The 10 biggest spirits stories of 2014By Amy Hopkins
Last year, the spirits industry was full of big buy-outs, financial headwinds, political turbulence and groundbreaking lawsuits – but which were the biggest stories that rocked the sector in 2014? Amy Hopkins and Melita Kiely report.
One story which continued to dominate headlines across the globe was China’s on-going crackdown on conspicuous consumption, which in particular hit the revenues of big spirits industry players such as Diageo, Pernod Ricard and Rémy Coiuntreau.
Meanwhile, the year kicked off with what would become the biggest industry acquisition in 2014. Shortly afterwards a debate over the ageing restrictions over Tennessee whiskey erupted between two of the world’s biggest drinks groups.
Russia’s diplomatic friction with the west was also a big talking point in spirits, as was Scotland’s referendum on independence and a spate of lawsuits in the craft sector.
Click through the following pages to discover our pick of the top 10 biggest spirits stories of 2014. If you think we’ve missed essential choices any out, let us know by leaving a comment below.
Suntory buys Beam
News broke at the beginning of January 2014 that Japanese drinks group Suntory Holdings planned to buy Beam Inc for US$16 billion (£9.7bn), creating Beam Suntory Inc.
The deal secured Beam Suntory’s position as the third largest drinks group in the world, behind Diageo and Pernod Ricard.
Headed by Matt Shattock, who has been CEO of Beam since 2009, the new company is now headquartered in Beam’s main office in Deerfield Illinois in order to create a stronger distribution presence for Suntory’s portfolio in the US.
“By combining the world leader in Bourbon and Japan’s leading spirits company, we have created a stronger global business with an even better premium portfolio,” Shattock said at the time.
“We will be focused on continuing our momentum, growing in developed and emerging markets, and building on our combined strengths.
“Those strengths include a dynamic portfolio across key categories, powerful routes to market and passionate people.”
Folllowing the acquisition, in September last year Suntory announced it would be fully integrating its spirits unit with that of Beam Suntory.
It resulted in a portfolio encompassing Beam’s brands of Maker’s Mark Bourbon, Courvoisier Cognac and Pinnacle vodka with the Japanese group’s Yamazaki and Hibiki whiskies.
China impacts drinks groups
The Chinese government’s crackdown on excessive spending and gifting among military officials has continued to pose problems for many spirits companies.
Cognac was worst hit by the measures when they were firs imposed, witnessing a fall in global sales of 10.2% by value in 2013/14.
High-end Scotch producers including Rémy Cointreau and Pernod Ricard also suffered heavy blows with profits plummeting.
French drinks group Pernod Ricard continued to reel from the effects of the clampdown and was forced to lower its full year profit expectations after experiencing an 18% sales decrease in the region.
It wasn’t until towards the end of 2014 that Pernod Ricard started to see a shift, recording a return to growth for the first quarter of its financial year as China’s sales slump finally started to improve.
The same could not be said for Rémy Cointreau however, which posted a significant sales decline of 15.5% in October, blaming the fall on the Asia-Pacific market that remains “adversely affected by the continued destocking in China”. Sales in the six months to September last year were €471.8 million compared to €558m in the same period in 2013.
Additionally, Diageo also continued to feel the effects of China’s clampdown recording a 31% decline in organic sales for the full year 2013/14.
The group’s gross profit fell from £6.9billion to £6.2bn, whiel the “weaker trading environment” resulted in an overall net sales decline of 10% from £11.3bn in 2013 to £10.2bn.
Nevertheless, commenting on the year ahead, Ivan Menezes, CEO of Diageo, said: “The catalysts for a near term recovery of consumer spend in the emerging markets are still weak however the future growth drivers for this industry, its aspirational nature as consumers in the emerging markets see increasing disposable income, and are undiminished.”
Tennessee whiskey barrel debate
A row between Diageo and rival whiskey producer Brown-Forman erupted in 2014 over the UK group’s challenge to the current legislation on the ageing of Tennessee whiskey. Brown-Forman, maker of Jack Daniel’s, argued that the Tennessee whiskey category was “under attack” by Diageo, maker of George Dickel Tennessee whiskey, while Diageo said Brown-Forman was “attempting to stifle competition”.
Under current laws, which were implemented last year and supported by Brown-Forman, Tennessee whiskey must be made from fermented mash of at least 51% corn, charcoal mellowed, and aged in new oak barrels within the Tennessee state.
