Promotions Help Diageo Gain Share in Control States

FILED OCTOBER 1, 2009

Dear Client:

Diageo gained volume share in September, while Pernod, B-F, Remy and Skyy lost share in control states, according to NABCA data as reported by UBS analyst Melissa Earlam. UBS believes Diageo’s “share gains are partly promo led.”

Overall, spirits volumes in control states grew 7.9% in September compared to the same period last year. Labor Day certainly impacted sales although there was pressure on price/mix due to down trading and promotional activity, says Melissa.

Diageo gained share in vodka (19.5% vs category 0.8%), rum (15.7% vs category 9.4%), Scotch (3%), gin (8.3% vs category 3.7%) and cocktails (25% vs category 11%). It lost share in Canadian whiskey (4.7% vs category 5.4%) and tequila (2% vs category 8.7%). Cordials were in line with the category at 1.6%.

Meanwhile, Pernod’s volumes grew 2% in September and gained share in Irish whiskey (18% vs category 16%), Scotch (2.7%) and rum (15.7%). They lost share in vodka (1.3%), gin (-0.5%), cordials (-0.2%) and again in Cognac/brandy (-32% vs category 3%). Brown-Forman saw volumes grow 3.3%, while Skyy grew 7.5% and Remy declined -1.4%.

UBS forecasts market volume growth of 1% and dollar sales growth of 1.6% in 2009.

DIAGEO WOULD CONSIDER AN ACQUISITION AT THE RIGHT PRICE

In an interview with Bloomberg today, Diageo chief Paul Walsh said: “You’ve got to be careful not to be full of hubris and go after these things at any cost,” with regards to acquisitions. He again confirmed that Diageo would be interested in Cuervo and Moet Hennessy if they became available but would not comment on whether Diageo was in any talks. He also said there “was no indication” that LVMH chief Bernard Arnault was willing to sell Moet.

Paul commented that there isn’t “any time pressure” for Diageo to make an acquisition, and that “there’s also nothing wrong with having a strong balance sheet.” Being “cash rich” now gives Diageo the flexibility to make an acquisition at the right price.

If the company doesn’t make an acquisition, Diageo “would then look at increasing the dividend” to shareholders and would not use cash to restart share buybacks “in the near future.” He didn’t give a timeframe for a possible dividend increase.

READERS RESPOND TO AMAZONWINE.COM CLOSING SHOP

Earlier this week we asked for your thoughts on Amazon.com leaving the wine business, although many argued they weren’t in the business in the first place, so no harm, no foul. The responses were pretty close with 45% saying “yes,” it’s a big setback for wineries, and 41% saying “no,” it’s not a big setback. 11% said they’re “not sure,” and 5% “don’t care.” Duly noted. Here are some comments that stood out:

Wine marketing consultant: “Regardless of the driving force to cease their operation, others will step forward to continue to push against state laws written in the 1930's to control the flow of alcohol with an inefficient & costly structure that ultimately punishes the consumer with a lack of true choice. Oddly, the states are limiting their own revenues by holding on to the outmoded model that restricts trade of their own in-state businesses.”

Retailer: “Yes, they exited because of the difficulties in navigating the 3-tier system. Everyone in the wine biz knows it's a killer to internet sales. However, a bigger question/hurdle is: do people really want to buy wine online? Wine.com is barely profitable, and they have the best compliance/shipping system of anyone. Amazon probably realized that the potential sales were not worth the headache.”

Retailer: “With tens of thousands of retailers providing easy access to product this is no loss to the consumer.”

Wholesaler: “Amazon exiting the wine business merely highlights beverage alcohol's special place in our society. The Three-Tier System has nicely balanced societal, regulatory and commercial needs for 75 years. Yes, it has its complexities but those are embedded for the "greater good" (e.g., taxes and fees collection, under-age drinking prevention, preclusion of tied houses of the past, etc.). If we were talking about books, small appliances or music, it would be a completely different matter. Alcohol deserves special, more-careful treatment.”

Distillery: “It certainly hurts us "little guys" in the short term. We currently are set up to distribute only locally. A shift of consumers to purchasing online could open many doors, and I believe still will eventually happen.”

Attorney: “AmazonWine's withdrawal is an example of the inefficiency and anti-competitive results that follow when every transaction is forced to go through the 3-tier system. Wholesalers serve a purpose and will never be obsolete but there is room in the industry for more than one path to get product to consumers.”

Negociant: “Any channel that can provide direct wine shipments lawfully is a plus to the ailing wine industry. Far too many small (boutique) wineries have no equitable distribution networks. The three tier system is dominated by a handful of powerful distributors (SWS, Charmer Sunbelt, RNDC, Glazer) who give attention to the mega wineries and their depletion/promotional dollars. In the end, the consumer loses and the small wineries lose. Eventually we'll have a handful of distributors and an equal number of large wine companies producing vanilla products for the masses.”

Distributor association employee: “As a parent, I don't want my children to be able to click and purchase. As the spouse of a UPS driver, I don't want my husband's livelihood being challenged because he has been turned into a convenience store or liquor store clerk and may have missed a license check. Amazon has no business being in the wine selling business unless they plan to deliver it themselves, using their own employees and equipment. Wineries don't need Amazon to compete, they need to develop sound and viable business plans and quit "just being passionate" about making wine.”

