NEW YORK--(EON: Enhanced Online News)--Rabobank has published a new report on the global spirits industry, evaluating strategies that companies in the Western spirits industry are employing to create value post-recession.
“The spirits sector has been under intense pressure as a result of the global recession, forcing companies to alter their strategies”
In the report, the bank’s Food & Agribusiness Research team says that Western spirits companies that pursue a strategy focusing on growing margins to create value have been more successful than those that reduced prices in order to grow volumes.
Rabobank’s wine sector analysts draw two key conclusions related to value creation in the Western spirits industry:
- Focusing on margin expansion is more effective for creating value than focusing on increasing volumes.
- Acquisitions are generally value accretive to companies, although returns may be weighed down in near-term.
“The spirits sector has been under intense pressure as a result of the global recession, forcing companies to alter their strategies,” explained Rabobank analyst Stephen Rannekleiv. “In light of these changes, Western spirit companies have often been forced to choose between sacrificing margins or sacrificing sales volumes. What we have seen from this study is that focusing on maintaining margins was generally a more effective method for creating value. Additionally, the study also finds that acquisitions are generally value accretive, although returns may be weighed down in the near term.”
Rabobank’s latest report focuses on 21 spirits companies with minimum annual revenue of EUR 50 million, looking at the evolution of their returns (operating profit) relative to total assets.
Whether looking at the group as a whole or at subsets of similar companies, the evidence points to a similar conclusion: driving improvements in EBIT has been a more effective strategy for creating value than driving improvements in asset turnover, even if some sacrifice in asset turnover is required. Pricing pressure on spirits suppliers remains intensive within the EU, but aggressive price reductions and discounting to maintain volumes and market share appear to be counter-productive to creating real value.
For some companies, a focus on margin growth may be difficult to achieve. Small companies with brands focused on categories that are in decline (e.g. brandy, bitters, etc) may find it difficult to push for margin growth on an organic basis and may need to look to acquisitions of stronger brands with better margins to improve their portfolios.
Acquisitions themselves appear to have been generally value accretive for the acquirers, but only over the long term. In the near term, heavy asset levels on the balance sheets of potential acquirers pose a tangible challenge to profitability. Many companies that have made significant acquisitions in recent years, such as Pernod Ricard, have return on assets that significantly lag their peers. Nevertheless, the research indicates that while acquisitions may reduce profitability in the short term, they will generally leave companies better positioned to generate greater value in the future.
Rabobank’s report on value creation in the Western spirits industry is available to media upon request.
Rabobank Group is a global financial services leader providing wholesale and retail banking, leasing, real estate services, and renewable energy project financing. Founded over a century ago, Rabobank is one of the largest banks in the world, with nearly $1 trillion in assets and operations in more than 40 countries. In North America, Rabobank is a premier bank to the food, beverage and agribusiness industry. Rabobank’s Food & Agribusiness Research and Advisory team is comprised of more than 80 analysts around the world who provide expert analysis, insight and counsel to Rabobank clients about trends, issues and developments in all sectors of agriculture. www.rabobank.com/f&a
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