However, Diageo is advocating change to the regulations, arguing that allowing for the reuse of barrels in Tennessee whiskey creation would deliver significant cost savings for small and large producers. The proposals were put forward to Tennessee lawmakers and a study committee, which has been considering the change.
Jeff Arnett, master distiller of Jack Daniel’s, hit out at the proposals, claiming it would lead Tennessee whiskey to be considered as “inferior to Bourbon”. “This is not about the interests of micro-distillers in our state,” he said. “We support micro-distillers. This is about Diageo, a large foreign company with more interest in Scotch and Bourbon, trying to weaken what Tennessee whiskey is and we simply shouldn’t allow it.”
While a survey among members of the Tennessee Craft Distillers Guild showed almost 80% – 11 out of 14 respondents – support the existing legislation, a number were critical. Michael Ballard, proprietor of Full Throttle S’loonshine, and Jesse James Dupree, CEO of American Outlaw Spirits, argued that that state’s “formal adoption of the Jack Daniel’s distillation and production process as the definition of Tennessee whiskey” violates protections under the United States Constitution.
The businessmen said they would not break ground on their planned Tennessee whiskey distillery until changes to the legislation were made. However, Darek Bell, of famed craft distillery Corsair, said current legislation keeps standards in Tennessee whiskey “as high as possible”.
A final decision on the proposals is expected later this month.
Emperador buys Whyte & Mackay
Among the various acquisitions made by spirits firms last year stands out Whyte & Mackay, which was sold by Indian drinks group United Spirits to Philippines-based brandy producer Emperador Inc in May.
The Scotch firm was bought for $430 million, according to a statement by United Spirits Limited (USL), which put the company up for sale in February as part of its tumultuous acquisition process by Diageo.
Competition concerns were raised by UK regulator the Office of Fair Trading (OFT) regarding Diageo’s acquisition of a controlling stake in United Spirits in November 2013.
The OFT ruled that there was “substantial competition in the retail sector between Bell’s whisky, a Diageo label and Whyte & Mackay’s own-label and branded blended whisky”.
Therefore, so as to lessen competition worries, United Spirits offered to sell the whisky business, which includes the Jura, The Dalmore, Fettercrane and Tamnavulin distilleries.
An array of bidders were named in different reports, including Gruppo Campari, SPI Group, Lions Capital and TPG Capital, but it was Emperador who closed the deal, which included supplying whisky to the US for three years.
Andrew Tan, chairman of Emperador, said at the time: “Whisky is the fastest growing spirits segment in the world, next to brandy. With this acquisition, Emperador will be exposed to two of the fastest growing spirits segments in the world.
“We believe that Whyte and Mackay is a prized asset with excellent growth opportunity and its acquisition is in line with our plans to enhance our product portfolio.”
The takeover was officially completed in November 2014.
‘Craft’ spirits lawsuits
The debate over what constitutes craft spirits has been brewing for some time, with many commentators arguing large distillers are hijacking the term for marketing purposes. In the final half of 2014, such criticisms were taken a step further when a number of consumer class action lawsuits were embarked upon, putting a handful of much-loved brands in the firing line.
As the craze for small-batch, independent spirits continued in 2014, consumers were warned to be vigilant amid concerns some larger producer were adopting misleading marketing tactics. In August, US advocacy group Consumer Class Actions urged American whiskey consumers to seek legal advice over brands they believe may have “falsely advertised their origin”.
Just a few weeks later, Templeton Rye revealed it would be changing its labels in order to mitigate crticisms the company may have breached federal disclosure requirements by suggesting the product is distilled in Templeton, Iowa, not a large third party whiskey distillery in Lawrenceburg, Indiana. “Currently there is some confusion, so all that confusion is going to be cleared up,” said Templeton Rye chairman Vern Underwood. “If it implies that the rye whiskey is made in Templeton, then that should be changed. Anything that is misleading should be changed.”
The brand also came under fire for stating it is created a using a Prohibition era recipe, which Underwood claims was not permitted by federal regulations.
Meanwhile, in September, Tito’s Handmade Vodka was forced to defend its craft credentials in the face of a “misguided” lawsuit. Consumers across numerous US states have launched legal action against the self-proclaimed “handcrafted” brand, which is thought to sell more than 15 million bottles a year. Brand founder Tito Beveridge said the vodka’s “small-batch distillation process” differentiates it from other brands, while he also predicted that other spirits brands marketed as “craft” will be targeted by similar lawsuits.
