ibisworld industry report 31214 distilleries in the...

WWW.IBISWORLD.COM� Distilleries�in�the�US November 2011 1

IBISWorld Industry Report 31214Distilleries in the USNovember�2011� Agata�Kaczanowska

Getting a buzz: Revenue will surge forward as demand for premium liquor rebounds

2� About�this�Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3� Industry�at�a�Glance

4� Industry�Performance4 Executive Summary

4 Key External Drivers

6 Current Performance

8 Industry Outlook

10 Industry Life Cycle

12� Products�&�Markets12 Supply Chain

12 Products & Services

13 Demand Determinants

14 Major Markets

15 International Trade

17 Business Locations

19� Competitive�Landscape19 Market Share Concentration

19 Key Success Factors

20 Cost Structure Benchmarks

21 Basis of Competition

21 Barriers to Entry

22 Industry Globalization

24� Major�Companies24 Beam Inc.

25 Diageo PLC

26 Brown-Forman Corporation

28 Pernod Ricard SA

30� Operating�Conditions30 Capital Intensity

31 Technology & Systems

31 Revenue Volatility

32 Regulation & Policy

32 Industry Assistance

33� Key�Statistics33 Industry Data

33 Annual Change

33 Key Ratios

34� Jargon�&�Glossary

www.ibisworld.com��|��1-800-330-3772��| ��[email protected]


This industry consists of distilleries that purchase a range of ingredients such as grains and sugar and manufacture them into spirits (i.e. not beer or wine). These

spirits are then bottled and sold to liquor wholesalers, bars, casinos, restaurants, hotels and other retail stores.

The�primary�activities�of�this�industry�are

Distilling liquors

Blending liquors

Bottling liquors

31212 Breweries�in�the�USThis industry manufactures beer, which is a close substitute to spirits.

31213 Wineries�in�the�USThis industry manufactures wines and brandy. As brandy is a distilled spirit made from grapes, it represents close competition to the spirits industry.

Industry�Definition

Main�Activities�

Similar�Industries

Additional�Resources

About�this�Industry

For�additional�information�on�this�industry

www.ttb.gov�Alcohol and Tobacco Tax and Trade Bureau

www.discus.org�Distilled Spirits Council of the United States

www.census.gov�US Census Bureau

The�major�products�and�services�in�this�industry�are

Cognac, cordials and liqueurs

Gin

Other spirits

Rum

Vodka

Whiskey


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Demand from wine and spirits wholesaling

SOURCE: WWW.IBISWORLD.COM

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Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2011)

29.8%Whiskey

5.7%Gin

25.6%Vodka

18.8%Cognac, cordials

and liqueurs

12.7%Rum

7.4%Other spirits


Key�Statistics�Snapshot

Industry�at�a�GlanceDistilleries�in�2011

Industry�Structure Life Cycle Stage Growth

Revenue Volatility Low

Capital Intensity High

Industry Assistance Low

Concentration Level High

Regulation Level Heavy

Technology Change Low

Barriers to Entry High

Industry Globalization High

Competition Level High

Revenue

$6.9bnProfit

$901.8mExports

$1.2bnBusinesses

70

Annual�Growth�11-16

4.1%Annual�Growth�06-11

2.1%

Key�External�DriversDemand�from�wine�and�spirits�wholesalingExcise�tax�on�distilled�spiritsPrice�of�coarse�grainsPer�capita�alcohol�consumptionPer�capita�disposable�incomeDemand�from�bars�and�nightclubs

Market�ShareDiageo PLC 28.2%

Brown-Forman Corporation 20.0%

Pernod Ricard SA 12.5%

p. 24

p. 4

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 33



Key�External�Drivers Demand from wine and spirits wholesalingThe alcohol wholesaling industry is the largest customer for distilleries, with demand from wholesalers in any given period dependent on inventories and end-user preferences. There are two types of regulatory environments based on individual state laws: open and control. In open states, spirits companies are allowed to sell spirits, wine and beer directly to independent distributors. By

contrast, control states have a monopoly over the warehousing and/or retailing of spirits and related products. Most states forbid distilleries from selling directly to the public. This driver is expected to increase during 2012, presenting a potential opportunity for the industry.

Excise tax on distilled spiritsTaxes and duties on alcohol are a significant revenue source for federal and state governments, so they will remain a

Executive�Summary

Although the Distilleries industry managed muted growth over the past five years, it was not immune to the economic downturn. What kept the industry from declining during the recession was a trend toward premiumization: an increase in the consumption of higher-grade liquors and spirits. An increase in the popularity of cocktails (over beer and wine) also drove demand for lower-quality industry products that are used for mixing drinks in bars and restaurants. IBISWorld estimates that industry revenue increased at an average

annualized rate of 2.1% over the five years to 2011 – robust growth, given the poor consumer sentiment during the time. In 2011, revenue will total an estimated $6.9 billion and display growth of 1.8% from 2010. While profit margins (earnings before interest and taxes) have been trimmed, they remain at a healthy 13.0% of revenue.

Over the past five years, the popularity of cocktails has reestablished liquor and spirits in social drinking locations like bars and nightclubs. Helped by advertising and promotion by major

industry players, the role of the cocktail has expanded from just a drink into a symbol of class and sophistication. In response, customers have upgraded their purchases, moving from the bottom shelf toward premium tiers of quality. When disposable income dropped during the recession, instead of compromising the quality of the products they purchased, consumers saved money simply by drinking their preferred liquor and spirits at home.

The industry is characterized by a high degree of concentration, with major players Diageo, Brown Foreman, Fortune Brands and Pernod Ricard accounting for 83.1% of domestic production. Acquisition activity and consumers’ trust in their brands during the recession have supported the market share dominance of these players. Imports are anticipated to maintain their presence in the market, though, as the premiumization trend balances out the declining US dollar.

In 2011, the industry will benefit from improving consumer sentiment and slowly expanding household budgets. Premiumization will likely become more widespread as spending increases, which will help drive up the annualized revenue growth rate to 4.1% over the five years to 2016, reaching $8.5 billion. Furthermore, growth will also benefit from a growing population of legal drinkers.

Industry�PerformanceExecutive�Summary�� |�� Key�External�Drivers�� |�� Current�PerformanceIndustry�Outlook�� |�� Life�Cycle�Stage

� As incomes return, consumers will demand more premium and super-premium spirits


Industry�Performance

Key�External�Driverscontinued

fact of life for local spirit producers. Their effect is to significantly increase the price of the final product, which creates a drag on demand. This driver is expected to decrease slowly during 2012.

Price of coarse grainsGrains are a key input for distilleries and their prices are volatile. Intense competition among brands means that consumers can be sensitive to drastic changes in price, and producers must absorb any rise in costs. Distilleries enter contractual agreements to insulate themselves from such shocks in the short term, but they are exposed to price hikes at renewal. This driver is expected to decrease during 2012.

Per capita alcohol consumptionThe social acceptability of alcohol has increased since Prohibition, and attitudes continue to change. While there is still an element of concern over the effects of excessive consumption, society is generally more accepting of moderate alcohol consumption. Even so, per capita alcohol consumption is expected to

decrease slowly during 2012, posing a potential threat for the industry.

Per capita disposable incomeThe level of real disposable income will affect spending levels across all categories. When people have more money, they are more likely to consume premium spirits, which translates to better margins for distilleries. They will also be more likely to dine out, raising the importance of the bars and restaurants segment relative to wholesalers. This driver is expected to increase slowly during 2012.

Demand from bars and nightclubsDemand from drinking establishments is a smaller source of sales when compared with the wholesale sector, but it remains a significant part of the Distilleries industry’s market. In the past five years, a drop in disposable income caused many consumers to drink spirits at home, decreasing the share of sales made through bars and nightclubs. This driver is expected to increase during 2012.

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Excise tax on distilled spirits


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Demand from wine and spirits wholesaling



Current�Performance

Premiumization, the trend of consumers trading up to higher-quality, higher-price spirits, has been the main engine behind the Distilleries industry’s robust revenue growth over the past five years. The emergence of a cocktail culture in the mid-2000s also pushed industry performance forward as people become pickier about the taste of their drinks. These combined trends have pushed distillery revenue to a record $6.9 billion in 2011. Continued growth is anticipated for this industry in 2011, though it will be slower than the past two years as improved consumer sentiment encourages people to visit bars that generally serve lower-margin alcohol than what consumers purchase for in-home consumption. The expected growth of 1.8% from 2010 to 2011 is slower than the average annual increase of 2.1% estimated from 2006 and 2011.

