22,375.6 *24,507.0 *21,718.2 *23,427.1 $Mill Total Wages *2,990.9 *3,198.1 *3,322.7 *3,050.6 *3,104.7 $Mill Total Assets N/A N/A N/A N/A N/A $Mill Domestic Demand *69,230.4 *78,335.6 *88,451.2 *88,908.8 *91,446.3 $Mill Volume sales *20.1 *20.5 *20.9 *21.0 *21.2 Billion Liters

CURRENT PRICES 2006 2007 2008 2009 2010 Industry Revenue *63,820.2 *74,281.9 *85,665.8 *87,336.8 *91,446.3 $Mill Industry Gross Product *16,721.5 *19,663.2 *22,897.5 *23,993.4 *25,145.1 $Mill Number of Establishments *8,050 *8,010 *7,930 *7,851 *7,840 Units Number of Enterprises *7,450 *7,410 *7,336 *7,263 *7,252 Units Employment *457,970 *439,650 *422,060 *413,620 *405,350 Units Exports *17,323.7 *21,217.7 *23,735.3 *21,334.2 *23,427.1 $Mill Imports *17,323.7 *21,217.7 *23,735.3 *21,334.2 *23,427.1 $Mill Total Wages *2,757.2 *3,032.6 *3,218.1 *2,996.7 *3,104.7 $Mill Total Assets N/A N/A N/A N/A N/A $Mill Domestic Demand *63,820.2 *74,281.9 *85,665.8 *87,336.8 *91,446.3 $Mill Volume sales *20.1 *20.5 *20.9 *21.0 *21.2 Billion Liters


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REAL GROWTH 2006 2007 2008 2009 2010 Industry Revenue *5.9 *13.2 *12.9 *0.5 *2.9 % Industry Gross Product *7.3 *14.3 *14.0 *3.3 *2.9 % Number of Establishments *-0.5 *-0.5 *-1.0 *-1.0 *-0.1 % Number of Enterprises *0.4 *-0.5 *-1.0 *-1.0 *-0.2 % Employment *-4.0 *-4.0 *-4.0 *-2.0 *-2.0 % Exports *8.1 *19.1 *9.5 *-11.4 *7.9 % Imports *8.1 *19.1 *9.5 *-11.4 *7.9 % Total Wages *1.8 *6.9 *3.9 *-8.2 *1.8 % Total Assets N/A N/A N/A N/A N/A % Domestic Demand NC *13.2 *12.9 *0.5 *2.9 %

RATIO TABLE 2006 2007 2008 2009 2010 Imports share of domestic demand *27.14 *28.56 *27.71 *24.43 *25.62 % Exports Share of Revenue *27.14 *28.56 *27.71 *24.43 *25.62 % Average Revenue per Employee *0.15 *0.18 *0.21 *0.22 *0.23 $Mill Wages and Salaries Share of Revenue *4.32 *4.08 *3.76 *3.43 *3.40 %

GRAPHS Revenue

Revenue Growth Rate


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Employment

Imports and Exports

Note: Unless specified, an asterisk (*) associated with a number in a table indicates an IBISWorld estimate and references to dollars are to US dollars.

SEGMENTATION Global Spirits Manufacturing

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Segmentation PRODUCTS AND SERVICE SEGMENTATION

Product/Services Share

Asian white spirits 8.0%

Gin 4.8%

Liqueur 12.2%

Other spirits 6.2%

Rum 12.3%

Tequila 3.6%

Vodka 21.7%

Whiskey 31.2%

This estimated product segmentation is based on value. However by volume, vodka, rum, tequila and Asian white spirits account for a larger share of production, due to their prominence as low-priced spirits in emerging countries.

In addition to the product types described below, spirits can be categorized as value, premium or super premium. Value spirits are marketed on the basis of low price, and are not heavily branded. Premium spirits are generally supported by substantial spending on brand awareness. Super premium spirits are the most expensive brands within each product segment, and in particular aged Scotch.

Whiskey

This category includes spirits distilled from malted barley, rye, corn, or wheat. (The spelling of US and Irish "whiskey" differs from Scotch and Canadian "whisky". In this report, "whiskey" is used as the generic term.) There are various types of whiskey, each being unique to countries or regions. These include scotch bourbon, Irish, Canadian and others.

The most popular brands are blends of single malt and unmalted Scotch. However, the higher-priced super premium Scotch whiskies are generally single malt. The top-selling Scotch brand is Johnnie Walker (owned by Diageo plc), and the number two is J&B (also Diageo). Global sales of Scotch increased by 3.0% for the year to June 2006

By law, bourbon is made in the State of Kentucky in the US and must contain at least 51% corn. The top-selling bourbon in the world is Jack Daniel's (Brown-Foreman). Tennessee whiskey is similar to bourbon, with the key difference being that it is filtered through maple charcoal.

These whiskeys, made in Ireland, are similar to Scotch, but they rarely have peat used in the malting process. The top selling Irish whiskey is Jameson (Pernod Ricard). In emerging nations there are many unique local whiskeys, such as Sang Thip in Thailand.


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Liqueur

This segment includes the broadest range of products in terms of both ingredients and taste. Liqueurs are spirits that are sweetened or flavored. Common additives are sugar, fruits, herbs, spices, flowers, cream, chocolate and coffee. Liqueurs that are prepared with fruit are sometimes termed 'cordials'.

A prominent type of liqueur is pastis, which is anise-flavored and often served diluted with water as an aperitif, particularly in France. Popular pastis brands include Pernod and Ricard. Also included in this segment is Irish cream, which is whiskey with added dairy and sugar, such as Baileys (Diageo). Furthermore, schnapps refers to fruit-flavored liqueurs, originating in Northern Europe. However, the common use of the term has widened to include other flavored liqueurs such as butterscotch schnapps.

Vodka

This includes any colorless spirit distilled from fruit or grain. Vodka originated in Poland and the surrounding countries. Also included in this segment are flavored vodkas, which are enjoying growth in demand. The top-selling global vodka brand is Smirnoff (Diageo). Growth by value for the year to June 2006 was 4.0% (source: Diageo).

Rum

IBISWorld includes all spirits made from molasses or sugar cane juice in this category. Included in this category is tafia, an inexpensive type of rum. The national liquor of Brazil, cachaca, has also been included in this category. Also included in this segment is the misleadingly termed Indian 'whisky' made from molasses.

Asian white spirits

This category includes Japanese shochu, Korean soju, and Chinese rice spirits. Sake and other similar "rice wines" are excluded from this industry as they are made by brewing rice, rather than distilling it.

Gin

This is made by re-distilling white grain spirits flavored with juniper berries. Gin may also have botanical flavorings such as lemon. It originated in the Netherlands in the 17th century and quickly became popular in England. The top-selling gin brand is Gordon's London Dry Gin (Diageo). Sales of gin fell 1.0% for the year to June 2006.

Tequila

This is a Mexican spirit produced from the distillation of pulped Agave cactus. Jose Cuervo is the best-selling tequila brand (Diageo). Sales of tequila increased by 8.0% for the year to June 2006.

Other Spirits

This segment includes spirits not classified in the above categories. Examples include local spirits such as Samogon produced in Russia, Pinga (Brazil), Pisco (Chile) and others.


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MAJOR MARKET SEGMENTS

Market Segment Share

Supermarkets and discount stores 25.0%

Independent grocery stores 21.0%

Hospitality 18.0%

Liquor stores 17.0%

Other 10.0%

Convenience stores 7.0%

Direct sales 2.0%

Sales of spirits by manufactures are usually conducted via wholesalers. These include independent wholesalers and distribution divisions of manufacturers. However, in this report, market segmentation has been provided by retail market channel. Sales through specific outlets in any one country are likely to be affected by liquor licensing laws, which can affect relative sales prices between outlets. For example, businesses licensed to allow the consumption of alcohol on premise may have to pay more for a license than businesses selling takeaway liquor. The difference in the costs of distribution will affect consumer prices and consumption patterns.

Supermarkets and discount stores benefit from convenience for consumers and the ability to offer low prices. This channel accounts the majority of sales in Europe. In the United Kingdom, supermarkets and other grocery stores can apply for licenses to sell alcohol 24 hours a day. Independent grocery stores are another significant outlet in countries where the grocery retail sector is less concentrated. This is the main market segment in Russia and Eastern Europe. The convenience store channel accounts for a small proportion of sales in most regions, except for North America where it accounts for around 25%.

Another important outlet is the hospitality industry including bars, clubs and restaurants. In this context, spirits are generally sold as drinks served at the bar rather than by the bottle. The sale of alcohol for consumption on premise requires a different license in countries such as Australia, Canada, Japan, UK, and most states of the US.

Others include liquor stores, market stalls and kiosks. In addition, an estimated 2.0% of sales by manufacturers are direct to consumers. These include sales by distillery outlets.

Major players often have their own sales offices or distribution companies operating in key national markets, as well as contracts with local distributors (including other industry players) to manage particular territories. The larger players that also produce beer and wine, such as Diageo, often have specialized sales forces for each of spirits, beer and wine. Other enterprises, such as Foster's Limited (Australia), have integrated distribution into multi-beverage sales teams. However, this has received mixed success.


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INDUSTRY CONCENTRATION Industry concentration is low

The level of concentration in the Global Spirits manufacturing industry is low, with the top four players accounting for around 20% of industry revenue. In volume terms, the concentration is even lower.

Although the overall industry is fragmented, the global premium brands are owned by a smaller group of major players. Of the premium spirits producers, concentration has been increasing with major acquisitions such as Pernod Ricard and Fortune Brands' acquisition of Allied Domecq. The major players have also acquired many smaller distilleries.

GEOGRAPHIC SPREAD Year: 2007 Spirits manufacturing revenue

Region Percentage

Europe 41.1

North Asia 32.1

North America 8.4

India & Central Asia 7.1

South America 5.7

South East Asia 3.0

Africa & Middle East 2.0

Oceania 0.6

Europe: Europe is the dominant region within the industry, due to high spirits consumption, and a strong spirits exporting industry. However, aging populations have curbed volume growth in most European countries.

North Asia: Growth in disposable income and population is driving growth in the spirits market. Greater acceptance of female drinking has also been a feature in a number of Asian countries. Locally produced white spirits dominate the market, although the fastest growth is in international whiskey brands. However, average annual growth in spirits sales in Asia over the current period is estimated to have lagged behind that of beer and wine.

North America: The market for spirits in North America is relatively small compared to its economy, due to the strong competition from beer and wine within the United States market. However, on a per capita basis, the Canadian spirits industry is strong, dominated by whiskey. The industry in Canada developed its own distinctive style of whiskey which is demanded heavily in the US and Japan. Tequila is a strong export product of Mexico.

India & Central Asia: India is the top-consuming nation of spirits in the world by total volume. The industry produces mainly for the Indian market, although it is expanding as an export base.

South America: This region is dominated by local and export-quality rum.


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South East Asia: Thailand and Singapore are two of the fastest growing whiskey drinking nations in the world, with total consumption growing at over 15% per year.

Africa & Middle East: South Africa dominates production within the region. Due to a large population of Muslims, who abstain from drinking alcohol, spirits consumption and production is low in the Middle East.

Oceania: This region has a small spirits industry, primarily due to the popularity of beer and wine in Australia. However, on a per capita basis, it has one of the strongest RTD manufacturing industries.

