Spirits Make Biggest Cuts in A&P Spending

FILED JANUARY 1, 2010

Dear Client:

A new report from Deutsche Bank’s Jamie Isenwater says that the spirits sector has taken a short-term approach by cutting their marketing budgets during the downturn, which almost guarantees it will be expensive to rebuild once the environment improves. In the last 6 months, Pernod Ricard (Sell), Diageo (Hold), AB Inbev (Hold) and Campari (Hold) cut A&P the furthest out of 30 European and US consumer staples companies, while Beiersdorf (Buy), Unilever (Buy), Henkel (Buy) and L’Oreal (upgraded to Buy) invested the most aggressively.

Jamie says that Pernod and Diageo cut their organic marketing spend by -24% and -18% respectively in the first half of calendar 2009. “We remain underweight Beverages with a particular caution on Spirits given the aggressive cutting of A&P spend seen on the back of the downturn,” said Jamie. “We see little earnings rebound for the Spirits sector as a result and struggle to see where earnings upgrades are likely to come from. Pernod Ricard remains a key Sell recommendation and we see little upside to Diageo at current levels.”

LOWER A&P EQUALS LOWER MARGINS. “When we analyze our entire consumer staples dataset we find a similar result – companies that cut A&P see their operating margins fall over time,” said Jamie.

The note points to a McGraw-Hill study of the early 1980s recession that says “companies that maintained or increased their advertising spend in 1980-81 grew over 50% faster in 1982 than those who cut spend and grew over three times faster by 1985. Whilst it may not be entirely surprising that increasing A&P, increases sales growth...a study of the PIMS (Profit Impact of Market Strategy) database shows that those companies who increased marketing spend also increased profits and returns post-recession.”

Deutsche Bank realizes that “in a difficult environment it can be very tempting for companies to cut marketing spend to protect profitability,” but that “the benefits of the cost savings are short-lived with profits dipping in the following year and again the year after as marketing spend needs to be rebuilt.”

Why is A&P spending so important? Deutsche believes it’s because “consumers are prepared to pay higher prices for brands they like and trust.”

DIGITAL MARKETING GAINS IMPORTANCE. Note that traditional media spend on TV and billboards are becoming less important as companies invest more in digital and word of mouth marketing. Diageo has said that its Smirnoff brand will spend 20% of its advertising budget this year on digital media, compared with the 10% Diageo as a whole spent on advertising through digital channels last year, according to the report. It’s estimated that 12-13% of advertising is now online globally although it’s very difficult to measure. Companies are also putting more effort into “category management, customer relationship management, and more sophisticated interaction with retailers and consumers in an effort to ‘push’ branded products.”

WSD BRIEFS:

DIAGEO today won a case against UK-based Intercontinental Brands over its Vodkat spirits. Diageo alleged the brand misled consumers into thinking it was vodka. Vodkat is actually a vodka based brand with a 22% abv mix of fermented alcohol and vodka. In the European Union, vodka must be made of 100% distilled alcohol and at least 37.5% abv. ICB has already changed Vodkat’s packaging to read “Vodkat Schnapps” and says it will consider other truth in labeling measures. Unless ICB appeals the decision, a final ruling is expected next month. Regardless, this case shows that vodka is a protected category in the EU much like Champagne and Scotch.

GOV CORZINE LEGALIZES SPIRITS TASTINGS. In one of his final gubernatorial acts, Governor Jon Corzine signed legislation last night allowing New Jerseyans the chance to sample distilled spirits at liquor stores, according to Discus. It allows adults to sample up to three separate one-half ounce servings of spirits in any one calendar day at a pre-planned tasting event. The law takes effect May 1.

MEXICAN TEQUILA PRODUCTION fell -20% to 249 million liters last year from a bumper crop of 312 million liters in 2008, according to the Agriculture Ministry. Exports in 2009 were about the same as 2008 at 136.1 million liters. Exports of tequila made entirely from the agave plant grew 3.9% to 37.3 million liters.

UK BANS “BINGE” PROMOTIONS. Starting in April, the UK will ban alcohol promotions that encourage binge drinking, such as speed drinking competitions and all you can drink events at the on-premise. In October on-premise locations will be required to offer drinks in smaller measures and tap water for free.

NEW YORK GOV DAVID PATERSON is again trying to push wine sales in grocery stores in the 2010-11 state budget. He claims the state could bring in $93 million in the next fiscal year through a one-time fee paid by grocery stores for licenses to sell wine. It is being hotly contested in the state.

BRINLEY GOLD RUM has signed a marketing agreement with Bedford & Grove, LLC to distribute the brand in 28 states with an emphasis on the midwest and west coast.


Until tomorrow, Megan

“Character is like a tree and reputation like its shadow. The shadow is what we think of it; the tree is the real thing.”
Abraham Lincoln

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YTD sell days Over/Under: 0

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