Spirits products are roughly categorized into four segments based on price and in order from cheapest to most expensive: value, premium, high-end premium and super premium. The price cutoffs vary by spirit; for

example, a case of rum for $120 might be considered pricey, but it would be inexpensive for a case of scotch. Depending on the spirit, a particular segment may be more popular than others. The dominant segment for vodka sales, for example, is the value segment because vodka is often served very diluted in a mixed drink. Whiskey sales, however, are concentrated in the premium segments because the alcohol is generally consumed neat.

Lower�bottom�line Profit was restrained over the five years to 2011 due to skyrocketing costs for key inputs, such as grains and sugar. This spike was triggered by poor growing conditions for key farming regions of the world starting in 2006. Crop failures in Argentina, Canada and Australia, among others, resulted in a global shortage and excess demand. Input prices remained volatile for liquor producers in 2010, with a drought in Russia and sugar crop failure in India driving up input prices. Consequently, producers significantly reduced expenditure on advertising to offset the higher costs.

The lowered advertising was only a temporary strategy, though, because producers wanted to keep consumers from switching to competing alcohols or cheaper brands. Advertising expenditure by major competitors, especially by large brewers and vintners, has reached unprecedented levels. Therefore, firms in the Distilleries industry have needed to spend more to convince consumers to head toward the liquor shelves. As a result of the significant competition, profit margins have thinned. Still, profit remains at a strong 13.0% of revenue – much healthier than many other industries.

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Consolidation The trend toward heightened revenue concentration has benefited from the recession. Buyers are becoming more sensitive to price and less experimental in their choice of beverages. This factor has prompted a return to well-known, trusted brands, which is benefiting the dominant players that own many of these marquee names. This factor has allowed the big brands to maintain or even expand revenue at the cost of smaller distilleries.

Consolidation is also becoming a feature of downstream liquor wholesalers. Distributors have traditionally been highly fragmented, largely because of the significant differences in liquor laws between most states. Competition among wholesalers for exclusive distribution territories has allowed manufacturers to hold significant market power. Merger activity, however, is letting distributors seize some control by limiting distiller options. Currently, this is only a concern for small distilleries, whose low market share gives them a disadvantage at the bargaining table. This factor may become

a concern to larger producers in the future, though, if distributors are able to gain sufficient scale.

Over the five years to 2011, industry concentration increased from 69.3% of revenue in 2006 for the largest four players to 89.7% in 2011. These companies acquired additional brands and expanded their markets. For instance, the second-largest spirits company in the world, French-based Pernod Ricard, acquired the Vin & Spirit group in July 2008. This acquisition signaled Pernod’s intent to establish a larger American footprint. Due to significant consolidation, establishment growth was limited to an annual rate of 0.8% over the five years to 2011 to reach 81 locations.

Premiumization�drives�growth

Even during the recession, consumers proved unwilling to abandon their preference for higher-quality liquors, with the premiumization trend continuing even as the severity and length of the downturn pressured consumer budgets. For instance, in 2008, demand for premium spirits remained, even as many sectors of the economy ground to a halt. Instead of switching to lower-quality products, people shifted their consumption from bars and restaurants to their homes to save money. Drinkers also began favoring domestic brands within their desired purchasing segments, allowing them to indulge in the luxuries while cutting back on spending. Premium spirits return better margins to producers because of their considerably higher price points and only marginally higher costs.

Prices received by domestic distillers rose 7.0% in 2008 due in part to weaker import competition.

Domestic liquors are often cheaper than their imported counterparts; therefore, just as imports benefited disproportionately from the premiumization trend, imports then fell 4.8% in 2009 when consumer spending dropped 0.6%. Importers benefit most from premiumization because many drinkers believe the best spirits come from their traditional production regions. For example, the United Kingdom is known for gin, Jamaica for rum and Russia for vodka. As a result of a move toward cheaper products, imports grew more slowly than industry revenue at an average rate of 1.1% per year over the past five years, reaching $4.7 billion in 2011.

� Competition among wholesalers has given manufacturers significant market power



Returns�to�producers While revenue is expected to rise to new heights across the board for drink types and segments, profit margins will be constrained by a single force: competition. Non-price-based competition, such as marketing, is already intense in this industry as companies try to capture a piece of the lucrative pie. The fast revenue growth between 2011 and 2016 will push the stakes even higher, and players will respond accordingly.

IBISWorld expects that operators of all sizes will introduce products tailored to specific niches in an attempt to grab market share. These introductions will be accompanied by extensive promotion and

advertising to ensure that customers take notice. Expanding marketing and product development expenditures will prevent margins from growing as fast as revenue. As a result, profit is expected to increase at an annualized rate of 5.7%, from 13.2% of revenue in 2011 to 14.3% in 2016, netting domestic distillers nearly $1.2 billion in 2016.

Growing�customer�base

Distillers will benefit from a larger pool of potential customers as domestic and global populations continue to expand. The increase in America’s drinking-age population will outpace general population growth due to longer average life spans and an uptick in birthrates in the early 1990s. Improved longevity will be a plus for this industry, since customers will be around longer to purchase spirits than before. This is

particularly beneficial to margins because older drinkers are more likely to purchase from the extremely profitable high-end premium and super-premium segments.

The baby boom of the early 1990s resulted in population growth rates between 1.15% and 1.40% compared with an average of 0.96% over the past five years. Americans born during these years will be turning of drinking age during the next five years, providing a boost to the

Industry�Outlook

It is difficult to imagine anything but a bright future for an industry with profit of 12.3% in a down year. Liquor and spirit distillers are expected to expand revenue rapidly as consumer sentiment and spending recover in the five years to 2016. Growth will be supported by continued premiumization and a strong cocktail culture. Industry revenue is expected to outpace the recovery of the broader economy, growing 4.2% from 2011 to 2012. IBISWorld forecasts revenue to then surge ahead to $8.5 billion in 2016, growing at an average annual rate of 4.1%.

Robust growth is anticipated to attract new distilleries over the next five years. A tight lending environment and competitive distribution contracts in recent years weakened the financial standing of some smaller firms. This fact may position them as prime targets for buyouts by larger operators in the next five. Likewise, larger firms are projected to expand in order to move production close to major markets and cut transportation costs as fuel prices surge. These trends combined are expected to boost the number of establishments 2.8% annually to 94 in 2016.

� Operators will tailor new products to specific niches in an attempt to grab market share



Growing�customer�basecontinued

industry’s potential market size. Also, spirits are more popular today than when these customers were born; therefore, this segment will more likely prefer cocktails than previous new drinkers.

Companies have begun to alter product mixes to enhance the selection of milder ready-to-drink beverages and capture this audience’s taste buds early on. The profitability of these new buyers will depend on establishing the premium level of spirits as their baseline for consumption. This factor will challenge companies, given constricted disposable income and high unemployment rates. Another source of good news for distillers

is that per capita consumption of spirits is on the rise. This factor enhances the effect of the first two trends and all but locks in a positive outcome for liquor producers. The increase in consumption levels has been driven by marketing efforts by the dominant operators, which have put spirits back on the social drinking landscape. Expanding thirst for liquors is also supported by disposable incomes, which, though currently in a downturn, are still high by historical standards. This factor has made spirits accessible to a larger proportion of the population that will not likely turn away after getting a taste for distilled products.

Drinks�and�drinking�patterns

Faced with shrinking budgets, consumers shifted their drinking patterns from bars and restaurants to their homes. This trend allowed people to buy higher-quality spirits than those bought during a night out because of drinking establishments’ additional markup. Americans have also switched to domestic spirits within the same quality tier because these drinks are generally cheaper thanks to lower transport costs. These trends will persist despite low consumer sentiment about the economy. Once the economy recovers, drinkers will reevaluate their frugal tendencies. As consumer sentiment improves, drinking on-premises will become increasingly prevalent, further boosting revenue.

In response, the Bars and Nightclubs industry (IBISWorld report 72241) will

increase its stocks of liquor. Even with a positive economic outlook, Americans may not be as quick to return to imported brands. In particular, with the expected weakening of the US dollar, the price of imports will stay elevated throughout the next five years. Import value will stagnate as a result and, as the industry bounces back, its share of domestic demand is forecast to grow over the next five years to 2016, at an annualized rate of 4.1% to $5.8 billion.