MARKET CHARACTERISTICS Global Spirits Manufacturing

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Market Characteristics MARKET SIZE

The global spirits industry enjoyed a period of exceptional growth over the period leading up to the global economic downturn of 2009. Growth was driven by rising per capita spirit consumption in developing countries and increasing demand for premium brands. The industry was hit hard by the global downturn of 2009, with recession in many key markets constraining demand across key markets and a collapse in air travel weighing on business and duty free sales.

The industry should recover from its hangover in 2010, with demand strengthening in mature markets and rising disposable income driving volume growth in Latin American and Asian markets. Across the globe, consumers will move along the quality spectrum from basic to premium spirit brands and products, helping producers increase profitability. Whiskey and Vodka will continue to be the best performing spirits over the year, while scotch and liqueurs will lag. IBISWorld estimates industry revenue increased at an average annualized rate of 7.0% over the five years to 2010.

The Global Spirits industry will exhibit another solid period of growth over the five years to 2015, albeit at a slower rate than during the past five years. Growth in the industry will continue to be driven by brand premiumization and volume growth in developing markets.

Asia will become increasingly important to the industry, with burgeoning populations, rising disposable income and aspirational consumption driving demand for regional spirits as well as international Scotch, vodka and Cognac brands. Firms will increasingly compete across a range of spirit products, and will typically produce each type of both white and dark spirits. IBISWorld forecasts that Global Spirits Manufacturing industry revenue will grow at an average annual rate of 5.6% over the five years to 2015.

LINKAGES Demand Linkages

F-GL - Global Wholesale and Retail Trade A variety of retail channels sell spirits to final consumers.

F4311-GL - Global Wholesale Trade Alcoholic beverage wholesalers are the primary intermediary between spirits manufacturers and retailers.

F4513-GL - Global Supermarkets The supermarkets industry is a prominent downstream retail channel for spirits.

G-GL - Global Hotels and Restaurants Hotels, bars, clubs and restaurants are an important retail channel in most countries. Supply Linkages

A0119-GL - Other Global Agriculture The Spirits Manufacturing industry purchases agricultural commodities such as grains, fruit and vegetables for distilling.

C1512-GL - Global Cardboard Container Manufacturing Spirits manufacturers purchase cartons for packaging.


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C2111-GL - Global Glass and Glass Products Manufacturing Glass bottles are the primary form of packaging for spirits.

C2513-GL - Global Commercial and Service Machinery Manufacturing This industry provides distilling and packaging machinery to spirits manufacturers.

DEMAND DETERMINANTS

The factors that determine the overall level of demand for spirits are:

Consumer attitudes towards alcohol consumption

Consumption of spirits is influenced by attitudes and views of consumers towards alcohol in general. Greater consciousness of the negative health and social effects of alcohol has been a barrier to volume consumption growth. In addition, greater awareness of the dangers of drink-driving has curbed consumption. Consumer attitudes toward alcohol are influenced by advertising campaigns and government regulations.

Appeal of spirits relative to other beverages

Spirits are a close substitute for beer and wine. As such, demand for spirits depends on their level of appeal to consumers vis-a-vis wine and beer. Consumer preferences are influenced by marketing and beverage taste. For example, the release of new ready-to-drink mixed spirits (RTDs) has widened the consumer base for the spirits industry, due to the broader appeal of their sweeter taste.

Disposable income

In general, higher disposable income allows consumers to spend more on discretionary products, such as spirits. It can also serve to shift consumers from low-price to high-price premium spirits. The level of disposable income is determined by macroeconomic factors such as GDP per person and employment levels.

Demographics

The age profile of the population is another determinant of demand. Per capita consumption of spirits is highest among the population in the 18-to-30 year cohort. Furthermore, spirit consumption is generally higher among men than women.

Price and relative prices

Retail prices of spirits relative to general price levels, and to other alcoholic beverages in particular, are demand determinants. At low price points, discounts can increase demand for spirits relative to beer and wine. However, at higher price points, discounts may be less effective and may even diminish the perceived quality and therefore demand for super-premium spirits.

Other factors

Along with growth in disposable income, greater confidence among consumers in the outlook of the economy stimulates higher consumption of discretionary items, including spirits. Another factor determining demand for spirits is the


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occurrence of special events. Demand for spirits, as well as other alcoholic beverages, can peak during festive seasons, public holidays, and major sporting events.

DOMESTIC AND INTERNATIONAL MARKETS Domestic and International Markets Trade Trade in this industry is high The trade trend is increasing Domestic and International Markets Analysis

International spirits companies generally have a range of beverages, and own production facilities in a number of countries. They will produce a spirit in a domestic market often associated with that product, such as vodka from Eastern Europe, or tequila from Mexico, and ship the good to other markets. Imported products are usually sold at a premium.

According to a report by the EU, price differentials play a significant role in cross border shopping for alcohol. At least one in six tourists return from international trips with up to two liters of alcohol. Price differentials are the result of differing costs of production and different taxation. High taxation of spirits has also stimulated growth in duty free purchases of alcohol, a rapidly growing source of downstream demand for the industry.

IBISWorld expects that over the five years to 2009, the value of international trade for the Spirits Manufacturing industry will increase at an average annual rate of 8.8%, to $22.33 billion. This is equivalent to 25% of industry revenue. This is a relatively high proportion of the industry, given that many domestic industries are largely insulated from international trade. For example in China, imports account for an estimated 0.1% of domestic demand. However, international trade in spirits is dominated by high value spirits, thus they account for a much higher proportion of international trade by value than by volume.

Almost half of the value of spirits exports is generated by the United Kingdom (31.0%) and France (17.6%). The top industry player, Diageo plc, is UK-based, and that the number-two player, Pernod Ricard SA, is based in France. The dominance of the United Kingdom in spirits exports is reflective of the prominence of Scotch in international trade, standing at an estimated $4 billion per year. Whiskey in general accounts for almost half of the value of international trade in spirits.

Over the current period, growth in the value of international trade is being led by vodka, with growth expected to accelerate strongly over the current period. In contrast, growth in the value of rum trade is estimated to be 1.0% per year.

Due to high tariffs on spirits, there is a substantial amount of spirit smuggling across borders. As such, the trade figures here, which are based on official records from customs agencies, underestimate the total value of international transfers. IBISWorld estimates that global illicit spirits trade is equivalent to 10-20% of legal trade. However, in developing regions such as Africa, it may exceed the value of legal trade.


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International Trade in Spirits by Product, 2007

Product type Percentage Value share

Percentage Volume Share

Whiskey 36.9 32.9 Grape Based 18.6 4.8 Liqueur 16.8 14.7 Vodka 11.9 20.8 Gin 6.1 7.3 Rum 0.6 0.8 Other 9.1 18.7 Source: United Nations COMTRADE database

BASIS OF COMPETITION Industry competition is medium Industry competition is increasing

Participants in the Global Spirits Manufacturing industry face competition from both internal and external sources.

Internal

Within most national markets, there is a medium-to-high level of competition. The means by which players can compete successfully and gain market share are:

Branding: Strong brands that appeal to a wide market are critical for winning market share. This requires spending on advertising in a range of media, in-store promotions, and development of logos and packaging that appeal to consumers. Branding of spirits often involves building a strong association with the 'sophisticated' or 'fashionable' elements of a particular country. For instance, Scotch brands are often associated with the ancient tradition of Scotland, and rum brands often portray links to the relaxed and festive reputation of the Caribbean.

Price: Spirit brands compete at different price levels. At the value level, a discounted price can win market share. However, at the high-priced premium and super premium end of the market, price is a less important factor than branding and taste. In some instances, super-premium products such as aged Scotch may even gain market share by setting prices higher, thereby attracting buyers by adding to the exclusive impression of the product.

Taste: The taste of a product can influence market share, and in particular contributes to consumers preferences for particular product segments (categories) over others. For instance, the RTD segment has been growing due to the appeal of the taste to younger consumers.

Distribution: Particularly in mass sales channels such as supermarkets. Effective penetration into major national markets, and key retail channels within them, requires sophisticated distribution networks. Often spirits manufacturers augment their own sales and distribution operations with wholesalers that specialize in particular markets or retail channels.

Despite strong competition within many national markets, on a global scale there is a high level of cooperation between spirits manufacturers. For instance, Maxxium is a joint venture formed by four spirits manufacturers - Beam Global Spirits


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& Wine (Fortune Brands), The Edrington Group, Remy Cointreau and The V&S Group - to distribute their brands outside the United States.

External

The industry faces strong competition from wine and beer manufacturers. As with internal competition, alcoholic beverage manufacturers of all kinds compete on branding, price, taste and distribution strength.

Brandies, including Cognac, and fortified wines such as port and sherry, are very close substitutes for spirits. Cognac, in particular, is a strong external competitor to premium spirits.

To a lesser degree, the spirits industry also faces competition from non-alcoholic beverages such as soft drinks, juice and bottled water.

LIFE CYCLE Life Cycle Stage This industry is in the mature stage of its life cycle Life Cycle Reasons • Industry value added growth is almost equivalent to GDP growth • Enterprise numbers in developing markets are growing • Generally stable group of products • Medium rate of technological change Life Cycle Analysis

Value added is estimated to have grown at an annualized rate of 9.9% per annum over the five years to 2009, which is a much greater rate than world GDP, which has grown at an annualized rate of 4.6%. This is largely attributable to strong revenue growth in the industry, but also a small increase in the proportion of industry revenue which is attributable to value added. Value added accounted for 26.9% of revenue in 2009 compared to 25.7% of industry revenue in 2004. This small increase in the ratio of value added to revenue can be attributed to the trend of premiumization which has characterized the industry (although this trend will be mitigated by reduced consumer sentiment in 2009).

The global spirits industry is estimated to be in a growth life cycle phase. Domestic markets are generally characterized by either stagnant or rising consumption levels. In mature markets with stagnant consumption levels, prices have been rising, facilitating industry revenue growth.

The number of enterprises in the industry is expected to decline at an annualized rate of 0.5% per annum, as production becomes dominated by medium to large corporations. This is due to the significance of scale and brand reputation in the success of spirits producers. Costs of production are expected to decline significantly as production at any one facility increases, leading to a large minimum efficient scale. This results in smaller producers finding it difficult to compete, resulting in either exit from the industry or consolidation. Increased globalization in the industry has resulted in these competitive pressures rising, resulting in less efficient producers exiting the industry.

The products of this industry have not changed significantly over the current period. Whisky remains the dominant spirit in terms of industry values. On the other hand, white spirits have experienced a resurgence in markets such as Australia and


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the US due to their increasing use in cocktails, while a growing cocktail culture has seen these products become more popular. Major players have reported declines in the value and volume of ready-to-drink sales, which had been growing strongly until as recently as 2006 and 2007.

The industry has been growing at distinctly different rates in different regions, with high growth in North and Central Asia, moderate growth in the US, and stagnant growth in Europe. However, this is generally reflective of differing rates of GDP growth. As such, the industry is considered to be in a mature phase within most regions.

INDUSTRY CONDITIONS Global Spirits Manufacturing

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Industry Conditions BARRIERS TO ENTRY Barriers to entry in this industry are high These barriers are steady

Overall, barriers to entry into this industry are high and steady. Barriers to entry include the high level of capital intensity, the long lead time for production (particularly for aged spirits), and the cost of legal compliance.

The production process for spirits is highly capital intensive and economies of scale are substantial. This results in larger producers having significant cost advantage over smaller producers, and channel revenue into advertising, enforcing trade marks, and maintaining their band image. Thus, producers have to be able to reach a sufficient scale before being able to enter the global spirits industry. This can be achieved, however, if producers are successful first in their domestic market before becoming multinational companies.