Wholesaler: “Bottom line is that wineries still have to produce a product at a price that excites the consumer. Looking to Amazon as an industry savior just allowed some wineries to postpone the long hard look in the mirror they need to be taking.”

Wholesaler: “It is a setback for wineries unable to find suitable distribution. Unfortunately there are many of them although they comprise a very small percentage of the total wine business in the US.”

Distributor: “Amazon and costco.com and all e-tailers have much bigger fish to fry. In the past 20 years they’ve had an advantage over bricks and mortar local retailers because they get to have less overhead and not charge 6% sales taxes. Moreover they’ve grown by having affiliates funneling money back to them. The states have long griped about not being able to tax them due to physical presence requirements. However, the states are thinking creatively. New York has a high profile way of piercing the tax free treatment of Amazon by going after affiliates. This is a big revenue source for Amazon and they are scared. Fighting this in NY and preventing replication in all 50 states is number one priority for Amazon and others, not getting into wine business. Entering the wine business at this stage of the battle could complicate their political/legal efforts. They can always come back in a few years once things settle down on other fronts.”

Winery, fulfillment: “No kid was ever arrested for driving drunk in a car, while drinking Broman Cellars Cabernet Sauvignon or Chateauneuf du Pape. With all this said and done...its' coming...direct sales to consumer...it's just a matter of time.”

Industry observer: “Amazon only offered a silver bullet shortcut. This is not an easy or cheap business. To do it right you have to have good experienced representation at the distributor level. If you can't afford that then pool the cost of representation with other small wineries. Success requires work (attention). If you don't want to work then sell to someone who will.”

Retailer: “As a retail wine store, I can't compete with Amazon or any other large internet wine shipper. All can get better prices on the wine they sell because they are able to buy in large quantities - a lot of the protectionism you see in this industry is the legislators concerns, not about greedy wholesalers, but about local businesses. There is nothing to stop the consumer from tasting at my wine store and then going on line and buying the wine from some out of state retailer, who pays less in license fees, and does not assume the liability that I as a local business do. Internet wine sales, is a death knell for small business, and for the employees of the small business.”

Winery: “I think that branding is still important. AmazonWine.com would have most likely carried the major brands that the big wholesalers do. For smaller wineries to compete we need to level the system so that it does not benefit the large wholesalers. A more simple three tier system would benefit the consumer most as the 50 different sets of liquor laws on the books only promote confusion. Indeed this is a large debate which will take years to resolve.”

Wholesaler: “I agree with California's view of fulfillment centers need to be licensed. I also agree that the three tier system needs to be updated to meet the advancements provided by the internet. That fact is that the playing field needs to be fair and level, requiring all who play to under the same rules.”

CONSUMER CONFIDENCE GROWING GLOBALLY, NOT SO MUCH IN U.S.

Global consumer confidence is improving according to the latest edition of the Nielsen Global Consumer Confidence Index, which jumped from 77 index points in April to 86 points this month. Most of the confidence is coming from consumers in Hong Kong, Brazil, India and Norway. Consumer sentiment towards economic recovery in Europe and North America, however, remains moderate along with consumer spending.

“The majority of consumers in the U.S. and Europe have conceded to a measured economic recovery, but it is recovery nonetheless,” said James Russo, vp, global consumer insights at Nielsen. “While consumer confidence in the U.S. edged up 4 index points in Q3 – the first increase since early 2007 – that hasn’t translated into spending confidence for the vast majority of American consumers. Clearly, this recovery will be manifested in measured and restrained spending as consumers work to repair their balance sheets.”

WSD BRIEFS:

COPIA IS INCHING CLOSER TO A POSSIBLE SALE, according to several local reports including the Press Democrat and Napa Valley Register. Bidders reportedly have until November 12 to submit their proposals. The property is worth about $25 to $35, and its debt is approximately $78 million. Funds used to buyout the property would go towards former employees and creditors, and could turn Copia into a hotel, shops, visitor center, conference facility or a wine and food education center.

DARDEN RESTAURANTS SEES SLOW RECOVERY. Darden Restaurants, owners of Red Lobster, Olive Garden, Capital Grille and LongHorn Steakhouse chains, is seeing a slow recovery, said chief Clarence Otis to FlexNewsFood.com. Olive Garden “continues to outperform the industry without the price discounting. Red Lobster is also on top without the price discounting,” he said. Clarence feels “pretty good” about food costs but did not mention alcohol costs.

SOCO LAUNCHES NEW ONLINE ADS. Brown Forman is launching new online advertising in the US for Southern Comfort, titled “What is Southern Comfort?” B-F said this is a common consumer question that the ad seeks to answer, with New Orleans (Soco’s birthplace) as the backdrop.


Until tomorrow, Megan

“The longer I live the more beautiful life becomes.”
Frank Lloyd Wright

--------- Sell Day Calendar ----------
Today's Sell Day: 20
Sell days this month: 22
Sell days this month last year: 23
This month ends on a: Fri.
This month last year ended on a: Fri.
YTD sell days Over/Under: 0


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