� The recovery will cause consumers to drink at bars and restaurants again, boosting demand


Industry�PerformanceGreater demand for premium and super-premium spirits has driven value-added growth, with revenue outpacing GDP growth

Growth in new products has attracted younger drinkers

The number of enterprises is increasing

Life�Cycle�Stage


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DeclineCrash or Grow?

Potential�Hidden�GemsFuture Industries

Quality�GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

Time�WastersHobby Industries

MaturityCompany consolidation;level of economic importance stable

Shake-out

Shake-out

Quantity�GrowthMany new companies; minor growth in economic importance; substantial technology change

Key�Features�of�a�Growth�Industry

Revenue grows faster than the economyMany new companies enter the marketRapid technology & process changeGrowing customer acceptance of productRapid introduction of products & brands

Breweries

Wine�&�Spirits�WholesalingSugar�Processing

WineriesCardboard�Box�&�Container�Manufacturing

Distilleries



Industry�Life�Cycle Distilleries are in a growth phase of its life cycle, driven by increased interest in cocktails. A tendency for consumers to trade up to more expensive beverages and a growing base of consumers drinking spirits. Demand for premium products has driven growth in value added over the five years to 2011. While weaker economic conditions since 2008 are slowing growth in the super premium segment, premium beverages have become the new base line for spirits and new drinkers are entering at this level.

Consumers with shrinking wallets may drink at home instead of on-premises, or trade down from super premium to premium products, however further trading down is expected to be limited. Weak price growth resulted in value added growing at a slower rate than industry revenue over the past five years. However, price growth is expected to recover with consumer sentiment and disposable income over the five years to 2016, as more consumers once again spend on

high-end premium and super premium spirits. Price and robust revenue growth are projected to drive industry value added up at an annualized rate of 3.4% over the 10 years to 2016, compared to annualized GDP growth of 1.8%.

Younger drinkers aged 21 to 25 have become an emerging market for distilleries, and are increasingly the subjected of distilleries’ promotion activities. Ready-to-drink beverages, in particular, are targeted at this demographic. This factor has been facilitated by new product introductions and effective marketing of white spirits, which generally have a milder taste making them more appealing to younger consumers. As new companies are successful in seeking out such niches enterprise growth is forecast at an annualized rate of 2.9% over 10 years to 82 companies in 2016. New product offerings are also contributing to the growth in per capita consumption and further fueling industry revenue.

�This industry is Growing


Products�&�Services

There are a large variety of spirits produced and sold within the United States. Whiskey, made from mashed corn, rye and other grains, is the single most popular. Brands such as Jack Daniel’s and Maker’s Mark are produced locally and are recognized worldwide. Sales in the high-end premium and super

premium segments make up 57.4% of all whiskey sales compared with 42.5% for tequila imports and just 15.2% for rum. This suggests that whiskey drinkers are sensitive to branding and quality and are willing to pay for it. This segment is expected to be as steady over the five years to 2016 as it was over the five years

�Products�&�MarketsSupply�Chain�� |�� Products�&�Services�� |�� Demand�DeterminantsMajor�Markets�� |�� International�Trade�� |�� Business�Locations

KEY�BUYING�INDUSTRIES

42482� Wine�&�Spirits�Wholesaling�in�the�US�As a result of a three-tier alcoholic beverage distribution system in most states, the Distilleries industry must sell its products to licensed distributors.

KEY�SELLING�INDUSTRIES

31131� Sugar�Processing�in�the�US�This is a key ingredient required for making distilled rums.

31213� Wineries�in�the�US�Grapes are purchased for blending into spirit products.

32221� Cardboard�Box�&�Container�Manufacturing�in�the�US�Paperboard is used to package and distribute bottled spirits to wholesalers, retailers and consumers.

32311� Printing�in�the�US�Label printing on spirit bottles is an important market tool and a necessary input.

32721� Glass�Product�Manufacturing�in�the�US�Glass bottles are a key raw material required to store and distribute the products from this industry.

42451� Corn,�Wheat�&�Soybean�Wholesaling�in�the�US�Wheat, maize, barley, rye and oats are necessary ingredients required for manufacturing various spirits and are purchased from wholesalers.

Supply�Chain

Products and services segmentation (2011)

Total $6.9bn

29.8%Whiskey

5.7%Gin

25.6%Vodka

18.8%Cognac, cordials

and liqueurs

12.7%Rum

7.4%Other spirits



Products�&�Markets

DemandDeterminants

Higher disposable income allows consumers to spend more on discretionary products, including spirits. It can also facilitate the shift from low-price to high-price products, as seen during the boom between 2002 and 2007. Demand for alcoholic beverages is generally higher among households that have higher disposable income levels.

The price of spirits relative to alternative alcoholic beverages influences

how much consumers are willing to buy. Traditionally, the price of spirits and beer increases faster than wine, thus encouraging the consumption of wine. This was the case during the recession, especially because many wineries cut prices in order to maintain sales volumes. The cost of liquors is also influenced substantially by excises and other taxes.

Additionally, prices of imported spirits are sensitive to changes in the US dollar.

Products�&�Servicescontinued

prior, making up a stable 28.8% of industry revenue.

Vodka is the second spirit in terms of revenue, first in terms of volume. The bulk of vodka consumption occurs within the value segment, which is the cheapest, because the vodka is often diluted; it is commonly used in cocktails and mixed drinks, in contrast to whiskey and brandy which are often consumed on their own. Examples of well-known vodka brands include Absolut, SKYY and Smirnoff. This segment is growing, along with the popularity of cocktails, over the five years to 2011. It is also forecast to continue to increase as a share of revenue during the following five years.

Cognac, cordials or liqueurs, make up the third largest proportion of revenue. These spirits are produced by the infusion of fruits, herbs, spices and other

ingredients with a base spirit to produce a more flavored spirit. They are often used in cocktails, consumed as an aperitif or as a shooter. Southern Comfort, Jagermeister and Cointreu are some of the most prominent liqueur brands. This segment is also growing, although at a slower pace than vodka over the five years to 2011. This trend is anticipated to continue through 2016.

Smaller segments include rum and gin, which are made from sugars and juniper berries, respectively. The majority of rum is imported from the Caribbean Islands. This segment, along with other products such as ready-to-drink cocktails, are a fluctuating share of revenue over the five years to 2011. However, the net change from 2006 is minimal, and any change over the five years to 2016 is not anticipated to be significant.

Spirit�sales

TypeValue�(%)

Premium�(%)

High-end�premium�(%)

Super�premium�(%)

Whiskey 17.5 25.1 36.9 20.5Vodka 21.3 25.7 32.9 20.0Cordials 19.9 67.4 12.6 0.0Rum 12.8 72.0 12.9 2.3Tequila 10.5 47.0 9.1 33.4Gin 52.1 13.7 32.8 1.4

SOURCE: DISTILLED SPIRITS COUNCIL OF THE UNITED STATES



Major�Markets

Revenue is derived mainly from the sale of spirits and related products through wholesalers to retailers. In most states, regulations prohibit distilleries from selling directly to the public or even to retailers. Additionally, distributors have extensive contact networks and specialize in selling to various retail outlets. Wholesalers reach a wide consumer market via sales to licensed drinking places, such as bars, hotels, restaurants, and casinos, as well as grocery,

convenience, and liquor stores. Wholesalers’ sales to liquor and food stores are expected to have increased over the past five years because consumers switched from going out to staying at home in order to save money. The broad share of industry sales accounted for by wholesaler-to-retailer sales declined over the past several years as people changed their buying habits.

Major retailers comprise bars, nightclubs, hotels, motels, casinos,

DemandDeterminantscontinued

The dollar’s rapid appreciation in 2009 made many import products less affordable and hurt the demand for foreign products. The gradual weakening in the dollar that IBISWorld projects between 2011 and 2016 will make American products slightly more desirable in export markets.

Spirits are a close substitute for beer and wine, and thus demand for spirits is sensitive to its relative appeal to drinkers. Consumer preferences are influenced by marketing, beverage taste and social acceptability. People also make decisions based on the perceived health benefits or detriments of consuming alcohol; some published research shows that wine can

be beneficial to cardiac health if consumed in moderation. Conversely, other research has shown that there are many negative side effects of drinking beer and spirits, especially in excess.