The long lead times between commencing production and the final product being available can also act as a barrier to entry. While some products can be distilled over shorter periods of time, it generally takes over a year to produce a quality product. With some products such as bourbons and brandies, there is a correlation between quality and the age of the spirit, making it difficult for new producers to compete at the premium end.

Compliance with legislation can also be a barrier to entry. The cost of legal compliance can differ across countries but is generally high. Since excise or other taxes are generally levied on spirits production, distilleries must maintain detailed accounts of production levels. In most countries a license needs to be obtained before commercially producing spirits.

At the same time opportunities exist to compete on the basis of quality rather than price, which would allow for smaller scale production, as long as consumers are willing to pay a premium for the product. There have been a number of examples of such entry, however as yet their effect on the overall industry has been limited.


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TAXATION

Excise rates on liquor are generally among the highest of all products. There are two reasons for this. Firstly, governments use it as a disincentive to heavy alcohol consumption, given the adverse health and social effects. Secondly, because overall demand for alcoholic beverages is relatively unresponsive to price rises, including those induced by higher taxes, alcohol duties are strong source of government revenue.

Value added taxes are applied to most goods and services at the retail level (although are calculated at each transaction in the value chain). These may be in lieu of a direct sales tax, which is becoming less common. The rates vary between countries.

A 2004 publication by the WHO compared the taxation rates on alcohol in a number of countries. This is the most extensive data currently available.

Taxes on Spirits - Countries other than the EU

Country

Percentage Sales Tax or

VAT

Percentage Total Tax as Percentage of Retail

Price Brazil 25 N/A Chile 18 47 United States 8 N/A Israel 18 N/A Poland 22 57 Russian Federation 20 35

India N/A 40.6 Thailand 7 N/A Australia 10 50 China 17 25 Source: World Health Organisation Taxes on Spirits in EU countries Country

Units Excise Per Hectolitre

Percentage VAT

Belgium 47.1 21 Denmark 82.36 25 Germany 0 19 France 3.40 19.6 Ireland 273 21 UK 234.7 17.5 Source: European Commission


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INDUSTRY ASSISTANCE The level of Industry Assistance is medium The trend of Industry Assistance is steady

Key Tariffs Goods Low Rate* High Rate* Imported spirits tariff 0.0 550.0 *Percentage of value unless otherwise specified

Many countries have high tariffs on imported spirits, in order to protect local industry and generate government revenue. In addition, national industry associations provide political, research, networking, and public relations support to their members. Examples of national assistance regimes are outlined below.

European Union

Within the European Union, excise rates vary between countries and spirits product types. However, the EU requires its members to adhere to certain minimum excise rates, so as not to allow any particular country a large competitive advantage in spirits manufacturing.

United States

Imports of most spirit types into the United States are free of a general rate of duty, however, they are subject to Federal Excise Tax, which substantially raises prices to consumers, thereby limiting industry growth prospects. For instance, the tariff on rum and tafia is up to 23.7 cents per liter. However, other than tariffs, assistance provided by federal and state government to this industry is minimal.

There have been no intentions signaled by the US Federal Government to change this level of protection in the near future, despite current strong competition experienced from foreign spirit makers.

Industry assistance is provided by the Distilled Spirits Council of the United States, Inc. (DISCUS), which is a national trade association representing producers and marketers of distilled spirits sold in the United States. DISCUS often lobbies all levels of government on behalf of producers with respect to excise taxes imposed on the industry's products. It also works with the hospitality industry, federal and state governments, local communities, private organizations and individuals to encourage responsible consumption of beverage alcohol and combating beverage alcohol abuse.

India

India has one of the most protected spirits industries in the world, with tariffs in imported spirits at up to 550% (source: Scotch Whisky Association). This provides substantial protection to the domestic industry, which focuses on high volume sales of low-priced spirits.


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REGULATION AND DEREGULATION The level of Regulation is heavy The trend of Regulation is increasing

The industry is subject to a high level of regulation pertaining to a wide variety of areas including production, product liability, distribution, international trade, labeling, advertising, labor, and the environment. Furthermore, in most countries licenses are required to commercially manufacture and distribute alcohol, including spirits.

Labeling

In many countries there are laws stipulating labeling requirements. For instance, United States laws provide that only whiskey made in Kentucky, and from at least 51% corn, can be labeled 'Bourbon'. Spirits generally must also be labeled with information such as alcohol content, country of origin and health warnings.

Licensing and State Monopolies

Licensing is commonly used to restrict the availability of alcohol. In many countries, those who wish to sell or produce alcohol must apply for a license (and sometimes pay a fee), before they are legally allowed to do so. Governments usually have different licenses for sellers of alcohol where the beverage is to be taken away (off premise), and for sellers of alcohol for consumption at a venue (on premise). According to the WHO, 73% of countries require a license for the sale of alcoholic beverages. A number of countries have a state monopoly on the sale of all (off premise) spirits beverages including Canada, Iceland, Cambodia, Colombia and Turkey.

State monopolies are also used for the production of either all alcoholic beverages, as is the case in Cambodia, and Mauritius. In countries such as Norway, Colombia, Costa Rica, Switzerland and Turkey, the state has a monopoly on the production of spirits, but not other alcoholic beverages.

Legal Drinking Age

In most countries the law prohibits alcohol consumption by people under the age of 18. Key exceptions are; a minimum age of 21 years in the United States, Indonesia and Egypt; a minimum age of 16 years in France, Germany, Italy, the Netherlands and Spain; and no minimum age in China and Vietnam.

United States

There are two types of regulatory environments in the US: open states and control states. In open states, spirits manufacturers are able to sell directly to independent distributors. In most control states, companies market their spirits products to state liquor control boards through the bailment warehousing system, and from there to state liquor stores. However, there are variations, such as in states that control distribution but not retail sales. Control states include Washington, Alabama, North Carolina, and Utah; open states include California, Florida, and most states in the South West and Plains regions.

On a federal level, regulation is largely the responsibility of the Bureau of Alcohol, Tobacco and Firearms (ATF) and the Food and Drug Administration (FDA).

Russia


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In Russia, the Rosspirtprom state company supervises the vodka industry. The Rosspirtprom also owns its own production facilities, accounting for 40% of Russian spirits production. However, it is in the process of being privatized.

COST STRUCTURE

Year: 2009

Item Cost %

Purchases 35.6%*

Selling and Distribution Expenses 18.7%*

Advertising 13.6%*

Wages 5.8%*

Depreciation 2.6%*

Interest 1.4%*

Utilities 1.0%*

Electricity & fuels 0.6%*

Other 6.2%*

Profit 14.5%*

Gross profit returns are relatively high for the spirits industry, particularly for manufacturers of premium spirits. Major global spirits companies can report net profits after tax in excess of 15% of revenue. However, IBISWorld expects that globally, profit levels average below this level at around 14.5%. Profit levels in this industry are much higher than other global beverage industries. This reflects high levels of capital investment, and relatively high barriers to becoming a global spirits producer.

Purchases make up the largest single cost component for this industry. The main commodities that are distilled to produce potable spirits are malted barley, wheat, rice, corn, potatoes, Agave cactus, sugar cane and molasses. (Brandies, which are produced from grapes, are included in the Wine Manufacturing industry.) The Spirits Manufacturing industry also purchases ingredients for flavoring such as dairy, fruits, herbs, spices and additives. For RTDs, soft drink concentrates are also required. Spirits are predominantly packaged in glass. For some of the larger players, spirits are purchased in bulk from other distillers and blended and packaged into their own branded products. However, this depends on the price point of the spirit. For low-price spirits, especially local spirits in developing countries, purchases are a very high proportion of revenue, whereas for premium spirits it is smaller, with other costs such as marketing being higher.

Labor costs for the industry are moderate and decreasing. However, average wages per employee are rising due to the higher level of skills required for remaining staff as the industry becomes more capital intensive and reliant on marketing. Furthermore, average wages vary considerably between countries due to variations in costs of living and labor supply.

Depreciation in this industry is moderate. While capital investment is high, the realization of economies of scale means that the annualized cost of using this capital is reduced.


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Advertising expenses for this industry are significant, as it is an important dimension of competition. Producers generally reinvest much of their gross margins into maintaining a brand presence in the industry. Many mediums are used to get this brand message across, including print, television, the internet and other media.

A related cost is selling and administrative costs. Selling costs can include the cost of discounts provided to retailers, or the cost of product promotions. These costs account for another significant proportion of industry revenue. This component of costs can also include legal costs and the cost of lobbying governments. Legal costs can be significant for companies registering and defending their trade marks, or applying for licenses.

Other costs included marketing expenses. Promotion of brands is a defining factor in the success of spirits manufacturers. Mass media such as newspapers, magazines, billboards, radio, cinema and television are commonly used to develop consumer appeal for particular brands. Another element of branding is brand protection, which involves registering of trademarks in each country and enforcing trademarks, licenses and trade secrets with legal action. Utilities form another relatively small component of spirits manufacturers' costs structure.

CAPITAL AND LABOR INTENSITY The level of Capital Intensity is high

• The distilling and bottling processes is highly automated • Little labor is required in production • However, significant labor is required for administrative and marketing functions

IBISWorld estimates that the ratio of capital to labor for the Global Spirits Manufacturing industry is 1 to 2.19. This means that for every dollar invested in capital, $2.19 is spent on labor. Depreciation has been used as a proxy for capital and wages and salaries represent labor costs.

Capital requirements include pot or column stills, bottling lines and machines, grain storage, and in some instances malting equipment. While the production process itself is capital intensive, other necessary business activities associated with a global spirits company are generally more labor intensive. These activities include administration, the creation and implementation of marketing campaigns, and general management of the company. As these functions have become more significant in the industry, the capital intensity of the industry has declined.

TECHNOLOGY AND SYSTEMS The level of Technology Change is medium

Recent developments in distillation technology have focused on areas such as reducing carbon emissions, reducing running costs, or minimizing water wastage. Processes have been developed to produce spirits from whey and other food byproducts, which can reduce the cost of spirit production.

Molasses is a byproduct of the distillation process and can constitute plant material from sugarcane, sugar beets and fruits. New technologies have been implemented to reduce the acidity of this waste so it can be disposed of with less harmful impacts on the environment. The process used to achieve this uses a fixed bed reactor loop.


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Other technology developments can be used to alter the boiling or evaporation point of a spirit, or the surface tension of a spirit or substrate. These methods can be used to improve the quality of the spirit, or its concentration. Technology has led distillers to being able to produce in one distillation the same quality of spirits which would have previously required double or triple distillation. Centrifugal separation can be used to reduce sediment in a mash before distillation, again resulting in a more pure finished product.

INDUSTRY VOLATILITY Industry revenue volatility is low

While volatility may exist in national markets, global revenue is generally smooth, and revenue volatility is low. The demand for spirits has generally followed a gradual upward trend. This has occurred as people's willingness to pay for discretionary items has increased, and has led low revenue volatility. Revenue volatility can occur in any one country if legislation changes significantly in any one year. For example an increase in excise tax will reduce net revenue (most spirits companies report their revenue net of excise). Such a change is only likely to affect global revenue, however, if it occurs in either the US or EU.

GLOBALIZATION The level of Globalization is medium The trend of Globalization is increasing

Many domestic markets remain isolated from the effects of globalization due to domestic preferences for low cost locally produced spirits. Due to the low value of local spirits production, relative to the value of traded spirits, the value of international trade accounts for 19.5% of the total value of the industry. This is a much higher proportion than the proportion of spirits by volume which are traded. IBISWorld estimates that 1.2% of the volume of global spirits production is traded.

