How The Global Market Changed The Liquor Game

At the end of 2013, the financial news outlet CNBC reported that rapid growth in “emerging markets” for liquor sales was grinding to a standstill. It cited sales figures for cognac and scotch. Both were down in China, according to the story, 12.2 percent and 11 percent respectively. "International brands have clearly been collateral damage," said one analyst.

These so-called emerging markets —countries like China and India — had been the engine driving huge growth at the world’s largest distillers. Business had been booming, but as the economy struggled to bounce back in 2013, these emerging markets weren’t returning to their former glory. The largest distillers and their investors were concerned that anemic growth may be here to stay.

But it wasn't all doom and gloom. Some argued that there was a light at the end of the tunnel: The slowdown was just a hiccup.

"Emerging markets are inherently volatile," said another analyst. "These short-term problems are not going to change the long-term plans of these companies. It's about riding out the storm. ... Ultimately, the demand is there.”

The latter predictions proved to be accurate. A month later, the Japanese food and beverage producer, Suntory, purchased Jim Beam in a $13.6 billion deal. The purchase made Suntory the third largest distiller in the world. It also sent shockwaves through the American market as people scratched their heads trying to figure out what it meant when a Japanese company purchased an icon of American booze brands. Beam, after all, also owned the once craft-sized distiller Maker’s Mark - it simply couldn’t have fallen into the hands of a foreign beverage behemoth. Analysts and reporters spun into gear to decide what it all meant for the global booze scene as well.

The truth is, the Suntory-Beam deal meant quite a few things. First, it meant that the global liquor business may have been down, but it was never out. As CNBC had hinted, healthy numbers and movement in the business were lurking just below the surface. Those emerging markets about which the analysts had been wringing their hands existed because there is, has been, and will continue to be an emerging middle class.

Some predict that the number of high-net-worth individuals in countries like India, China, Mexico and Brazil —the emerging markets — will increase by 400 million in the next decade. Another analyst told NPR last year, "We're looking at another three billion people entering the global middle class by the year 2030.”

That’s a lot of people with money to spread around. And they have already proven that they are willing to spend it on well-known premium liquor brands. Diageo, the company that owns the scotch whisky brand Johnnie Walker, reported that emerging markets accounted for 80 percent of the total net sales of that brand in 2013. Couple that with the knowledge that Johnnie Walker is the ninth best-selling liquor brand in the world and you get an idea of how important the emerging middle class is to growth in the liquor business.

Those markets in various corners of the world mean that liquor is, increasingly, a global game. The purchase of Jim Beam also underscored the rapid globalization of liquor brands; meaning large multi-national companies are snatching up brands from different countries, only to peddle them in markets around the world. From Kentucky front porches and rocking chairs to Tokyo karaoke bars, Beam would go after Suntory came knocking.

This point is much less significant, and it may have only seemed to Americans that it was a big deal. That’s because Americans just aren’t accustomed to large foreign companies purchasing iconic American brands. Meanwhile, they suck down scotch and foreign produced vodkas with abandon. Of course, it was always known that Jim Beam and Jack Daniels were crossing the oceans to mingle in the bars of foreign countries, but for a Japanese company to swoop in and take Jim away just seemed like too much.

That’s not to say that anything could have, or should have, been done to stop the purchase. It is just to say that it suddenly occurred to Americans after the Beam purchase that large global forces were at play in the liquor market. And since the United States is still the largest economy and the largest liquor market in the world, that may make a difference, as we shall see.

Large global forces or not, we are not likely to see another deal like Suntory and Beam for quite a while. Why? Because everything has shaken out. With its multibillion dollar purchase, Suntory became the third largest distiller in the world. The next one up the ladder is Pernod Ricard who owns Chivas Regal, Jameson, and Absolut, along with other popular brands.

The big dog among the major distillers is Diageo, whicj owns, as we know, Johnnie Walker. But they also own Crown Royal, Smirnoff, and Tanqueray. With a portfolio like that, it is unlikely that regulators in the United States would let Diageo take another major brand. Pernod, according to a New York Times story, is still recovering from the $8.9 billion purchase of Absolut in 2008. That’s a lot of immobility at the top of the market.

The players on the next tier down, in terms of size, just don’t have the clout to make a major play on the big name brands. Campari, which owns Skyy Vodka and Wild Turkey, can’t do it. Neither can Bacardi, despite owning a fairly impressive collection of brands that includes Dewar’s, Grey Goose, and Bombay. In fact, according to the same Times story, these two could be targets in the distant future should the economy really start booming again.

But is that what we want; more consolidation in the liquor business? Doesn’t it seem strange that the iconic rum producer, Bacardi, owns, operates and distills popular brands of scotch, vodka, and gin? Those aren’t cheap, bottom-shelf brands that Bacardi owns, either. People plunk down decent money for the privilege to quaff Grey Goose. Many of those imbibers probably believe that they are supporting a modest establishment dedicated to small, quality batches or premium liquor. Ditto the brands owned by the giant Diageo.

So what does premium mean these days? Is it the brand that is premium, meaning that it evokes a certain image in the consumers mind? Or is it the quality of the product that defines premium status? That’s hard to say. Certainly, the big distillers are spending large sums to get control of these big name brands, and people around the globe are quick to put their money on the bar to have drinks poured fem the top-shelf bottles.

But a backlash may be looming. In the United States all of this consolidation is spurring a movement towards smaller, craft-like distilleries. It may also  be a bit of an aftershock to the craft beer movement that swept the world’s largest booze market during the last two decades.

Whatever the cause, it is a return-to-roots type of movement, with small batch distillers cropping up around the country and placing a focus on quality rather than volume. Distillers like Buffalo Trace and Woodford Reserve are producing high quality bourbons and have remained content not sell out to larger companies. Even smaller distillers are setting up shop these days and producing truly boutique liquors.

Once the alcohol soaked wave of consolidation has crested and fallen back, the next wave in booze may just be the mindset that smaller is better. If it catches on in the U.S., it is likely to catch on in other areas too. And that may be the longest-lasting legacy of the Suntory and Jim Beam deal.

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