Spirits consumption is significantly greater among men than women. While the heaviest consumers of spirits tended to be persons aged 45 years old and over, persons aged 25 and younger and women make up a rapidly expanding market share, as ready-to-drink mixed spirits gain in popularity. In addition, the age profile of the population is also relevant as a higher proportion of the population over the legal drinking age will increase the market size and demand for liquors.

Major market segmentation (2011)

Total $6.9bn

31.8%Wholesalers to other retailers

23.5%Wholesalers to

liquor stores

20.4%Wholesalers to

food stores

17.2%Exports

7.1%Retailers (direct

from manufacturer)




International�Trade International trade in the industry has a significant effect on the performance of distilleries. Imports account for a relatively large proportion, meeting about 45.2% of domestic demand. The sources of imports are largely determined by the type of spirit imported and are steady over time. In many instances, spirits are imported from countries where they have a history of production, such as tequila from Mexico. Gin imports are the most concentrated, with the United Kingdom and France providing over 95% of the product. Rum and vodka are more dispersed by comparison. While the usual suspects, Jamaican rum and Russian vodka, are the single most dominant, they comprise only 15% of their respective markets. Whiskey falls in between these two extremes. About three quarters of imported whiskey is sourced from the United Kingdom while much of the remainder comes from Canada.

The premiumization trend has been a boon for importers into the United States. Imports are generally perceived as being of a higher quality and can command higher margins. IBISWorld expects that trading up by consumers will drive imports up at an annualized rate of 2.7% over the five years to 2011 to over $4.7 billion. Imports took a hit in 2009 due to weaker exchange rates, a trend which is expected to persist through early 2011.

The US export contribution is dominated by whiskeys, which make up almost 75% of exports by value. This is because America is world renowned for its Kentucky bourbons. Nineteen out of

every 20 cases of whiskey exported by the United States each year are of the bourbon variety. Other prominent spirits include rum, at 6.3% of exports by value, and brandy at 4.4%.

Despite competition from non-US brands of spirits, especially whiskey and vodka, there has been strong growth in the value of American exports over the current period. IBISWorld estimates that the value of spirits exports from the United States will grow at an annualized rate of 5.1% over the five years to 2011, to nearly $1.2 billion.

The years 2009 and 2010 were an exception to the generally positive trend for trade over the past five years. The global contraction caused customers in all markets to turn to affordable local brands. As a result, exports fell more than 10% while imports were down by 7%. Over the five years to 2016, the depreciating dollar will help exporters recover quickly by

Major�Marketscontinued

private clubs, restaurants, specialty liquor stores and licensed grocers. While most of these purchase spirits through a wholesaler, some are located in states with regulation exemptions and have sufficient buying power to negotiate directly with producers. Wholesaler and

retailer contribution to industry sales is expected to decline because of a greater emphasis on developing export markets. Exports account for about 17.2% industry revenue in 2011. Foreign markets will continue to be a source of growth for US products in the five years to 2016.

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Exports Imports Balance

Industry trade balance


Level�&�Trend��Exports in the industry are Medium and Increasing

�Imports in the industry are High and Steady



International�Tradecontinued

making their products more affordable around the world. It will help further strengthen US brands at home.

Imports From...

Total $4.7bn

34%Other

24%United Kingdom

18%France

15%Mexico

10%Sweden

Exports To...

Total $1.2bn

55%Other

16%Canada

12%United

Kingdom

10%Germany

8%Australia

Year: 2009SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA SOURCE: USITC


�Products�&�Markets

Business�Locations�2011

MO2.0

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

Great Lakes

VT1.0

MA5.1

RI0.0

NJ4.1

DE0.0

NH2.0

CT0.0

MD3.1

DC0.0

1

5

3

7

2

6

4

8 9

Additional�States�(as marked on map)

AZ0.0

CA11.2

NV0.0

OR4.1

WA0.0

MT0.0

NE0.0

MN2.0

IA1.0

OH3.1 VA

1.0

FL5.1

KS0.0

CO3.1

UT1.0

ID2.0

TX3.1

OK1.0

NC1.0

AK0.0

WY2.0

TN4.1

KY14.3

GA1.0

IL2.0

ME2.0

ND0.0

WI1.0 MI

4.1 PA3.1

WV0.0

SD0.0

NM0.0

AR2.0

MS0.0

AL1.0

SC0.0

LA1.0

HI4.1

IN2.0

NY0.0 5

67

8

321

4

9


Mid- Atlantic

Industry�establishments�(%)�

� Less�than�3%� 3%�to�less�than�10%� 10%�to�less�than�20%� 20%�or�more


�Products�&�Markets

Business�Locations Distilleries are located throughout the United States with the distribution of production centers roughly in line with population. The sole exception to this is a disproportionate presence in the Southeast, particularly in Kentucky and Tennessee. These two states comprise 18% of U.S. establishments and nearly 30% of industry employment. This region is the birthplace of American bourbons and is still responsible for the majority of its production.

California is the only other state accounting for more than 6.0% of establishments. However, this is due largely to the size of the state, as the producers there are relatively small. Over two thirds of them employ less than ten people and only one has more than a hundred employees.

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EstablishmentsPopulation

Establishments vs. population



Key�Success�Factors Effective product promotionMarketing, especially brand positioning, is essential to success in local and international markets. The intense competition among brands necessitates large expenditures on advertising and promotion.

Economies of scaleMass production reduces average and marginal costs, thereby improving profitability. This is especially important for value brands that compete mainly on price.

Economies of scopeA diverse array of products can reduce the risks of shocks to specific segments. Distilleries that make multiple types of

spirits, or even other beverages such as wine and beer, are less susceptible to losses from changing preferences.

Guaranteed supply of key inputsSuccess is highly dependent on the ability to ensure adequate quantities of raw materials. The price of key inputs such as grains and sugars can be extremely volatile. Firm viability is dependent on limiting the exposure to these shifts.

Financial structure of the companyThe debt level of the firm and the way in which it is financed will affect cash flows. Highly leveraged firms can increase the return on equity for their owners but are susceptible to cash flow fluctuations and bankruptcy.

Market�Share�Concentration

The Distilleries industry is very highly concentrated, with about 89.7% of revenue being controlled by the top four major players. In 2006, these same top four players generated only 69.3% of industry revenue. They have increased their market share over the five years to 2011, mainly by acquisitions. This strategy has been pursued most aggressively by Pernod Ricard which used to be a smaller player itself, controlling about 10.2% of the US market in 2006. Its acquisition of Vin & Spirits in 2008 has catapulted its current market share to 12.5% despite some divestitures.

There is also considerable reallocation of market share and brands among the top players as they are constantly buying and selling brands among each other. For example, Fortune Brands purchased the

Cruzan Rum brand from Pernod Ricard in 2008 and then sold the same company its Absolut Vodka brand later in the year. The heavy acquisition and brand trading strategies are expected to continue over the five years to 2016, with the major players focusing their positioning within their respective niche markets.

The remainder of the market share is spread out over regional and local brands. These firms have smaller distilleries, most of which will not expand beyond their regional or niche markets. There are fewer such players compared to similar industries such as wine and beer. This is because microbreweries and wineries are relatively easy to setup, but distilleries are more tightly regulated and face steeper tax rates due to the higher alcohol content of their product.

Competitive�LandscapeMarket�Share�Concentration�� |�� Key�Success�Factors�� |�� Cost�Structure�BenchmarksBasis�of�Competition�� |�� Barriers�to�Entry�� |�� Industry�Globalization

Level��Concentration in this industry is High

�IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive�Landscape

Cost�Structure�Benchmarks

Average profit (earnings before interest and taxes) for this industry is around 13.0% of total revenue, which has trended up in the five years to 2011. Returns are even better for dominant players. They are able to take advantage of economies of scale throughout the production and distribution process and push down costs. A consumer trend towards premiumization is expected to drive profits up further over the five years to 2016, despite the bigger price tag on higher quality inputs. Smaller distilleries do not enjoy the same level of profits. Their promotional expenditures are significantly lower but this is offset by higher average production costs and limited market penetration. The net result is a healthy but leaner profit margin for many small-scale operations.

Purchases are the greatest cost to this industry, making up about 54.8% of industry revenue in 2011. This has increased over the past five years as a result of growing demand for higher-quality products, which necessitate purchases of finer inputs. Items purchased include bottles, concentrated spirits, sugar, grains and water. The primary raw material used to produce whiskey, gin and vodka is grain, while sugar accounts for 97% of the cost of raw materials needed to produce rum. Prices of grains and sugar have been unusually volatile during the five years to 2011 and are anticipated to stabilize over the following five years. Despite this,

purchases are anticipated to continue to remain a high portion of revenue as demand for superior quality liquors and spirits grows.

