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Spirits companies should work harder to protect margins, warns Rabobank

Published:  21 October, 2013

If spirit companies are to generate growth in a depressed market they are better to concentrate on protecting margins than trying to drive volumes, according to Rabobank, financial experts for the drinks industry.

In a recent report Rabobank focuses on 21 spirit companies which have minimum annual revenue of EUR 50 million. It took a close look at their return on assets (ROA) so that it could provide a benchmark to assess the success of different spirit companies' strategies. ROA, which is sometimes referred to as return on investments, is a measurement of the operating profit compared to the total amount of assets a company has or in simpler terms how effectively a company is using its assets to generate earnings.

The dominating conclusion when looking at both sub groups of the companies and as a whole, indicated strategies focused on improving earnings before interest and taxes (EBIT) was far more effective in generating value than implementing  a strategy which improved asset turnover.

The global recession has forced spirit companies in recent years to to choose between price reductions to maintain volumes and market share or risk seeing sales volumes decline due to keeping prices at a level to stabilise profit margins.

Rabobank analyst Stephen Rannekleiv explained: "The spirits sector has been under intense pressure as a result of the global recession and 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."

The study found that reducing prices to maintain value for larger spirit companies is actually counter-productive to creating real value.

Additionally, it found that investments in declining categories, such as brandy and bitters, as well as for smaller spirits brands acquisitions of other brands to achieve better margins and expand their portfolio will better position themselves in the long term.

It is not surprising that in recent months there have been a number of consolidations in certain spirits categories, such as Cognac, with Pernod Ricard purchasing Le Maine au Bois earlier this year.