Major players have been increasing their reach in emerging economies by acquiring successful local brands. In some cases these brands are marketed beyond the countries in which they were produced (as is the case with 42 Below vodka), however in some cases they maintain a national, rather than international, profile. Thus brand owners can gain exposure to products which are domestically produced and consumed, but are nonetheless profitable brands.

Two driving forces behind increased globalization of the spirits manufacturing industry is the incentive to locate production in low cost countries, and companies desire to be exposed to high growth markets. In many developed counties, the spirits manufacturing industry is reaching maturity, and income growth is below the world average. By purchasing brands in countries where the industry is growing major players are able to grow their businesses. Furthermore, companies can create more opportunities for themselves in counties where incomes are rising. The location of manufacturing plants in low cost locations allows major players to increase their margins over the cost of production.

International trade in alcoholic beverages

Year Billion Dollars

Spirits Billion Dollars

Spirits Billion Dollars

Wine Billion Dollars

Wine Billion Dollars

Beer Billion Dollars

Beer 2004 6.533 N/C 12.58 N/C 7.86 N/C 2005 7.396 13.2% 12.87 2.3% 8.59 9.3% 2006 8.080 9.2% 13.26 3.0% 9.33 8.6%


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2007 9.473 17.2% 13.72 3.5% 10.09 8.1% 2008 10.310 8.8% N/C N/C Source: IBISWorld Database

KEY FACTORS Global Spirits Manufacturing

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Key Factors KEY SENSITIVITIES The key sensitivities affecting the performance of the Global Spirits Manufacturing industry include: Age Group (15-34) Younger consumers are the heaviest spirits consumers. As such, as the size of the population of this group rises, the expanded spirits market facilitates greater sales. However, in most countries the legal drinking age is 18 years. Domestic Goods Prices - Agricultural - Crops - Grains Because grains are a key input into spirits manufacturing, price rises can lead to higher spirits prices and revenue. However, if price rises are not passed onto consumers, then they will result in shrinking profit margins. Other Taxes and Duties - Spirits Taxes and duties on spirits raise the retail price of spirits, thus acting as a disincentive to purchases and lowers revenue received by manufacturers. Per Capita Disposable Income Greater per capita disposable income, which can be created by increased employment or average wages, facilitates both increased consumption of spirits, and a shift from low to higher-priced spirits.

KEY SUCCESS FACTORS The key success factors in the Global Spirits Manufacturing industry are:

• Economies of scope A broad range of spirits facilitates greater returns on activities such as distribution and marketing.

• Control of distribution arrangements Effective distribution in key global markets can be difficult to establish but is necessary for success.

• Effective product promotion Effective promotion through well selected media is critical for premium spirit brands to grow market share.

• Must have license In many countries, licenses are required to manufacture and distribute alcoholic beverages.

• Economies of scale Larger distilleries and multi-distillery enterprises can achieve wider profit margins.

• Establishment of export markets Presence in major export markets - with sales offices, distribution agreements, or joint ventures - is central to growing revenue given the limited size of many domestic markets.

KEY FACTORS Global Spirits Manufacturing

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• Market research and understanding Understanding of consumer preferences, leading to improved product, label and packaging development is critical for market share growth.

KEY COMPETITORS Global Spirits Manufacturing

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Key Competitors MAJOR PLAYERS Market Share

Major Player Market Share Range

Diageo plc 17.8% (2010)

Pernod Ricard SA 8.1% (2010)

Bacardi & Company Limited 4.6% (2010)

Fortune Brands, Inc. 3.0% (2010)

Brown-Forman Corporation 2.6% (2010)

Other 63.9% (2010)

PLAYER PERFORMANCE Diageo plc Market Share: 17.8%

Diageo plc, headquartered in London, United Kingdom, is the largest spirits manufacturer in the world. It was formed upon the merger of Guinness and Grand Metropolitan in 1997. It manages eight of the world's top-20 spirits brands, and 17 of the top-100. As of June 30, 2006, it was the fifteenth largest publicly quoted company in the UK. The company focuses on both organic growth of its existing brands as well acquisition of premium drinks brands which it expects will add value for its share holders.

In 2001, Diageo, in alliance with Pernod Ricard, acquired the drinks operations of Seagram from Vivendi Universal. In 2002, Diageo sold Malibu rum brand to Allied Domecq. In 2003, Diageo announced the establishment of a 50/50 joint venture with Jose Cuervo relating to Don Julio and Tres Magueyes tequilas. Under its terms, Jose Cuervo will acquire a 50% ownership interest in Tequila Don Julio, S.A. de C.V. and its affiliates from Diageo.

A key alliance Diageo has is with LVMH Moet Hennessy-Louis Vuitton SA (LVMA). The two companies have joint distribution arrangements for Diageo's Scotch and gin, and LVMA's champagne and cognac in the Asia Pacific and France. Diageo has also agreed not to compete directly with LVMA's premium champagne or cognac brands in any market.

Diageo has one of the largest inventories of aging Scotch and Canadian whiskies, valued at $3,038 million at June 30, 2006. The maturity periods vary, and can be as long as 30 years.

Financial performance

Over the current period, Diageo has executed many acquisitions and disposals, which have had a substantial effect on its financial data. However, organic growth, reflecting change within existing business rather than from change in ownership, is discussed here as the best indicator of performance within the spirits industry.


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2008-09:

Diageo was impacted by the global downturn in 2008-09, with sales revenue declining almost 9% in US dollar terms. The diversity of the company's product range and the globalised nature of its business provided the company with some support over the year. Poor demand from Europe and North America was also somewhat mitigated by resilient demand for spirits in Africa, the Middle East and Latin America. Sales of Johnnie Walker hit particularly hard due to its relatively high pricing point. The company embarked on major cost initiatives and global restructuring over the year. As part of this, Diageo announced in June 2009 the closure of the Johnnie Walker blending and bottling plant in Kilmarnock, Scotland. Expected to make 700 workers unemployed, the decision caused outrage amongst local press and politicians and has been the subject of protests and strikes. In local currency terms, the company's revenue actually increased 15% due to the depreciation of the dollar against the British pound over the year.

2007-08:

Reported sales and profit growth was greater than that expressed in the above table due to the depreciation of the pound during the year (Diageo reports in British pounds). The company reported net sales growth (net of excise charges) of 8.1% while profit from continuing operations increased by 10.9%.

Organic volume growth was 3.0% in 2008, with volume growth being strongest in the company's International segment (which includes Latin America, the Caribbean, Mexico, Africa, Global Travel and the Middle East), at 5.0%. Organic sales growth was also strongest in the International segment, with sales up by 19% in those regions. Asia pacific recorded a decline in organic sales of 12% for the year.

Strong brand performances included Smirnoff, which recorded net sales growth of 10%, Johnnie Walker (12% net sales growth), and Captain Morgan (13% net sales growth).

2006-07:

In the US, Diageo has ceased its voluntary restriction on television advertising and has started promoting its brands on local cable stations. However, political concern has been raised about this, and possible future restrictions could harm revenue growth in the US market. The company's financial results for the year in the US were, however, strong. Net sales in the US were up 7.0%, with operating profit up by 12%, despite turbulence in the stock market and falling consumer confidence. During the year, company spent an additional 8% on marketing.

In Asia, the company continued to expand its marketing and logistics capabilities. Marketing spend in the region increased by 22%. In January 2007, a subsidiary of Diageo acquired a 43% stake in Chinese company Sichuan Chengdu Quanxing Group Co, which holds 39.5% of the equity of the leading maker of premium traditional Chinese liquor. IBISWorld expects the move will be followed by a strengthening of this equity position.

2005-06:

On an organic basis, revenue and volume growth was 6.0% higher for the year, with a 7.0% gain in operating profit. This was accompanied by an 8.0% surge in marketing spending. Organic revenue for spirits increased 8.0%, and RTDs 2.0%. The company achieved higher growth than the industry average in all of the spirits categories. This was due to acquisitions and strong marketing expenditure.

By region, North America had revenue growth of 6.0%, Europe was flat, and the rest of the world generated a 13% revenue gain. A number of acquisitions were made, including Ursus Vodka Holdings VB in Greece and the Smirnov vodka


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brand in Russia. The company released a new whiskey brand in Europe, The Singleton Single Malt, which is directed at both connoisseurs and new whiskey drinkers.

During 2006, the company continued to shift tasks form regional headquarters to the business service center in Budapest, Hungary. Group financial control and treasury activities have been shifted and it is planned that various market and supply functions will be transferred in the future.

2004-05:

Overall, operating revenue was flat from the previous year. On an organic basis, revenue increased by 4.0% and operating profit by 7.0%. The main factor affecting performance was the difficult trading conditions in Europe. Organic growth in spirits revenue was 5.0%, but RTD sales fell 5.0%.

During the year the company achieved volume sales of over 125 million cases. Volume growth of 7.0% was led by strong gains in the US and offset by a decline in Europe. Marketing spending was over GBP1 billion, a 1.0% organic increase from the previous year. The company increased its spending on non-RTD drinks, but reduced spending on RTDs. Overall RTD sales declined, primarily due to across the board declines in Europe.

Diageo completed its exit from Burger King, allowing it to focus on its core competence of premium drinks. In addition, the company purchased the Irish cream whiskey producer, The Old Bushmills Distillery, from Pernod Ricard.

2003-04:

On an organic basis revenue for premium drinks (excluding Burger King revenue) increased by 6.0%, led by gains in all territories except Ireland. In addition, net profit increased by 7.0% on an organic basis. Johnnie Walker Scotch and Captain Morgan Gold Rum achieved the highest growth rates.

The termination of distribution rights for Cuervo 1800 in October 2002 reduced sales revenue by $14.5 million while other disposals, including Kamchatka in the United States and Gibson's Whiskey in Canada, adversely affected sales revenue by $9 million. The company's termination of distribution rights and the disposals noted above reduced profit before exceptional items by $23.5 million.

2002-03:

On an organic basis, premium drinks revenue increased by 3.0%. This was led by 6.0% growth in the Great Britain region, primarily due to a 5.0% volume gain. On an organic basis, net profit increased by 7.0%, again led by Great Britain, when net profit increased 15%.

The year was notable for the number of new product introductions and line extensions including: Smirnoff Twisted V in the US, and Bell's Special Reserve in the UK. The company continued to emphasize the use of its own dedicated sales people to promote its brands.

Diageo plc - financial performance Year*

Million Dollars Sales

% change Growth

Million Dollars NPAT

% change Growth

Employees

2003-04 16161 3.4 2654 5.1 23720 2004-05 16163 0.0 2608 -1.7 22966


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2005-06 13420 -17.0 3527 35.2 22619 2006-07 15761 17.4 3190 -9.6 22520 2007-08 16205 2.8 3046 -4.5 24373 2008-09 14840 -8.4 2583 -15.2 23802 Source: Annual Report Note: *Year end June Pernod Ricard SA Market Share: 8.1%

Pernod Ricard is the second-largest spirits producer in the world by value. Pernod Ricard's best selling spirits brands are Ricard, Ballantine's and Chivas Regal. It also owns Jacob's Creek wines. As of June 2006, the company had 101 production sites and 17,600 employees around the world. Peron Ricard's revenue base is heavily weighted in Europe, and in particular its home country of France. The company is the top spirits manufacturer in continental Europe, South America and the Asia-Pacific. It operates by decentralized decision making, in order to best deal with the variety of conditions in the various geographic markets. Prominent brands include Malibu, Absolut, Kahlua, and Havana Club International.