Labor costs are much lower than other beverage manufacturing industries at 5.0% of industry revenue, and are decreasing proportionately as revenue increases. This is because most of the production process is contained within the aging process, which is not especially labor intensive. This process does contribute to capital costs by requiring temperature control and storage mechanisms. Because of the machinery required to do this, depreciation is at 2.1% of industry revenue. Depreciation is expected to stay constant over the 10 years to 2016. However, utilities are increasing as a proportion of revenue as prices of energy remain volatile. They are estimated to be 1.7% of revenue in 2011, and will grow over the five years to 2016.

OtherMarketing is 15% of industry revenue on average, and takes up even more resources for mainstream and premium brands. It was cut over the five years to 2011 as companies decreased spending in this department to balance their books. However, companies must spend constantly to remind consumers of the presence and value of their brands. Without significant expenditures in mass media and point of sale promotions companies risk losing market share to

Industry�Costs�and�Average�Sector�Costs■�Profi�t■�Rent■�Utilities■�Depreciation■�Other■�Wages■�Purchases

Industry�Costs�(2011)�

Average�Costs�of�all�Industries�in�sector�(2011)�

13.0Profit

54.85.021.92.1

1.7

9.2Profit

58.811.214.43.2


0 100%1.5

1.2

1.9



Cost�Structure�Benchmarkscontinued

competitors who are willing to pay to have the consumer’s ear. With the increasing trend towards premium offerings, successful branding and advertising will become even more critical for success, stimulating an increase in this segment’s portion of revenue over the five years to 2016. Other costs include distribution and general

administration, which are significant for the industry as a whole but more so for the major players. These firms must invest more in operations in order to manage the wider range of products, markets and suppliers. Other costs are decreasing proportionately, to 6.9% of revenue in 2011 and lower over the five years to 2016.

Barriers�to�Entry The difficulty of entering this industry varies depending on the target market for new entrants. Production is highly capital intensive for all distilleries and substantial volume is needed to spread out these costs. Additionally, the long interval between the start of production and the final product being available mean that cash flows are not established for some time. While some products can be distilled over shorter periods of time,

some whiskeys can take over two years of aging. Delayed revenues can deter players with smaller cash reserves from entering the market.

Due to the relationship between aging and quality, these players may still compete in the value oriented segments of the market. Many small distilleries have been able to carve out profitable niche by focusing on local markets and bottom-shelf brands.

Basis�of�Competition Although much of the market share is concentrated in the hands of a few players, these participants compete heavily on branding. Price-based competition is particularly intense in the value segment where it can be the only differentiating factor for buyers.

Internal�competitionTo participate in anything beyond regional niche markets, major distillers spend millions building their brand. Through advertising and promotion, they are able to reach out to consumers, communicate brand associations and hopefully induce buying. Because there are so many brands seeking to do just that, companies must make substantial allocations for these costs or risk having their message drowned out. Hence, larger firms have a competitive advantage in that they can use sales revenue from well recognized products to

promote emerging brands. Price and quality are tied together in such a way that many similar-quality products are often priced in a certain range. This intensifies the competition in this arena, giving major players yet another advantage because they face decreasing costs per each additional unit produced and because they can buy inputs at cheap, bulk prices.

External�competitionThe industry competes with other beverages, most notably beer and wine but also soft drinks, for a share of the consumer’s wallet. Customers can choose to quench their thirst through a wider range of products but generally turn to alcoholic beverages during social interactions. The popularity of cocktails has helped distilled products gain prominence and acceptability at social drinking events.

Level�&�Trend��Competition in this industry is High and the trend is Steady

Level�&�Trend��Barriers to Entry in this industry are High and Steady



Industry�Globalization

Of the four major players Diageo and Pernod Ricard are headquartered in Europe while Fortune Brands and Brown-Forman are located domestically. However, the dominant American companies are globalized themselves, earning almost half of their revenues in international markets.

The trend toward premiumization has created additional demand for imported spirits. Consumers associate imports

with superior quality and have been willing to pay a premium for these products. This is especially true for vodka, rum and tequila, as their production is traditionally associated with other regions of the world. However, the recession and weakening dollar is causing Americans to rethink this habit, as is their growing preference for cocktails. Consumers are trading down towards lower price offerings

Barriers�to�Entrycontinued

For entrants seeking broader penetration, the barriers are considerably higher. This arena is dominated by a handful of well-established, multinational companies. These firms can produce cheaply because they can produce high volumes of products with increasing returns for each item, enabling them to lower prices. Companies have established exclusive dealings with distributors and exclusive territories, restricting distributors to certain geographic areas or certain product lines. These can be used to lock in distributors, making it difficult for new entrants to find independent distributors for their products. Additionally, these companies spend millions on advertising and branding.

New entrants must make similar expenditures to capture the consumer’s ear and have a chance to capture their taste buds. The strength of existing brands and distribution networks puts new entrants at a competitive disadvantage.

Barriers�to�Entry�checklist� LevelCompetition HighConcentration HighLife Cycle Stage GrowthCapital Intensity HighTechnology Change LowRegulation & Policy HeavyIndustry Assistance Low


Level�&�Trend��Globalization in this industry is High and the trend is Increasing


Trade�Globalization Going�Global:�Distilleries�2000-2011

Expo

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Expo

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200

150

100

50

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200

150

100

50

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Imports/Domestic�Demand Imports/Domestic�Demand0 040 4080 80120 120160 160

International trade is a major determinant of an industry’s level of globalization.

Exports offer growth opportunities for fi rms. However there are legal, economic and political risks associated with dealing in foreign countries.

Import competition can bring a greater risk for companies as foreign producers satisfy domestic demand that local fi rms would otherwise supply.

Export ExportGlobal Global

ImportLocal ImportLocal

Distilleries2000

2011



Industry�Globalizationcontinued

including a switch from imports to domestic brands.

Over the five years to 2011, American companies have been able to expand their international brand power. Whiskey brands in general, but bourbon more so than others, have been the largest beneficiaries of this. Renowned U.S.

brands include Jack Daniels, Maker’s Mark and Jim Beam. This trend has only been boosted by the weakening of the dollar, which makes American exports more affordable. IBISWorld expects these brands to gain popularity around the globe, enhancing the position of US companies during the five years to 2016.


Player�Performance Illinois-based Beam Inc. is a public holding company with subsidiaries that manufacture and sell distilled spirits. Prior to 2011, the company was previously called Fortune Brands Inc. before spinning off its home and security products and selling off the company’s golf business. Also, the company no longer produces wine. Its products include bourbon, whiskey, scotch, tequila, cognac, cordials, liqueurs, rum, vodka, gin and ready-to-drink cocktails. While US sales are expected to remain at about 67.0% of revenue, spirits will generate far more than the 37.3% portion of revenue for which they accounted before the company’s restructuring.

Until recently, Future Brands LLC was the subsidiary controlling operations within the Distilleries industry in the United States. Future Brands LLC was a joint venture formed by Fortune Brands and Sweden’s Vin & Spirit. Under the deal, Fortune Brands held 51.0% of the

Future Brands LLC and Vin & Spirit held 49.0% in exchange for a $270 million payment. In addition, Vin & Spirit paid $375 million to acquire a 10.0% equity interest in Fortune’s spirits and wine business in the form of convertible preferred stock. The aim of the collaboration was to maximize US sales of their key brands, including Jim Beam bourbon and Absolut vodka.

Competitor Pernod Ricard bought Vin & Spirit in 2008, necessitating a parting of ways. Pernod paid Fortune $230 million in cash for early termination of its contract with Vin & Spirit and sold the Cruzan rum brand for $100 million. The acquisition included a distillery at St. Croix in the Virgin Islands that increased the number of production facilities under Fortune’s control to five. Fortune subsequently closed Future Brands LLC and integrated its brands and sales force within the Fortune banner before scrapping it for Beam Inc. in 2011.

