Tough day for Diageo

Two news reports covered by the Buffalo Trace newsletter made me feel badly for Diageo.

The first, as predicted by many industry observers including yours truly, is that India’s United Spirits Ltd. has become the world’s largest liquor company by sales volume.

No big deal you say. But what about this?

The Sunday Times reports that the Beckmann family has reportedly held discussions about selling the business for shares of Diageo stock instead of cash. If correct, it would make the family the largest shareholder with 10%. That would give them the right to express opinions about how all the brands are run. Too scary to contemplate.

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India

“India is the cradle of the human race, the birthplace of human speech, the mother of history, the grandmother of legend, and the great grand mother of tradition. Our most valuable materials in the history of man are treasured up in India only!”

Mark Twain

Last month I was contacted by Mr. Bishan Kumar the Group Editor of an Indian magazine focusing on the liquor trade called Spiritz. Mr. Kumar is my type of editor/publisher, someone with a passion for his publication and his readers. We hit it off from the outset and the next thing you know, I’m writing a monthly column called Booze Abroad.

It made me think how little most Americans know about India. From an alcohol industry perspective, India is the subject of many misperceptions and, until recently, you could have included me in that criticism.

Things you might want to know about India and why I’m thrilled to have an audience there  –

Their spirits business is the 3rd largest in the world (236 million cases) and ahead of the US, which is # 4. The industry is dominated by brown spirits and growing at the rate of 18 to 20% per year.

United Spirits Limited (USL) run by Dr. Vijay Mallya, is the major company in the market. It’s the second largest spirits company in the world…and growing. Lookout Diageo.

The dominant factor in the market is Indian Made Foreign Liquor (IMFL) and all the major global players have a presence in the country. In fact, the # 2 player in the market is Pernod Ricard India Ltd, which had an 8% volume share of spirits in 2010. (By the way, that company was previously Seagram India Ltd. Enough said.)

The future outlook for spirits is quite good based on a number of factors — rising income levels and a growing middle class; a youthful population; international travel and exposure to premium products. All that is fueling a demand for imported products like tequila/mezcal and bourbon/other US whiskies. Currently, whisky, vodka and rum dominate the market.

Oh, and it’s not just about liquor. Beer is flying off the shelves and the wine business, while still small, is growing.

All in all, it’s a fascinating country with a robust and interesting booze industry. With all my international travel, I’m sorry to say I’ve never been to India – a situation I hope will soon change.

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Cuervo for Sale?

I no sooner posted the piece below on South America when my inbox lit up with stories about the possible sale of Jose Cuervo International.

(In case you don’t know, the brand(s) are owned by the Beckmann family and distributed worldwide by Diageo.)

Both Buffalo Trace Newsletter and Wine and Spirits Daily had special additions on Sunday reporting that the Beckmann family was in talks to appoint Barclays to explore a possible $2 billion sale of all or part of the Jose Cuervo brand.

I heard from a wide range of people who know the brand and the players well. Their opinions on the matter were all over the place, but very interesting.

Some wondered about the low price…

“As recently as a few years ago, they bragged about a $5 billion price tag …$2 billion must be for part and not the production or for limited worldwide distribution…seems crazy.”

The more cynical views had to do with the historic combative nature of the relationship between Cuervo and Diageo…

“I once heard a senior Diageo executive say that if Patron were available, they would gladly overpay for it in order not to have to deal with the Beckmanns any longer.”

“Diageo’s recent poor performance on the brand now looks like a strategy to keep the value low in order to buy the Beckmanns out.”

My own view is that it could be (as WSD suggests) based on a preemptive move against the possible sale of Sauza, although count me among those who think Beam Global will remain in tact and flourish in the future. Perhaps it’s a warning shot to Diageo to pick up the pace since their contract comes to an end in a few years.

What I can’t understand is where Proximo (also owned by Beckmann family members) fits in the equation. They are doing well and could easily handle the addition of Cuervo to the portfolio. But, their strength is strictly in the US. So, perhaps the low price tag is for international distribution.

One thing for sure is that the Beckmanns are shrewd and unpredictable so who knows what they have in mind.

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