Pernod Ricard can trace its origins to the establishment of an absinthe distillery in the late eighteenth century. Absinthe continued to be the prime product produced by Pernod, as the company was then know, until 1932, when pastis was made legal and it began to produce and market the licorice-flavored drink. After that time, pastis sale drove revenue growth, leading to a public listing of the company in 1962. In 1975, the company merged with Ricard to form Pernod Ricard. Since then the company has expanded rapidly by acquisition.

In 2001, the company acquired 40% of Seagram's spirits assets. In 2005, it partnered with Fortune Brands, parent company of Beam Global Spirits and Wine, to acquire Allied Domecq. As part of the buyout, Bushmills Irish whiskey was sold to Diageo, and Braemar, Glen Grant and Old Smuggler brands sold to Campari. In 2008, the company acquired 100% of V&S Group, the owner of Absolut Vodka for $8.9 billion (excluding V&S's 10% stake in Beam Global Spirits and Wine). The company had acted as the distributor for SPI, but will now exit from these arrangements, leaving SPI (producer of Stolichnaya vodka) to find another distributor.

Financial Performance

2008-09:

Pernod Ricard saw revenue grow by 2% over 2008-09. The company's diversified portfolio of key brands and premiumization strategy helped it weather the financial crisis better than most of its competitors. Pernod Ricard successfully integrated Vin and Spirit into the company over the year, with Absolut Vodka posting strong sales. Rum also performed well over the year, while Scotch suffered from weak demand across key markets. The group also benefitted from resilient demand in emerging markets, particularly for prestige brands. In local currency terms, the group's revenue increased by 9% over the year due to the depreciation of the dollar against the euro.

2007-08:

The most notable event for the company during the year was the acquisition of Vin and Spirit, which includes the Absolut brand. While the consideration for the company was at the high end of expectations, the company reported that the purchase offered Pernod the opportunity to increase growth in all markets and should lead to an increase in operating margins.


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Sales growth was strongest for the company in emerging markets. The Asia and Rest of the World segment recorded sales growth of 12.6%, while profit from recurring operations in the region grew by 17.7%. Ten of the group's top 15 brands posted double digit organic growth during the year. Outstanding brands included Martell (up by 24%), Jameson (21%), Mumm (18%) and Havana Club (17%). While the company reported that its performance results were adversely affected by exchange rate effects (the company reports in euros), in US dollar terms, sales and profit growth was strong.

During the year, Pernod withdrew from the Maxxium distribution agreement which had applied to the Vin and Spirit business. Improved profit margins were attributed to successful implementation of price increases.

2006-07:

During the year Stolichnaya performed particularly strongly, increasing sales volumes by 19%. Other successful brands included Ballantine's, up 17% as well as Havana Club and The Glenlivet, both up by 15%. The company was able to purchase the remaining shares in Tia Maria International and Tia Maria Limited, bringing its shareholding to 100%.

Net sales were positively affected by strong organic growth, which was offset to some extent by a negative foreign exchange effect. The company reported that strong growth of the Ballantine's and Martell brands in Asia and the rest of the world contributed to growth in this segment.

During the year, the company pursued a premiumization strategy which led to an improvement in its gross margin and contributed to growth in operating profit.

2005-06:

For the year ending June 2006, Pernod Ricard generated $7.61 billion in revenue and net income of $0.84 billion. During the year, the company completed the operational integration of Allied Domecq, a year ahead of expectations. Meanwhile, the group's existing brands achieved 4.4% organic growth.

There was a decline in volume sales for the top two brands, Ricard and Ballantine's, due to their exposure to weak European markets. Declines in Beefeater and Kahlua reflected industry wide weakness in gin and liqueur sales. This was offset by growth in Chivas Regal, Malibu, Stolichnaya and Havana Club, which were targeted for strong advertising expenditure. Sales for Chivas Regal in China grew by over 50%.

Ricard held the lead within the anise spirits market in France, which in turn accounted for 29% of the total French spirits market. Strength in the supermarket channel in continental Europe has been a key success factor.

2004-05:

The company changed its reporting period from December to June year end. As such, the financial period is for the 18 months to June 2005. Total revenue for the 18 months was $6.33 billion, with net income of $0.78 billion. On a pro rata basis, Pernod Ricard wines and spirits achieved 7.3% growth from the previous 18-month period.

The purchase of Allied Domecq, in partnership with Fortune Brands, allowed Pernod Ricard to rise in prominence within the industry. New brand additions to the company's portfolio included Beefeater Gin, Ballantine's Scotch, Malibu, Kahlua, and Tia Maria. There were declines in volume sales for Pernod and Seagram's Gin, offset by double-digit growth in Chivas Regal, Havana Club and Jameson. During the year, the company focused its marketing on premium brands.


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2003:

For the year ending December 2003, Pernod Ricard sales revenue was $4.44 billion, with net income of $0.58 billion. Total sales volume was 616 gigaliters, up from 592 gigaliters in 2002. There was a 5.0% volume decline for the top spirit Ricard, offset by growth in Seagram Gin (3.0%), Chivas Regal (7.0%), and Havana Club (11%). During the year, Pernod Ricard re-launched Chivas Regal, Martel, and The Glenlivet.

In Asia, the company launched the super premium Royal Salute 50 Years Old, retailing at $8,888 per bottle. It received a favorable response from business communities in China and Taiwan. Overall there was 100% growth in group volume in China, offset by tough market conditions in Japan and South Korea.

Allied Domecq plc (Former Player)

Allied Domecq plc was acquired by Pernod Ricard, in partnership with Fortune Brands, in 2005. Prior to the acquisition, Allied Domecq plc manufactured and sold spirits and wines globally, as well as having franchised businesses in the fast-service restaurant industry. It was the second-largest drinks company in the world (behind rival Diageo plc), with total shipments exceeding 55 million cases approximately 10,000 employees worldwide. The spirits manufacturing operations produced well-known brands such as Ballantine's, Beefeater, Malibu, Kahlua, Sauza, Tia Maria and Maker's Mark.

Pernod Ricard - financial performance Year*

Million Dollars Revenue

% change Growth


% change Growth

Employees

2003-04 4435.5 N/C 585.2 N/C N/A 2004-05 6328.7 42.7 777.0 32.8 17600 2005-06 7612.2 20.3 840.8 8.2 12304 2006-07 8681.3 14.0 1153.4 37.2 17684 2007-08 9663.3 11.3 1372.1 19.0 19300 2008-09 9852.7 2.0 1292.6 -5.8 18600 Source: Annual Report Note: *Year end June Bacardi & Company Limited Market Share: 4.6%

Bacardi limited is the largest privately owned spirits brand. The company manufactures a number of global brands including Bacardi Rum varieties, Grey Goose vodka, Bombay Sapphire gin, and have recently acquired 42 Below from a New Zealand company. Spirits are produced at 31 manufacturing plants around the world.

The company was founded by Don Facundo Bacardi Masso in Cuba. He is said to have produced the first white rum in the world by aging the rum in oak barrels. The company has since moved to Puerto Rico where it is now based. It had established international operations early in the company history, establishing a distillery in New York prior to prohibition (which was then closed when prohibition came into effect).

The company had previously been a loose confederation of companies, mostly in private hands. Bacardi International Ltd., (based in Bermuda), Bacardi & Company Ltd., (Nassau), the Bacardi Corporation (USA), Bacardi Imports (USA) and Grupo Bacardi de Mexico S.A. (Mexico). Bacardi Corporation company had been a publicly listed company, but became private in 1992 after a reverse stock split and a buoyant for shareholders of Bacardi Corporation who held less than 1000


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shares. This enabled it to reduce the number of shareholders to below 300, and become a private company. Following the reverse stock split all five companies were combined under a single holding company, Bacardi Limited.

In 2009, the company recorded an increase in net income despite difficult trading conditions. Sales in all regions declined during the year, with the greatest decline recorded in North America (compared to 10% growth in this region in the previous year).

In 2008, brands which performed strongly included Grey Goose Vodka, which recorded an increase in volume of 18% during the year. Eristoff vodka recorded a 9% increase, while Cazadores tequila and Bombay gin were both up by 6.0%.

In 2007, the standout performer of the range was Grey Goose vodka, which experienced a 30% increase in volume. Other strong brands were Martini Vermouth, up 14% by volume and Eristoff Vodka, up 11%.

Bacardi - financial performance Year

Million Dollars Sales

% change Growth


% change Growth

2007 3989 -12.5 730 10.9 2008 4530 13.6 795 8.9 2009 4394 -3.0 805 1.3 Source: Company Website Fortune Brands, Inc. Brand/Trading Name(s): Baron Von Scheuters Schnapps, Canadian Club Whisky, Courvoisier Cognac, Teacher's Scotch, Beam Global Spirits and Wine, Inc. Market Share: 3.0%

Illinois-based Fortune Brands, Inc. has subsidiaries engaged in the manufacture and sale of home and hardware products, office products, golf products, and distilled spirits and wine. Its operations within the spirits industry are part of subsidiary Beam Global Spirits and Wine. In 2005, Fortune Brands joined with Pernod Ricard in acquiring the assets of Allied Domecq. In the deal, Fortune acquired Canadian Club, Marker's Mark bourbon, Laphroaig single-malt Scotch and Sauza tequila.

In 2008, Fortune Brands and Pernod Ricard reached an agreement to end the joint distribution company which had been established by Fortune Brands and Sweden's Vin and Sprit (following Pernod's acquisition of Vin and Spirit). Fortune brands received $230 million so that Pernod could exit the distribution agreement. In addition, Fortune brands acquired the Cruzan Rum brand for $100 from Pernod. Fortune brand reported that the solution represented a win-win situation, allowing Pernod to gain exclusive rights to distribute Absolut and other V&S brands in the US and securing compensation for Fortune Brands and a fast growing rum brand.

In 1999, the spirits and wine business formed an international sales and distribution joint venture named Maxxium International B.V. (Maxxium) with Remy Cointreau and Highland Distillers, which began operating in August 1999, to distribute and sell spirits in key markets outside the United States. The company agreed to contribute assets related to its international distribution network and make periodic cash payments with a total estimated value of $110 million in return for a one-third (later one-quarter) interest in the venture. The future of Maxxium is now in doubt as Remy-Cointreau will exit in April 2009 and Pernod has negotiated the exit of the Vin and Spirit business.



23 February 2010


2008:

A significant event for the company was the acquisition of Vin and Spirit from the Swedish government. There had been significant interest in the brand.

Sales were adversely affected by a number of factors during the year. The most significant was an increase in excise tax on ready to drink spirits in Australia, which reduced revenue from the region by around $47 million. Other factors which contributed to the lower sales result included the transitional effects of employing a new distributor in the US, lower sales in regions which were being affected by low consumer confidence and declining discretionary expenditure associated with the global financial crisis. Operating income fell strongly due to lower sales and restructuring charges.

2007:

In 2007, Fortune brands sold its wine business to Constellation Brands. The sale of this business was expected to allow the company to focus its business on the higher return business of selling spirits. The company estimated that it would realize a net gain from the sale of the brands, many of which it had acquired from Allied Domecq.

During the year, net spirits sales improved strongly due to a shift towards higher priced brands and favorable exchange movements. International markets recorded relatively strong growth including retail travel sales and sales in emerging markets. Higher net sales, favorable exchange rates and growth in the premium spirits segment facilitated growth in operating income which exceeded net sales growth.