�Major�CompaniesBeam�Inc.�� |�� Diageo�PLCBrown-Forman�Corporation�� |�� Pernod�Ricard�SA�� |�� Other�Companies

10.3%Other

Beam�Inc.�29.0%

Diageo�PLC�28.2%

Brown-Forman�Corporation�20.0%

Pernod�Ricard�SA�12.5%


Major�players(Market share)

Beam�Inc.�(US�distilleries�segment)��–�fi�nancial�performance

Year*Revenue�

($ million) (% change)Operating�Income�

($ million) (% change)

2006 1,784 57.6 493 56.5

2007 1,795 0.6 1,645 233.7

2008 1,645 -8.4 380 -76.9

2009 1,613 -1.9 333 -12.4

2010 1,786 10.7 365 9.6

2011 2,014 12.8 390 6.8

*IBISWorld�estimatesSOURCE: ANNUAL REPORT AND IBISWORLD

Beam�Inc.��Market share: 29.0% Industry�Brand�NamesJim Beam Courvoisier Sauza Canadian Club Cruzan Windsor Knob Creek Effen Vodka Laphroaig Sourz


Major�Companies

Player�Performance London-based Diageo was formed after the 1997 merging of alcoholic beverage giant Guinness with food and spirits company Grand Metropolitan. Once created, the companies and brands were divided into four divisions: The Pillsbury Company, Burger King, Guinness, and United Distillers and Vintners (UDV). Diageo quickly sold its non-beverage divisions to focus on establishing a larger footprint within the markets for alcoholic drinks. In line with this goal, the company began pursuing growth through organic means as well as acquisitions. The company has continued to expand its brand line-up by adding Ketel One vodka and Don Julio tequila in 2008. It has also introduced several new products under its Baileys, Smirnoff and Captain Morgan banners such as Bailey’s minis and Captain Morgan Tattoo.

In the United States, Diageo owns and operates three distilleries, including one at Stamford, CT (headquarters for the company’s North American Premium Drinks Business), Menlo Park, CA and Addison, TX. It produces whiskey, vodka, gin and rum in the United States, including Popov and Gordon vodka brands. Its US operations generate about 14.8% of 2011 company revenue. In May

2011, Diageo announced the closure of the Menlo Park bottling plant in California and the specialty product building at the Relay plant in Maryland. New investment will be made in the packaging plants at Plainfield in Illinois and Relay in Maryland.

The company formed an agreement with the US Virgin Islands government in the summer of 2008 to establish a new production plant there in exchange for considerable subsidies. This new distillery is expected to have the capacity to produce 20 million gallons of rum per year. This facility will supply all of the rum for Captain Morgan products starting in 2012. Bringing this production in-house will bring profit from this process into the company; the previous supplier contract is expiring in 2012.

Financial performanceDiageo’s US liquor and spirits production revenue increased 1.5% to total $2.0 billion in 2011. This growth was all organic as the company only made acquisitions in foreign markets. Meanwhile, operating profit was healthy at 34.9% of revenue. In 2009, the company faced a 4.0% decline in sales of its organic brands, but this was offset by

Player�Performancecontinued

Since 2006, the company has lost some market share, especially after divesting the Absolut brand. Although Fortune’s spirit sales succumbed during the downturn, falling 8.3% in 2008 and 2.0% in 2009, these decreases were due to the sale of Vin & Spirit rather than in a decline in sales of continued operations. In 2011, the acquisition and success of the Skinnygirl read-to-drink cocktails business and other new product introductions bolstered company sales. Over the five years to 2011, company revenue is expected to increase at an average annual rate of 2.5% to $2.0

billion. Much of this growth can be attributed to acquisitions such as Mixxium Worldwide B.V. and EFFEN vodka in 2009.

Operating profit in 2011 is estimated to be 18.1% of revenue as the company maintains high sales with relatively low spending on marketing. The company improved profit by reducing production capacity and scaling back on marketing; still, this performance remains far below profit attained between 2005 and 2007. Reduced promotion may drown out the company’s message, eroding Beam’s strength in the spirits market.

Diageo�PLC��Market share: 28.2% Industry�Brand�NamesJohnnie Walker Smirnoff Ciroc Kettle One J&B Baileys Tanqueray Captain Morgan Red Stripe


Major�Companies

Player�Performance Brown-Forman began as a single-bourbon distillery in Louisville, KY in 1870. Its best-known product, Jack Daniel’s Whiskey, is produced at a distillery in Lynchburg, Tennessee. Ironically, Lynchburg is part of Moore County, a dry county where the sale of alcohol is prohibited. Brown-Forman has about 4,100 employees, over a quarter of which are located in Louisville, KY. The company operates seven US distilleries and distributes to retailers and wholesalers in over 130 countries through its thirty wine and spirits brands. While spirits are expected to generate about 91.1% of company revenue in 2011, US products make up 40.8% of sales.

Brown-Forman used to operate in the consumer durables market, selling

dinnerware and glassware, through its Lenox and Gorham brands. The company sold off this business between 2005 and 2007 to focus on the alcohol beverage industry. The capital made available from the spinoff has allowed the company to acquire Chambord liqueur and the Cassa Herradura brand.

Brown-Forman’s performance is suffering due to the difficult economic climate. In order to stay competitive, Brown-Forman announced that it would seek to cut costs by cutting its workforce 8.0%. It saved between $15 million and $25 million in 2010 through this and other measures, such as eliminating raises and cutting back on travel and discretionary spending.

The company earns over half of its revenue overseas, most notably in


the performance of its newly acquired Ketel One and Don Julio brands. As a result, Diageo managed to grow its net sales and profit 63.7% and 27.5%, respectively, while industry-relevant revenue shot up 311.9%. The company’s well-established premium brands, including Captain Morgan and Smirnoff, benefited from consumers trading down from superior brands. Diageo also continued to expand its range of offerings

by launching Captain Morgan 100 and Smirnoff ready-to-drink (RTD) cocktails. The latter of these was surprising given the company’s persistent difficulty in achieving profitability within the RTD segment yet reflects an industry-wide trend toward RTD products. During the five years to 2011, company revenue increased at an annualized rate of 22.3%, which was also helped by the Ketel One and Don Julio acquisition in 2009.

Diageo�PLC�(US�distilleries�segment)��–�fi�nancial�performance

Year*Revenue�

($ million) (% change)Operating�Income�


2005-06 712.9 19.5 197.1 6.5

2006-07 561.8 -21.2 161.4 -18.1

2007-08 517.4 -7.9 156.4 -3.1

2008-09 2,131.0 311.9 623.9 298.9

2009-10 1,924.7 -9.7 681.1 9.2

2010-11 1,953.1 1.5 719.4 5.6

*Year�end�June;�IBISWorld�estimatesSOURCE: ANNUAL REPORT

Brown-Forman�Corporation��Market share: 20.0% Industry�Brand�NamesJack Daniel’s Finlandia Gentleman Jack Southern Comfort Chambord Liqueur el Jimador Don Eduardo Canadian Mist Old Forester Woodford Reserve


Major�Companies


Europe, which makes up 25.0% of total sales. As a result, the company’s profit is exposed to changes in the value of the US dollar relative to other currencies. Brown-Forman cited the appreciation of the US dollar in 2009 as a crucial factor in depressing sales in foreign markets and diminishing profitability. The inverse is likely in 2011, as the weak dollar gives US products a competitive edge abroad.

The company also noted that its flagship Jack Daniel’s brand had essentially flat US sales after years of consistent improvement. The Finlandia brand performed much better, expanding net sales 10.0%, mainly because 90.0% of its sales occur outside of the United States, isolating it from the US economy’s

slowdown. In contrast, the volume of the Southern Comfort brand declined 5.0%. Southern Comfort is often used in mixed drinks and suffered from the shift toward off-premise drinking, where they are less likely to mix complicated cocktails.

Despite a difficult climate over the past few years, Brown-Forman earned a 21.9% operating profit in 2011. This profitability improvement is a reflection of successful cost-cutting measures and improving consumer sentiment. Company revenue is expected to grow 0.6% to $1.4 billion, an annual increase of 3.1% over the five years to 2011. Recent revenue growth is attributable to increased sales of products across all categories as the company builds its brand and market reach.