And sure enough, another high profile brand, Beam Suntory’s Maker’s Mark, was sued for false advertising by two consumers in San Diego. The claimants sought to turn their case into a class action lawsuit, meaning which means any consumer in California who has purchased a bottle of Maker’s Mark within the last four years could benefit if it proves successful.
None of the mentioned brands have yet been found guilty by a court for false advertising, but 2015 may set a precedent on the issue.
Russia bans spirits brands
It has been a tempestuous year for Russia with its plight to seize Crimea from Ukraine, but the country caught the drinks’ industry’s attention following a spate of suspensions of certain spirits brands.
In August, Russia’s consumer rights protection body planned to ban imports of Sazerac’s Kentucky Gentleman Bourbon sue to health and quality concerns.
As reported by The Moscow Times, Russia’s Rospotrebnadzor agency discovered signs of phthalates organic chemicals in the Bourbon brand.
The firm claims phthalates can cause cancer and infertility problems, in addition to other health concerns.
Soon after, further reports emerged detailing Russia’s ban on imports of Ukrainian vodka and beer, which allegedly violated consumer rights.
Once again, Rospotrebnadzor stopped imports of alcoholic products from certain Ukrainian manufacturers claiming the measure was put in place to protect consumer rights after “numerous violations” were discovered.
In particular, the body noted alcoholic beverages produced by Global Spirits-owned Ukrainian Distribution Company, a major vodka distributor, did not correspond to the volume fraction of alcohol and organoleptic characteristics. Furthermore, it cited beer made by Sun InbevUkraine was not labelled correctly, and another make produced by Obolon also did not comply with requirements of energy value and organoleptic characteristics.
Rospotrebnadzor said all lab tests were conducted by Russian and internationally-accredited centres.
Scotch whisky declines
Figures released in September 2014 by the Scotch Whisky Association (SWA) revealed exports of Scotland’s native spirit continued to decline in the first half of the year.
The drop in numbers was attributed to the Chinese and Latin American markets continuing to bite resulting in total exports of Scotch whisky reaching £1.77 billion in the first six months of the year, down 11% from £1.99bn in the same period of 2013.
The SWA explained the decline was due to 10 years of fast growth for the category which has been stunted by “economic headwinds and uncertainty”.
Exports to key markets such as Singapore, the US, Brazil and Mexico decline due to a multitude of reasons, including economic slowdowns across several regions, a stronger pound sterling and destocking.
In November, more bad news arrived with figures from the SWA detailing export declines in the US of 16% in the first six months of 2014 down £63 million, while a 3% decline in sales in the UK was blamed on the country’s “unfair excise duty”.
In contrast, some markets did experience growth, with exports to France – the largest market for Scotch by volume – increasing 3% to 86 million bottles and 6% by value making it the second largest value market behind the US. Elsewhere, exports to the United Arab Emirates (UAE) grew 26% to £54m and Australia increased by 4% to £37m.
Despite the struggles Scotch has faced with declines however, David Frost, CEO of the SWA, said he remained “confident” in the long-term prospects for Scotch whisky, but highlighted the need for government support in the face of increased devolved powers in Scotland.
However, in October Diageo – the world’s largest producer of Scotch whisky – announced it is to delay its planned increase in production capacity as global demand falters. The drinks firm had pledged to invest £1 billion in 2012 in order to increase its Scotch whisky production capacity to meet growing demand around the world.
Diageo said the delay is to “ensure the right balance between supply and demand” and that it continues to see “long-term potential” in the Scotch whisky category.
Scots vote ‘no’ to independence
The majority of the Scotch whisky industry breathed a sigh of relief in September when the Scottish public voted to remain part of the United Kingdom. Fears had been mounting in the run-up to the referendum on independence as a poll revealed a “yes” vote was more possible than expected.
The Scotch Whisky Association welcomed the return of a 55% “no” vote, claiming the industry applauded the stability this would bring. Alex Salmond, leader of the ruling Scottish National Party and Yes Scotland campaign, said: “It is important to say that our referendum was an agreed and consented process and Scotland has, by a majority, decided not at this stage to become an independent country,” said the leader of the Yes Scotland campaign.
“And I accept that verdict of the people. And I call on Scotland to follow suit in accepting the democratic verdict of the people of Scotland.”
David Frost, chief executive of the SWA, said if Scotland voted in favour of independence, this would pose “huge implications” to the Scotch industry, some of them potentially “damaging and difficult to manage”. Frost raised concerns about an independent Scotland’s monetary, fiscal and taxation policy, which is currently “predictably managed” in the UK. He also claimed that a potential break from the EU could damage’s Scotch whisky’s geographical status, while independence may hamper export ambitions.