2006:

In 2006, the wine and spirits business recorded strong growth, largely due to completion of a number of wine and spirits brands (initially part of Allied Domecq) from Pernod Ricard. The acquisition was initiated in July 2005, and virtually completed by January 2006. Since all acquired brands were included in the 2006 result, reported sales growth was particularly strong for the year.

Brands which were reported to have performed well in the company's spirits and wine business included Jim Beam bourbon, Sauza tequila and Maker's Mark bourbon. The increase in operating income was attributed to higher sales, and synergies associated with the Allied Domecq brand acquisition.

2005:

Fortune Brand's Spirits and Wines sales for 2005 grew 40% from the previous year, to $1.64 billion. This reflected a favorable mix shift to premium and super premium products. During the year, the company acquired Teacher's Scotch from Allied Domecq, which will be marketed heavily in India in particular. This and capacity growth at production facilities in India contributed to the increased in employment levels.

Results for the year were also positively affected by the acquisition of some Allied Domecq brands from Pernod Ricard. Since these brands were transferred into a Pernod controlled subsidiary in which Fortune brands had shares, some sales of Allied Domecq brands contributed to the strong sales growth of Fortune Brands during the year.

2004:


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Spirits and Wine segment sales increased by 7.1% to $1.17 billion during 2004. This was driven by new product introductions and demand for premium spirits and wine. The company's investments in consumer brands like Moen, Jim Beam and Kensington continued to generate share gains in key markets.

2003:

Spirits and Wine net sales increased by 5.7% to $1.09 billion due to the benefit of foreign exchange ($35 million) and growth in spirits sales ($17 million), primarily Jim Beam ready-to-drink products in Australia, higher sales of DeKuyper cordials and super premium spirits in the US, and higher pricing for Jim Beam bourbon. These benefits were partly offset by decreased volumes for some non-premium products in the US. Operating income increased by 9.6% to $302.8 million benefiting from favorable foreign exchange ($22 million) and higher revenues, partly offset by increased selling and marketing administration costs ($12 million).

Fortune Brands Spirits and Wine Business, Inc. - financial performance Year


% change Growth

Million Dollars Operating Profit

% change Growth

Employees

2004 1169.0 7.1 333.7 10.2 1284 2005 1642.0 40.5 401.0 20.2 3682 2006 2761.4 68.2 714.0 78.1 3178 2007 2606.8 -5.6 766.7 7.4 2828 2008 2480.9 -4.8 543.7 -29.1 3279 2009 2563.2 3.3 410.2 -24.6 3140 Source: SEC Filings Brown-Forman Corporation Market Share: 2.6%

Brown-Forman was founded in 1870, when George Brown and John Forman opened the Brown-Forman Distillery in Louisville, Kentucky. Old Forester was the first brand manufactured and it sold well to the end of the century. In 1956, Brown-Foreman acquired the Jack Daniel's Distillery at Lynchburg, Tennessee. Further acquisitions within the spirits industry ensued, including Korbel, Quality Importers, Canadian Mist and Southern Comfort. In 2000, the company acquired 45% of Finlandia Vodka Worldwide for $83 million. The majority of the company's revenue in generated within the US market.

In 2004, Brown-Forman acquired the remaining 20% of the capital stock of Finlandia Vodka Worldwide Ltd (FVW) from the Altia Corporation of Finland (Altia) for $60.8 million. Brown-Forman and Altia had jointly owned FVW since 2000. In 2003, Brown-Forman announced that it reached agreement with National Distributing Co. in Florida to transfer distribution rights, effective June 1, 2003, from NDC to Premier Beverage Co., a division of Charmer-Sunbelt Group. In 2002, Brown-Forman announced a distribution alliance with Bacardi.


2008-09:

Net sales declined during the year, which was largely attributed to the stronger US dollar. Volumes were steady during the year, while average prices (in domestic currencies) improved marginally. The company reported that the performance of its flagship band, Jack Daniels, was solid during the year, with some improvements in markets such as the UK and


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Australia. Gentleman Jack exhibited volume growth of around 20% during the year. Finlandia also recorded strong volume growth.

The fall in net profit after tax was smaller than the decline in net sales during the year. Positive effects on profit which contributed to this included lower advertising expenditure, and a net gain on the sale of some wine brands.

2007-08:

For the first time in the company's history, sales outside the US consisted of more than half (52%) of the company's total sales. Volume growth was strongest for brands such as Finlandia and Jack Daniels as well as the company's ready to drink beverages. However Jack Daniels volume growth was relatively weak in the US, which was attributed by the company to consumers trading down, while the price of Jack Daniels increased.

Finlandia reportedly recorded strong growth, and was a major contributor to international expansion. The brand experienced strong growth in markets outside of the US such as Poland and Russia. Southern Comfort recorded an increase in net sales, while global depletions (a measure of demand for the product) were constant. Volume growth in the United Kingdom, South Africa and Australia was offset by a 1.0% decline in the US.

Gross profit growth was attributed to price increases on several brands, and strong consumer demand for these brands. Advertising expenses were up by 15% (less than the increase in sales revenue).

2006-07:

During the year, Brown Foreman acquired Chambord and Cassa Herradura, brands which were considered to have strategic value, with Chambord expected to benefit from a growing 'cocktail culture'. A strong performing brand during the year was

The company's gross margin declined from 54.2% in 2005-06 to 52.8% in 2006-07, largely due to higher excise taxes in the company's German and Australian businesses, which reduced gross margin by 1.5 percentage points.

Brown-Foreman sold its consumer goods businesses, Hartmann luggage and Brooks & Bentley, following the sale of Lennox in 2005-06. This is expected to allow the company to focus on its core beverage businesses.

2005-06:

For the year ending April 2006, Brown-Foreman generated revenue of $1.97 billion and net income of $0.32 billion. There was a decline in revenue from the previous year due to strong price competition in the US market. Spirits accounted for 84% of total revenue. Following a repackaging and premiumization of Southern Comfort, the brand achieved 5.0% growth in volume sales for fiscal 2006. 'Premiumization' refers to when a brand is shifted to a more premium category by the use of higher relative pricing, bottle and label re-design, and a shift in advertising style.

The company reported that Jack Daniel's sponsorship of NASCAR has been successful in promoting the brand in a socially responsible way with its "Pace yourself. Drink responsibly" banner.

2004-05:


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For the year ending April 2005, revenue increased by 4.5%, to $2.31 billion, with net income at $0.31 billion. Global depletions for Jack Daniel's Tennessee Whiskey continued to grow by high single-digits in the United States and by double-digits internationally. Southern Comfort sales rose by high single-digits. Global depletions and shipments also grew at double-digit rates for Finlandia Vodka, driven by continued strength in Eastern Europe and the return to growth in the US, partially attributable to the introduction of a new flavor.

2003-04:

For the fiscal year ended April, 2004, beverage total revenue increased by 7.4% to $2.21 billion, with net income at $0.26 billion. Organic sales growth was 4.0%. Operating income was driven by the company's premium spirits brands and a double-digit increase in marketing spending.

Jack Daniel's volume increased for the twelfth consecutive year as consumer demand increased globally, up 6.0% on the previous year. The brand's volumes were particularly strong in the US, UK, Canada, South Africa and China. Volumes in Korea, Japan, and Europe were sluggish due to mixed economic conditions, and a growing anti-alcohol sentiment in Europe.

For Southern Comfort, growth in the US, UK and South Africa was partially offset by weaker performance in Europe. Both brands achieved record sales and profit levels, driven by higher volumes, positive foreign exchange trends and price increases. Volumes for Finlandia were higher because of the new markets of distribution added late in fiscal 2003. However, Canadian Mist struggled in the highly competitive mid-priced whiskey market in the US.

2002-03:

For the fiscal year ended April, 2003, sales increased 5.2% to $2.06 billion and operating income was $0.25 billion. Beverage advertising expenses were up 8.0% as the company increased branding activities for its spirits. Selling, general and administrative expenses rose 9.0%.

Consumer demand for Jack Daniel's Tennessee Whiskey remained positive, with depletions increasing in the United States. Southern Comfort sales were also strong, with growth led by the US market. Volume sales also increased for Finlandia, as the company added new markets to its distribution agreement.

Brown-Forman Corporation - financial performance Year*


% change Growth


% change Growth

Employees

2003-04 2213 7.4 258 5.3 6400 2004-05 2312 4.5 308 19.4 6100 2005-06 2444 5.7 320 3.9 3750 2006-07 2806 14.8 400 25.0 4400 2007-08 3282 17.0 440 10.0 4466 2008-09 3192 -2.7 435 -1.1 4100 Source: IBISWorld Database Note: *Year end April


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OTHER PLAYERS

Player market shares quoted in this report represent less than the value of their total sales revenue. This accounts for the fact that the major players earn income from wholesaling of spirits, which is excluded from this report.

Constellation Brands, Inc.

Estimated market share: Less than 1%

Constellation Brands, Inc., is one of the world's largest wine producers, but also manufactures distilled spirits. Its spirits portfolio includes Black Velvet, Skol Vodka, Mr Boston, and Fleischmann's Extra Dry Gin. Constellation's amaretto liqueur brand, Amaretto di Amore, is the number-one US amaretto. Constellation operates five distilled spirits manufacturing facilities in the United States, three of them being in Georgia. Total spirits revenue in 2008 was $414.2 million.

Remy Cointreau


Remy Cointreau derives around 45% of its revenue from Cognac sales. Remy Martin is the company's primary brand in this category and enjoys strong brand recognition and premium positioning. The next strongest brand is Cointreau, an orange flavored liqueur, which is currently suffering from a slowdown in sales in the US and Japan, but continues to perform well in France. Other spirits brands include Metaxa, Passoa and Mount Gay Rum. IBISWorld expects that full year sales revenue for the company will be around $950 million in 2008.

LVMH Moet Hennessy Louis Vuitton


Also known for luxury fashion items and super-premium champagne, LVMH is the producer of leading cognac brand Hennessy. The company's wine and spirits business generated revenue of $4595.22 in 2008 (at average 2008 exchange rates), however the majority of this revenue is estimated to have been generated from wine rather than spirits sales.

INDUSTRY PERFORMANCE Global Spirits Manufacturing

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Industry Performance CURRENT PERFORMANCE

After years of solid growth underpinned by rising consumption of spirits in emerging markets and increasing demand for higher value spirits in more mature markets, the Global Spirits industry was hit hard by the global economic downturn in 2009. The industry should return to stronger growth in 2010, driven largely by the same trends, although at a much slower rate than before the financial crisis. IBISWorld estimates industry revenue increased at an average annualized rate of 7.0% over the five years to 2010.

Industry to recovery from its hangover

After experiencing a painful hangover in 2009, the Global Spirit Manufacturing industry will return to moderate growth in 2010. Since appearing on the brink of collapse in early 2009, global growth has picked up sharply as coordinated fiscal stimulus and massive interest rate cuts around the world helped stabilize financial markets, ease credit constraints and bolster consumer and business confidence. However, while most of the world's developed economies will emerge from recession during 2010, growth will remain weak as interest rates rise and credit remains constrained. Volume growth is expected to decline in key European and North America markets, with Eastern Europe, Spain and Ireland performing very poorly. Japan will be a major drag on growth over the year. Emerging markets should prove a stronger source of growth for spirit manufacturers. China has recovered faster than any other country in the word and with GDP growth there forecast to return to double digits, will be a small but growing market for spirits in 2010. India will continue to dominate the whiskey market, while Latin America, Russia and Australia will all contribute to industry coffers over the year. Across the globe, consumers will continue to move along the quality spectrum from basic to premium spirit brands and products, helping producers increase profitability. Whiskey and Vodka will continue to be the best performing spirits over the year, while scotch and liqueurs will lag.