Brown-Forman�Corporation�(US�distilleries�segment)��–�fi�nancial performance

Year*Revenue�

($ million) (% change)Net�Income�


2005-06 1,192.7 10.2 278.4 13.5

2006-07 1,294.6 8.5 277.7 -0.3

2007-08 1,380.1 6.6 288.0 3.7

2008-09 1,368.1 -0.9 283.3 -1.6

2009-10 1,382.1 1.0 304.2 7.4

2010-11 1,389.7 0.5 327.4 7.6

*Year�end�AprilSOURCE: ANNUAL REPORT


Major�Companies

Player�Performance Pernod Ricard USA is the American subsidiary of Paris-based Pernod Ricard SA, one of the world’s largest wine and spirit producers and the second-largest company in the United States by sales volume. It is headquartered in Purchase, NY and employs over 1,000 people in the United States, out of over 19,000 employees worldwide. It owns one production facility, the Wild Turkey Distillery in Lawrenceburg, KY but is also affiliated with the Seagram Lawrenceburg Distillery in Indiana. Pernod Ricard currently produces Wild Turkey Bourbon and Seagram’s Extra Dry Gin in the United States while importing the remainder of its spirit brands. About 8.1% of company sales are generated from its US distillery operations.

After being a minor player in the United States for over a decade, the company decided to increase its presence in the world’s single largest spirit market. Pernod Ricard continued an aggressive expansion strategy by acquiring the Vin & Spirit group in July of 2008. This put the Absolut brand under Pernod’s umbrella, allowing it to compete with Diageo’s Smirnoff vodkas. Its existing vodka

brand, Stolichnaya, was unable to compete. The Absolut brand proved to be extremely successful in 2009, helping revenue grow 19.2% that year. Additionally, the higher margins of Absolut, along with increased prices and lowered marketing costs, resulted in much higher operating margins.

The company’s strategy is to focus on the high-end segment of the market, which it believes is driven by the 70 million members of the Millennial Generation (ages 21-29). Because premium brands are linked strongly to the cocktail culture and on-premise locations such as bars and nightclubs, the company’s promotions and innovation are focused in these areas. It has also emphasized working with wholesalers to streamline distribution and effectively control costs.

IBISWorld estimates that the US distillery segment grew at a 6.4% five-year rate through 2011. Segment revenue grew 14.4% to $869.2 million in 2011, driven by strong marketing initiatives. Meanwhile, its profit grew at a slower 9.1% rate in 2011, contracting slightly to a 24.7% operating margin.

Pernod�Ricard�SA��Market share: 12.5% Industry�Brand�NamesMaker’s Mark Jameson Absolut Malibu Kahlua Beefeater Chivas Regal The Glenlivet Ballantine’s Havana Club

Pernod�Ricard�SA�(US�distilleries�segment)��–�fi�nancial�performance

Year*Revenue�

($ million) (% change)Net�Income�


2006 637.7 129.1 147.2 119.5

2007 733.3 15 171.6 16.6

2008 746.4 1.8 184.8 7.7

2009 845.7 13.3 223.6 21

2010 759.6 -10.2 215.0 -3.8

2011 869.2 14.4 234.5 9.1

*IBISWorld�estimatesSOURCE: ANNUAL REPORT


Major�Companies

Other�Companies The four major players control the majority of market share, but many smaller operators thrive in smaller niches. The largest of these segments includes that of mainstream bottom shelf spirits, where products in this category compete solely on price and are not bought for their quality or taste. A large proportion of these purchases are in the handle, or 1.75 liter form, and they are diluted with juice or sodas in

mixed drinks. Another potentially profitable niche involves narrowly targeted high-end premium or super premium brands. These brands include locally distilled ones that cater to nearby populations or nationwide brands that focus on a single type of alcohol. SKYY Vodka successfully executed this strategy. SKYY is the number two super-premium vodka brand in the United States.


Capital�Intensity The majority of the production process is mechanized and little labor is needed. Over half of all firms have fewer than twenty employees. However, larger players such as Diageo and Fortune Brands are vertically integrated into wholesaling and marketing. This drives up their labor costs considerably as they must pay additional workers such as salesmen and marketers. On average, companies in this industry spend 90 cents on labor for every dollar they spend on capital.

Like all large-scale manufacturing, liquor production requires substantial amounts of machinery. Stills, filtration systems, bottling lines and other machinery are bought when a plant is

first established but require continuous maintenance and repair. Large plants

�Operating�ConditionsCapital�Intensity�� |�� Technology�&�Systems�� |�� Revenue�VolatilityRegulation�&�Policy�� |�� Industry�Assistance

Tools�of�the�Trade:�Growth�Strategies�for�Success


Labo

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veCapital�Intensive

Change�in�Share�of�the�Economy

New�Age�Economy

Recreation,�Personal�Services,�Health�and�Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional�Service�Economy

Wholesale�and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old�Economy

Agriculture�and�Manufacturing.�Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment�Economy

Information,�Communications,�Mining,�Finance�and�Real�Estate.�To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

BreweriesWine�&�Spirits�Wholesaling Sugar�Processing

Wineries

Cardboard�Box�&�Container�Manufacturing

Distilleries

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit

DistilleriesManufacturingEconomy

Level��The level of capital intensity is High


Operating�Conditions

Revenue�Volatility There has been a steady increase in the demand for liquor and spirits in both value and premium offerings. The industry has seeped a share of consumer spending away from beer. It has achieved this mainly by positioning spirits as an affordable luxury in difficult times while reinventing traditional cocktails and widening the offerings of ready-to-drink beverages. It has also stressed the lower number of calories in liquors and spirits. The orderly nature of this gain in market share has meant

revenue volatility has been limited over the five years to 2011. The fastest growth during this time was 4.1% in 2007, while the slowest was a 0.6% revenue increase in 2008.

IBISWorld forecasts revenue volatility to rise during the five years to 2016, given the increase in spirits consumption. The recession has created a drag on growth in 2008 and 2009, but is expected to relent during this time. This will allow revenue to advance more rapidly, driving up potential volatility.

Technology&�Systems

The distilling process has not changed significantly over the last millennium. It is simple enough that individuals can make their own spirits using inexpensive home-distilling kits. Technological improvements in large-scale distilling are incremental and focused around making a safe and consistent product. Examples include better filtration systems and greater knowledge about aging of fruits

and grains. The latter has allowed distilleries to produce in larger, more efficient batches that reduce waste, without hurting the quality of their output.

Cheaper and faster bottling and palleting technologies have sped up the process of packaging shipments. Over the past five years innovations in these areas, and in labeling and printing, have helped companies maintain their bottom line.

Capital�Intensitycontinued

must spend an average of $450,000 annually in addition to the initial set up costs which can be in the multi-millions

for some facilities. However, the specific amount of capital spending varies each year and by the size of the plant.

Level��The level of Technology Change is Low

Level��The level of Volatility is Low


Volatility�vs�Growth

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1

0.1

Five�year�annualized�revenue�growth�(%)�–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue�Chip

* Axis is in logarithmic scale

Distilleries

A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.


Operating�Conditions

Industry�Assistance This industry receives no government assistance. Imports of all liquors and spirits for drinking are free of duties but are still subject to the federal excise tax. There have been no intentions signaled by the US government to change this level of protection in the near future, despite strong competition from foreign spirit makers. There are several distillers associations, organized by state, region or product. However, the main industry association which has promoted the

production of distilleries is called DISCUS, or the Distilled Spirits Council of the United States.

Regulation�&�Policy The Distilleries industry is heavily regulated, especially when compared to breweries. It is one of the most complicated industries with respect to interstate commerce since individual states restrict the sale and shipment of alcoholic beverages across state lines. Regulations favor trade primarily through networks of approved wholesalers and retailers. In addition, spirits manufacturing and sales are made more cumbersome by the fact that laws differ between states.

There are two types of regulatory environments: open and control. In open states, spirits companies are allowed to sell spirits, wine and beer directly to independent distributors. In contrast, control states have a monopoly over the warehousing or retailing of spirit products. Eighteen states control distribution channels, half of these states also hold monopolies over the retailing of spirits and other alcoholic beverages.

United States Alcohol and Tobacco Tax and Trade Bureau (TTB)The TTB is the enforcement agency responsible for regulating all alcohol

products. This includes approving packaging, monitoring advertising and ensuring that distilleries follow Food and Drug Administration (FDA) rules concerning food additives and colorings. This agency also collects taxes and issues distillery permits for wholesaling and trade. These functions were previously performed by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF); however, they were reassigned in 2003. The ATF’s current role in the alcohol industry is limited to preventing and pursuing smugglers.