While Scottish company William Grant & Sons donated a “substantial sum of money” to the pro-unity campaign Better Together, a number of other Scotch producers signed an open letter urging a “no” vote. Among the signatories were Ian Curle, CEO of The Famous Grouse and The Macallan Scotch whisky producer Edrington, Peter Gordon, chairman of Glenfiddich maker William Grant & Sons, Robert Anderson, CEO of the Tomatin Distillery, and Gavin Hewitt, former CEO of the SWA.
Hewitt had previously been embroiled in a debate with the Scottish National Party (SNP), which he said urged the SWA to “stay out” of the independence debate, a claim the SNP has denied.
Since the vote was returned, David Frost added his name to an open letter drafted by business leaders calling for a “stable and sustainable” settlement with regards to further devolved powers to Scotland.
Diageo swaps Bushmills for Don Julio
The news that UK drinks giant Diageo had swapped its Bushmills Irish whiskey brand for full ownership of Don Julio Tequila, leaving it without a presence in the fast-growing Irish whiskey category, came a something of a surprise to the industry.
In November, it was revealed that Diageo had struck a deal with Casa Cuervo to acquire the remaining 50% stake in Don Julio which it did not already own. The deal also involved Diageo – which was paid a lump sum of US$408m – taking over the production and distribution of Smirnoff vodka in Mexico. In return, Cuervo was given the Bushmills Irish whiskey business, which sold 800,000 cases worldwide in the year to June 2014, generating £57m for Diageo.
According to Diageo CEO Ivan Menezes, the deal allowed the group to “deliver two key objectives”. “We have secured our position in the growing super and ultra-premium segments of the Tequila category and further strengthened our global footprint by expanding our leading position in Mexico where the growth of spirits has great potential,” he said.
Diageo had been seeking to enhance its presence in all segments of the Tequila market in 2014, acquiring premium brand Peligroso in January and entering a 50/50 partnership with US rap star Sean “Diddy” Combs in acquiring luxury Deleon Tequila in the same month. Diageo’s acquisition trail follows its failed bid to take over Jose Cuervo in 2013, when its long-term distribution deal with the brand also fell through.
The deal clearly articulated Diageo’s primary focus on the high-end Tequila market, at the expense of staying in the Irish whiskey sector. However, analysts claimed the acquisition made “strategic sense” for Diageo since Bushmills was an “underperforming brand”.
According to Euromonitor analyst Jeremy Cunnington, some commentators may find the agreement “strange” due to the “expected global prospects” of both categories, with Irish whiskey set to see higher CAGR than Tequila, but it is a “win win” situation for both Diageo and Cuervo.
He said that the key to Diageo’s logic was its ambitions in the US, where Bushmills has “failed to work” with the brand’s share of the Irish whiskey market falling 17% in 2008 and 8% in 2013 due to the dominance of Pernod Ricard’s Jameson.
It remains to be seen whether Cuervo has the capacity to boost the brand’s position in the category this year.
Chip Tate leaves Balcones
Chip Tate, founder and former master distiller of iconic Texan whiskey distillery Balcones, was at the centre of spirits industry gossip in 2014 as he entered a legal battle with his own board of directors, leading to his exit from the business in November.
Tate and his second round investor Michael Rockafellow, initially brought Allen on board through his Oklahoma-based equity firm PE Investors LLC in February 2013 in a bid to increase capacity. Tate’s share in the business reduced and the equity group became the largest shareholder.
Relations quickly deteriorated and in August, the board of investors, led by PE’s Greg Allen, took out a restraining order against Tate, preventing him from entering the distillery or speaking with distillery workers and the media. The board accused Tate of attempting to derail the firm’s expansion plans through his “unconscionable and reprehensible” behaviour, while Tate denied the allegations and claimed the board were trying to oust him from the distillery – which he hand-built in 2008 – and gain “universal control”.
As the saga progressed, a US judge said the baord’s decision to suspend Tate was “invalid”, with the board agreeing to drop its temporary restraining order against the distiller. Mediation ensued, but Tate said his hope remained that either he or PE Investors would leave the company. As such, the board purchased Tate’s 27% stake in Balcones, adding that its US$15 million expansion had continued unhindered.
Speaking to The Spirits Business, Tate said he planned to open a new distillery in Texas under the Tate & Co name, where he intends to distil brandy. However, Tate will adhere to a gardening period under the terms of his departure from Balcones, meaning he cannot produce or sell whiskey until March 2016.