Industry performance hampered by the global downturn

The global spirits manufacturing industry faced challenging conditions during 2009 as the global economic downturn led industry revenue growth to slow to just 0.5% over the year. As the fallout from the financial crisis sent most of the world's major economies spiraling into recession, the parlous consumer environment and de-stocking at a wholesaler and retail level impacted volume growth across most product categories. A major downturn in airline travel weighed on duty free sales, while a reduction in business entertaining and passenger numbers hurt sales of scotch, cognac, liqueurs and gin. By region, the North American market proved relatively resilient, with demand for vodka and premium spirits remaining strong. Europe was far more susceptible to the downturn, with sales down sharply across most products. In the Asia Pacific, the impact of the excise duty increase on ready to drink products continued to hurt sales volumes of RTD spirits in Australia, while Japan weighed heavily on the region's growth. India remained a bastion of strength for whiskey, while the Latin American and African markets exhibited moderate growth.

Revenue growth robust prior to the financial crisis

In 2008, Pernod Ricard acquired V&S from the Swedish government, resulting in the company having its own international vodka brand. V&S produces Absolut, the third most recognized vodka brand behind Smirnoff and Stolichnaya.

The industry was affected by a downturn in consumer sentiment. This downturn was due to financial market instability caused by financial institution exposure to the subprime mortgage affair in the US. As spirits are a discretionary product, domestic demand in downstream markets weakened significantly, leading to stagnant revenue growth in a number of


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markets. The US and European markets were most strongly affected. The weakening of the US dollar led to fairly strong industry growth in US dollar terms.

However, some markets are expected to record moderate to strong growth during the year. Emerging economies are expected to continue along their growth trend, at a slightly lower pace. Increased consumer acceptance of alcohol and a growing middle class is expected to stimulate growth in China and India.

In 2007, the industry is estimated to have grown by a further 13.3%. Growth was strongest in China, Australia, and the US. In the US, the industry is expected to grow by 5.6% due to increasing cultural acceptance of spirits, creative marketing, and a thriving cocktail culture. These trends were also observed in Australia where the industry grew by an estimated 15.9% in US dollar terms (4.1% in Australian dollars).

The Chinese industry continued to grow strongly, recording industry revenue growth of 34.7%. The rapid growth of the domestic industry attracted interest from V&S Group (the Swedish company now owned by Pernod Ricard), which formed a partnership with Jian Nan Chun (JNC) in order to enter the Chinese market. The company will initially distribute premium baijiu (a Chinese white spirit), but represented a significant step towards domestic production of spirits in China by V&S. Now the move presents an opportunity for Pernod Ricard, which acquired V&S in early 2008.

In 2006, industry revenue increased by a further 6.0%. Major players, Pernod Ricard, Fortune Brands and Diageo were occupied with incorporating newly acquired product lines into their existing businesses. Bacardi, having experienced significant turnover of managerial staff in 2006, was also refocusing.

In the US, industry growth was led by an increase in volume of consumption in premium spirits. Super-premium spirits also achieved strong growth, although still representing a small share of total revenue. Industry revenue in the US grew by an estimated 11.3% during the year, as consumers increasingly traded up to higher priced products. Industry observers reported consumers using beverage choice to signal sophistication or social status.

Revenue growth was again strong in China, with the industry growing by an estimated 25.4% during the year. The value of spirit production in the EU declined in real terms by 3.8% as growth was curbed by a tightening regulatory environment, consolidation at the retail level, and declining consumer confidence.

In 2005, industry revenue is estimated to have grown by 10.8% during the year. Pernod Ricard acquired Allied Domecq then sold a number of Allied Domecq brands to Fortune Brands and Diageo. The acquisition positioned Pernod Ricard as the second largest spirits company globally. The acquisition had significant strategic implications for the major players in the industry, reducing the number of large scale global competitors, and presenting opportunities for brand acquisitions as Pernod sold of a number of overlapping brands.

In Europe, the EU recorded revenue growth of 3.3% in US dollar terms. In China the industry returned to growth, recording an increase in industry revenue of 34.1%. Major players across the Chinese industry recorded strong growth. Chinese industry leader SYWG recorded revenue growth of 32.3%.

In the US, the industry grew by an estimated 8.7%, due a strengthening of domestic demand. Major players reported strong sales growth during the year. Light spirits recorded the greatest growth, particularly vodka, a common base liquor in cocktails.

Growth markets


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Over the past five years, revenue growth has been driven by less developed markets. Major players in the industry have recognized this and have begun to acquire brands or businesses which increase their exposure to high growth markets. However, many domestic markets remain difficult to enter, due to the strength of local brands, or the availability of very low priced products, or high levels of household spirit production. Major international players have focused on the growing middle class in emerging economies in an attempt to extract greater margins from less price sensitive consumers. While industry revenue growth is lower in developed markets such as US, Canada, and the EU, margins remain high relative to other countries.

Asia is a major source of global growth. However, the market remains dominated by low-priced local spirits, given the large populations on very low incomes (less than US$2,000 per year). The popular spirits are generally rice-based, or sugar cane spirits as in Korea. However, there has been a gradual shift to higher priced western imports as the middle classes expand, in India and China in particular. India is the fastest growing market in the world for spirits, mainly whiskey. India is already the world's largest consumer of whisky and is expected to become the fourth largest market for spirits during the outlook period.

Rising premiumization

Consumers have been trading up in their beverage choices for a number of years. This trend has been dubbed premiumization, and has facilitated increased margins for producers and stimulated industry revenue growth. This is especially important in regions where the spirits market has reached maturity and per capita consumption levels are stagnant or declining, such as Western Europe and Australia. As aggregate consumption growth is constrained, increases in prices become more important in driving industry revenue growth.

Premiumization has been facilitated by increased interest in cocktail culture, savvy marketing and rising per capita incomes. Social trends such as cocktail consumption and increased social acceptance of alcohol consumption have led to more people choosing to consume spirits in a social environment. Consumers have used beverage choice to signal individuality, or sophistication, leading to increased consumption of premium products. Effective branding, advertising and marketing have all fed this trend. Product placements on television or film (where certain brands are incorporated into a scene of a movie or television show) have also been used in counties where spirits advertising is restricted.

Ready to drink products in decline

Over the past five years, Ready to Drink (RTD) products appear to have reached their peak values and volumes and are now declining in many mature markets. Many of the major players now exclude ready to drink products when quoting volume growth. The decline of these products has been attributable to concern over their association with youth alcohol consumption. IBISWorld also expects that the consumer shift towards premium products has also contributed to some. It is expected that RTDs will remain an important part of the market, as they attract a relatively higher margin for manufacturers, and provide consumers with convenience. However, underlying demand conditions are weakening. In some markets the products continue to grow, such as South Asia.

Mergers, acquisitions, and strategic partnerships

The past five years has been characterized by a number of significant brand acquisitions which has changed the number and market power of the major players in this industry. Industry players benefit from having a prominent beverage in each of the major spirit categories (i.e. whiskey, vodka, rum etc), since both brand ownership and distribution rights play a significant role in determining players performance. Where a player does not produce a well know spirit, it can fill the strategic gap by distributing a particular product for a smaller player on a global scale.


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The joint acquisition of Allied Domecq by Pernod Ricard and Fortune Brands in 2005 enabled Pernod Ricard to become the number two global spirits company. This gave Pernod significantly greater exposure to the North American market, where demand was growing faster than the company's base markets of France and other European countries. The transaction also enabled Fortune Brands to acquire a number of spirits brands such as Makers Mark bourbon Sauza tequila, Courvoisier cognac, Canadian Club whiskey, Laphroaig single-malt Scotch.

In 2008, Pernod Ricard acquired V&S group, giving it a leading vodka brand in a number of markets, Absolut. Pernod also acquired distribution rights for Absolut in the US after buying out its joint venture partner. The acquisition further strengthens Pernod's position in the US market. It is expected that Pernod will cease to distribute Stolichnaya vodka (for which it had global distribution rights) following the acquisition due to antitrust concerns. This presents an opportunity for other major players to distribute the brand which had enjoyed strong growth in the US and other markets.

Maxxium is a joint venture which was formed between V&S, Fortune Brands, The Edrington Group and Remy Cointreau. Following the acquisition of V&S, its share of the company is now owned by Pernod Ricard. The company was formed in 1999, and constitutes the distribution business for its shareholder companies outside of the US. However its future is uncertain as Remy Cointreau will withdraw in 2009 and Pernod Ricard has indicated it intends to withdraw within two years (in 2010).

Profitability to lift in 2010

IBISWorld estimates that profit levels in the global spirits industry grew over the years to 2008, mainly on the back of the trend towards premiumization across most product segments. Profits are then estimated to have declined in 2008 as input prices remained relatively high, consumer sentiment declined, and financing costs rose strongly. In 2009, profits took a further hit as sales volumes deteriorated across key markets, constraining price growth. In response to this, firms in the industry slashed costs and restructured their operations.

Industry profitability is forecast to rise moderately in 2010 as an upturn in demand in key markets results in stronger price growth, outpacing rises in input costs and wage growth. Producers are also expected to benefit from the continuing trend towards premiumization in the spirits industry. Demand for high quality premium and super-premium brands was more resilient than expected in 2009 and IBISWorld expects this segment of the market to recover both quicker and stronger than more standard brands from the upturn in 2010. This is expected to boost profitability and margins over the year. The weak US dollar will also contribute to earnings for European based major players Diageo and Pernod Ricard SA. Against this, rising interest rates and the ongoing high cost of capital will weigh on major players who have borrowed heavily to finance acquisitions in recent years.

Volume Consumption

Emerging nations in general have the highest per person spirits consumption. This is in contrast to per person consumption of wine and beer, where the developed countries, particularly in Europe, have the lead.

In addition to the countries listed above, many of the smaller island nations in the Caribbean also have very high per person consumption of spirits. The high negative correlation between the average income of an area and the volume of spirits consumed is reflective of the fact that spirits are often the lowest cost alcoholic beverage in poor countries. As such, it is expected that as countries develop, the spirits volume consumption declines, even though the total value may increase as the consumers switch to higher priced premium spirits along with higher consumption of beer and wine.

Distribution


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Although spirits distribution is accounted for at the downstream wholesaling industry, the distribution arrangements of manufacturers can be a key success factor. Producers will either manage their own distribution, or contract with a third party to handle distribution. The third party approach is more common with smaller manufacturers, however this may be utilized in regions where a larger producer does not have a strong presence.

Third party distributors are generally specialists in their local territory and may be either independent distributors or subsidiaries of other beverage manufacturers. This is the common distribution method for larger, multi-brand manufacturers.

Enterprises that produce other beverages in addition to spirits and handle their own distribution take either a specialist channel or integrate multi-beverage channel approach. Those taking a specialist channel approach have separate sales teams or distributors for each type of beverage, such as spirit, beer, wine, or soft drink. Others have single sales teams or distributors in each territory to handle all beverages.

Industry Size

IBISWorld expects that the industry will contract from 8,130 establishments (national headquarters) at 2003 year end, to around 7,840 at 2010 year end. However, this reflects the development of fewer, but larger and more capital intensive distilleries in emerging countries such as China. In Europe and the US, the number of establishments is increasing. At 2009 year end, there will be around 7,252 enterprises (parent companies). This is reflective of the fact that most enterprises are single-establishment.