Level�&�Trend��The level of Regulation is Heavy and the trend is Steady

Regulated�statesDistribution only Retail monopoly

Iowa AlabamaMaine IdahoMichigan New HampshireMississippi North CarolinaMontana OregonOhio PennsylvaniaVermont UtahWest Virginia VirginiaWyoming Washington

SOURCE: BUREAU OF ALCOHOL, TOBACCO, FIREARMS AND EXPLOSIVES

Level�&�Trend��The level of Industry Assistance is Low and the trend is Steady

Key�Tariffs

GoodsLow�Rate

High�Rate

Harmonized tariff (cents per liter) 0.0 23.7

SOURCE: USITC


�Key�StatisticsRevenue�

($m)

Industry�Value�Added�

($m)Establish-

ments Enterprises EmploymentExports�

($m)Imports�

($m)Wages�($m)

Domestic�Demand

($m)Consumption�

(Million gallons)2002 5,124.8 1,107.7 71 60 5,729 658.1 3,835.6 328.8 8,302.3 366.22003 5,739.3 1,157.1 81 65 5,412 693.2 4,051.7 302.0 9,097.8 383.32004 5,629.7 1,155.9 80 65 5,531 818.2 4,200.0 319.9 9,011.5 391.02005 6,173.0 1,226.1 74 59 5,461 820.2 4,295.1 300.2 9,647.9 402.62006 6,240.2 1,322.8 78 61 6,710 933.6 4,501.7 418.0 9,808.3 428.42007 6,493.8 1,427.1 82 63 6,958 1,016.9 4,762.5 446.6 10,239.4 431.02008 6,534.2 1,364.0 77 61 6,729 1,071.6 4,620.0 383.9 10,082.6 435.92009 6,668.8 1,301.6 78 66 7,288 1,030.9 4,396.8 334.7 10,034.7 445.22010 6,813.8 1,456.4 75 65 7,134 1,122.8 4,640.0 400.3 10,331.0 454.32011 6,937.3 1,409.5 81 70 7,693 1,195.4 4,745.6 348.1 10,487.5 462.32012 7,228.7 1,479.2 80 69 7,380 1,248.4 4,945.9 330.5 10,926.2 471.52013 7,582.9 1,564.1 84 73 7,478 1,312.6 5,189.2 355.9 11,459.5 480.62014 7,833.1 1,660.8 87 75 7,461 1,359.0 5,361.5 377.5 11,835.6 492.12015 8,162.1 1,777.8 90 79 7,510 1,419.3 5,587.8 403.9 12,330.6 505.72016 8,472.3 1,818.5 94 82 7,530 1,476.6 5,801.2 430.4 12,796.9 515.7Sector�Rank 148/195 165/195 183/195 180/195 186/195 113/183 69/183 186/195 129/183 N/AEconomy�Rank 540/706 612/706 688/705 680/705 671/706 139/230 79/230 660/706 154/230 N/A

IVA/Revenue�(%)

Imports/�Demand�

(%)Exports/Revenue�

(%)

Revenue�per�Employee�

($’000)Wages/Revenue�

(%)Employees�

per�Est.Average�Wage�

($)

Share�of�the�Economy�

(%)2002 21.61 46.20 12.84 894.54 6.42 80.69 57,392.22 0.012003 20.16 44.53 12.08 1,060.48 5.26 66.81 55,801.92 0.012004 20.53 46.61 14.53 1,017.84 5.68 69.14 57,837.64 0.012005 19.86 44.52 13.29 1,130.38 4.86 73.80 54,971.62 0.012006 21.20 45.90 14.96 929.99 6.70 86.03 62,295.08 0.012007 21.98 46.51 15.66 933.29 6.88 84.85 64,185.11 0.012008 20.87 45.82 16.40 971.05 5.88 87.39 57,051.57 0.012009 19.52 43.82 15.46 915.04 5.02 93.44 45,924.81 0.012010 21.37 44.91 16.48 955.12 5.87 95.12 56,111.58 0.012011 20.32 45.25 17.23 901.77 5.02 94.98 45,248.93 0.012012 20.46 45.27 17.27 979.50 4.57 92.25 44,783.20 0.012013 20.63 45.28 17.31 1,014.03 4.69 89.02 47,592.94 0.012014 21.20 45.30 17.35 1,049.87 4.82 85.76 50,596.43 0.012015 21.78 45.32 17.39 1,086.83 4.95 83.44 53,781.62 0.012016 21.46 45.33 17.43 1,125.14 5.08 80.11 57,158.03 0.01Sector�Rank 160/195 42/183 85/183 24/195 184/195 38/195 113/195 165/195Economy�Rank 552/706 52/230 105/230 80/706 651/706 63/705 335/706 612/706

Figures are inflation-adjusted 2011 dollars. Rank refers to 2011 data.

Revenue�(%)

Industry�Value�Added�

(%)

Establish-ments�

(%)Enterprises�

(%)Employment�

(%)Exports�

(%)Imports�

(%)Wages�

(%)

Domestic�Demand�

(%)Consumption�

(%)2003 12.0 4.5 14.1 8.3 -5.5 5.3 5.6 -8.2 9.6 4.72004 -1.9 -0.1 -1.2 0.0 2.2 18.0 3.7 5.9 -0.9 2.02005 9.7 6.1 -7.5 -9.2 -1.3 0.2 2.3 -6.2 7.1 3.02006 1.1 7.9 5.4 3.4 22.9 13.8 4.8 39.2 1.7 6.42007 4.1 7.9 5.1 3.3 3.7 8.9 5.8 6.8 4.4 0.62008 0.6 -4.4 -6.1 -3.2 -3.3 5.4 -3.0 -14.0 -1.5 1.12009 2.1 -4.6 1.3 8.2 8.3 -3.8 -4.8 -12.8 -0.5 2.12010 2.2 11.9 -3.8 -1.5 -2.1 8.9 5.5 19.6 3.0 2.02011 1.8 -3.2 8.0 7.7 7.8 6.5 2.3 -13.0 1.5 1.82012 4.2 4.9 -1.2 -1.4 -4.1 4.4 4.2 -5.1 4.2 2.02013 4.9 5.7 5.0 5.8 1.3 5.1 4.9 7.7 4.9 1.92014 3.3 6.2 3.6 2.7 -0.2 3.5 3.3 6.1 3.3 2.42015 4.2 7.0 3.4 5.3 0.7 4.4 4.2 7.0 4.2 2.82016 3.8 2.3 4.4 3.8 0.3 4.0 3.8 6.6 3.8 2.0Sector�Rank 125/195 179/195 8/195 7/195 11/195 74/183 113/183 194/195 136/183 N/AEconomy�Rank 442/706 664/706 22/705 22/705 22/706 97/230 144/230 703/706 170/230 N/A

Annual�Change

Key�Ratios

Industry�Data



Jargon�&�Glossary

BARRIERS�TO�ENTRY Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry.

CAPITAL/LABOR�INTENSITY An indicator of how much capital is used in production as opposed to labor. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3 – $8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation.

CONSTANT�PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using 2011 as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC�DEMAND The use of goods and services within the US; the sum of imports and domestic production minus exports.

EARNINGS�BEFORE�INTEREST�AND�TAX�(EBIT)� IBISWorld uses EBIT as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding tax and interest.

EMPLOYMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees.

ENTERPRISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry.

ESTABLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates.

EXPORTS The total sales and transfers of goods produced by an industry that are exported.

IMPORTS The value of goods and services imported with the amount payable to non-residents.

INDUSTRY�CONCENTRATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%.

INDUSTRY�REVENUE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY�VALUE�ADDED The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added).

INTERNATIONAL�TRADE The level is determined by: Exports/Revenue: Low is 0 –5%; Medium is 5 –20%; High is over 20%. Imports/Domestic Demand: Low is 0 –5%; Medium is 5 –35%; and High is over 35%.

LIFE�CYCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each.

NON-EMPLOYING�ESTABLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals.

VOLATILITY The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees of the establishment.

Industry�Jargon

IBISWorld�Glossary

OFF-PREMISES The purchase of liquor in packaged form (bottles, cans or casks) for consumption at home or anywhere other than the location of purchase.

ON-PREMISES The purchase of liquor for immediate consumption.

PREMIUMIZATION Trading up toward products that are of a higher quality and price.

READY-TO-DRINK�(RTD)� A bottled beverage that typically has some combination of spirits and juices. Examples include Smirnoff Ice and Jack Daniels and Cola.

STILL A distilling apparatus, consisting of a vessel in which a liquid is heated and vaporized and a cooling device or coil for condensing the vapor.

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