Total industry employment is expected to decline at an average annual rate of 3.8%, to 405,350 at 2010 year end. This mainly reflects changes in industry structure within China, where there has been a strong improvement in labor productivity. This has been due to the increasing involvement of global major players in the Chinese industry, which has improved technology and production processes.

The value of total industry wages for 2010 is expected to be $3.1 billion. Average wages vary greatly around the world. For instance, in Europe the average industry annual wage is around $33,000; in Japan and the US it is over $40,000; but in China it is around $2,000.

International trade

Over the five years to 2010, the value of international trade in spirits is expected to increase at an average annual rate of 8.9%, to $22.34 billion. International trade, which is primarily in premium and super premium spirits, has been a key driver of industry revenue. However, the value of spirits trade has been curbed by high tariffs in many countries, designed to protect local industries. The value of international trade in spirits declined significantly in the wake of the financial crisis, as the most of the world's economies went into recession and credit companies became unwilling to provide letters of credit, severely hindering the ability of producers to engage in international trade. The value of international trade is forecast to rise over 2010 as global trade resumes and demand in emerging markets outpaces that I developed markets.

European nations account for the majority of the value of global spirits exports. The United Kingdom alone accounts for 31.0% of the value of international trade. This is largely attributable to its dominance as a producer of premium whiskey. France accounts for a further 17.6% of the value of international trade, but only 5.5% of trade in volume terms. This significant discrepancy is largely due to the super-premium positioning of Cognac, which can only be produced in the Cognac region of France.


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Spirits Consumption per Person Aged 15+ Years Top Ten Countries

Liters pure alcohol per yea

Moldova 10.9 Russia 7.6 Thailand 7.1 The Bahamas 7.1 Latvia 6.6 Haiti 6.5 Belarus 6.3 Lao 6.1 Bosnia & Herzegovina 6.0 North Korea 5.4 Source: World Health Organisation Major distilled spirit exporters Country

Percentage Value share 2009

Percentage Volume Share 2009

United Kingdom 30.96 29.8 France 17.56 5.5 United States 5.41 4.6 Germany 5.22 5.7 Ireland 4.55 4.2 Singapore 4.04 1.4 Mexico 3.83 4.3 Sweden 3.53 3.3 Italy 3.04 3.4 Netherlands 2.58 1.7 Source: United Nations COMTRADE database

HISTORICAL PERFORMANCE

The process of basic spirits distillation has not changed substantially in hundreds of years. However, there has been automation and improved bottling and quality control. The main exception is the RTD category, which has only been a feature of the industry since the 1980s.

In Scotland, malt whiskies made in pot stills were the main variety until the 1830s, when the introduction of column stills allowed the distillation of grain whiskies. It then became common practice to blend a range of malt whiskies with grain whiskies to produce milder flavors. These blended whiskies became popular with non-Scottish drinkers.

From 1920 to 1933 the manufacture, sale and transportation of all alcoholic beverages was banned in the United States. During this period, known as the 'Prohibition', only ten companies were issued with licenses to distribute whiskey for medicinal purposes, but not to produce it. However, illegal establishments called 'speakeasies' were setup for the sale and consumption of spirits. It was during this time the gin rose in popularity in the United States due to the relative ease of production. There were also prohibition laws in force in Scandinavia and the USSR at around the same time, but not in most other countries.


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Since the 1970s, the industry growth in most developed countries slowed. This was largely due to government measures aimed at reducing alcohol consumption and drink-driving. These measures include advertising, stricter retailing regulations, and high taxes on spirits. However, beverage innovation has driven growth in some segments. For instance in 1974, a new category was created with the release of the first cream liqueur, a category now dominated by Baileys Irish Cream (owned by Diageo plc). Ready-to-drink spirits mixed with soft drink also began to appear in the 1980s and 1990s, which have generally achieved much higher growth rates than conventional bottled spirits, albeit from a low base.

Revenue (constant prices) Revenue $ Million Growth % 1998 61,775.1 N/A 1999 51,587.8 -16.5 2000 46,362.0 -10.1 2001 44,846.9 -3.3 2002 45,702.6 1.9 2003 57,067.3 24.9 2004 59,025.2 3.4 2005 65,360.0 10.7 2006 69,230.4 5.9 2007 78,335.6 13.2 2008 88,451.2 12.9 2009 88,908.8 0.5 2010 91,446.3 2.9 Revenue

Revenue Growth Rate

Gross Product (constant prices) Gross Product $ Million Growth % 1998 18,012.1 N/A


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1999 14,717.7 -18.3 2000 12,959.6 -11.9 2001 12,255.6 -5.4 2002 12,397.0 1.2 2003 15,201.7 22.6 2004 15,196.6 0.0 2005 16,907.4 11.3 2006 18,139.0 7.3 2007 20,736.3 14.3 2008 23,642.0 14.0 2009 24,425.3 3.3 2010 25,145.1 2.9 Gross Product

Gross Product Growth Rate

OUTLOOK Global Spirits Manufacturing

23 February 2010


Outlook Revenue (constant prices) Revenue $ Million Growth % 2011 95,305.5 4.2 2012 101,319.1 6.3 2013 105,322.8 4.0 2014 112,903.6 7.2 2015 119,774.6 6.1 2016 125,112.4 4.5 Revenue

Revenue Growth Rate

Gross Product (constant prices) Gross Product $ Million Growth % 2011 26,503.5 5.4 2012 27,909.7 5.3 2013 28,992.6 3.9 2014 30,117.5 3.9 2015 31,986.0 6.2 2016 32,876.9 2.8


23 February 2010


Gross Product

Gross Product Growth Rate

The Global Spirits industry will exhibit another solid period of growth over the five years to 2015, albeit at a slower rate than during the past five years. Growth in the industry will continue to be driven by premiumization and increasing market share in the Asia-Pacific region. The industry will increasingly feature competition based on branding. Firms will increasingly compete across a range of spirit products, and will typically produce each type of both white and dark spirits. Over the five years to 2015, IBISWorld forecasts that Global Spirits Manufacturing industry revenue will grow at an average annual rate of 5.6%, to about $120 billion.

Manufacturers in better spirits

After a year of recovery in 2010, the global economy should head back towards trend growth over 2011, delivering better conditions for spirit manufactures. Although developed economies will have to contend with winding back of fiscal stimulus and rising interest rates, rising wealth and improving labor markets across the North America and Europe should result in stronger demand for white sprits, particularly vodka, and whiskey. Asia will continue to take market share off Europe, with Latin America and Africa also demonstrating solid growth, while North America remains relatively stable. As economic conditions improve across the globe, the trend towards premiumization in spirits in expected to continue, helping producers maintain solid profit growth. The spate of consolidation witnessed in recent years should enhance major players' prospects in emerging markets.

Premiumization to continue

The trend towards premiumization is expected to continue over the next five years, helping spirit manufacturers boost profit margins and stimulating industry revenue growth. During the period before the financial crisis, producers benefited from consumers moving up the quality spectrum, choosing higher value added, premium and super-premium spirits over standard spirit brands. Rising disposable income, sophisticated marketing and cocktail culture contributed to this. The trend is expected to continue over the five years to 2015, although at a slower rate than before. This will prove especially important in mature European and North American markets, where per capita consumption is forecast to decline. So called super-premium brands will also experience strong growth in the Middle East, Russia and China, with new uber rich aspiring to be like their Western peers.


23 February 2010


Towards Asia

Spirit manufactures will increasingly turn to developing markets as developed economies settle on weaker long term growth paths and per capita consumption of spirits falls. Developing economies including China, India, Brazil and others, emerged from the global financial crisis in much better shape than their Western brethren and offer far more attractive growth opportunities with their burgeoning populations, steadily rising incomes and aspirational consumption behavior. Major players have already been lobbying, through institutions such as the European Union, to have import tariffs into these countries reduced, and are likely to direct more advertising expenditure into these growth regions. In contrast, slower economic growth and aging populations will continue to constrain industry growth in Europe. In developed markets, major players will devote resources to retaining market share and encouraging young consumers to drink more spirits in favor of beer and wine.

Most of this projected growth in developing markets will come from Asia, particularly India and China. Between them, the two countries represent a staggering third of the world's population and steady growth in disposable incomes and increasing Westernization of beverage choices will drive strong growth in volumes and per capita consumption of spirits. India is the world's largest whiskey market by a long way and is forecast to grow this product share further over the next five years. Introduced to India during the period of the British Raj, Scotch style whisky is popular among affluent Indians. This sector is fiercely protected by the Indian government, however, with tariffs of over 50% on imported Scotch. Thus, domestically produced whiskey makes up over 98% of the Indian market.

The Chinese spirits market is also heavily regulated and dominated by domestically produced spirits. In 2008, the Chinese government lifted restrictions on cereal distillation, resulting in very strong growth in domestic spirit production, led by sorghum based Baijiu. IBISWorld expects imported spirits will also demonstrate strong growth over the next five years, particularly Cognac and Scotch. Scotch overtook cognac in 2004 as the most popular imported spirit in China and this trend should continue as more wealthy Chinese increase their consumption of prestige spirits. Diageo and Pernod Ricard have aggressively marketed their flagship Johnnie Walker and Chivas Regal brands to great success in recent years. In 2009, Diageo also launched the first Chinese made Vodka, Shanghai White. Though only a small part of the Chinese spirit market, vodka is expected to grow solidly over the next five years.

Another trend expected to continue over the next five years will be the decline of some national or regional drinks, in favor of international brands. Besides the gradual decline of white spirits in Western Europe due to falling per capita spirit consumption, vodka is expected to fall in popularity in Russia and Poland due to government regulation and rising competition from beer, while shochu sales will decrease due to the ageing population and anemic growth.

Profitability to moderate later

Profit levels in this industry are expected to remain high relative to other beverage manufacturing industries. However, profits are expected to decline marginally over time, as more producers are able to compete on a global scale. Strong domestic spirits companies will be able to enter into the international spirits industry and erode the returns being earned by current players. Companies which are expected to become more prominent in the global industry include Kirin and The Edrington Group. As more companies compete on a global scale, some of the significant profits of this industry are expected to be competed away. Average profit levels are forecast to decline slowly to around 13% in 2015.

International Trade

After slowing during and after the downturn of 2009, international trade in spirits is expected to return to strong growth in 2011, steadily gathering pace thereafter. The value of international trade is expected to grow at an annualized rate of 8.7% over the five years to 2015.


23 February 2010


IBISWorld expects that international trade will continue to grow as the industry becomes more globalized. A rise in the value of international trade should also be stimulated by reductions in tariffs. This will also be driven by the activities of major players which will seek to expand their operations into developing nations.

As domestic spirits markets become more open to the world economy, especially by reducing tariffs, major players will be able to expand their market share and the industry is likely to become more concentrated. In particular, any reduction in spirits tariffs in India would open the largest volume whiskey market to foreign producers. In addition to being heavy consumers of whiskey, disposable income is rising rapidly, facilitating higher consumption of premium spirits by the expanding Indian middle-class.

Those players that have a wide global reach will have an increasing advantage during the next five years. There are several factors that can contribute to the gains including economies of scale and scope that arise from the operation of a large multinational and the ability to shift production and administrative functions to low cost countries. Multinational spirits producers will also be able to transplant brands which are successful in particular domestic markets into other markets, to replicate the success of these brands.

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