SPECIAL REPORT: Battle of the drinks giants

The latest research published by Euromonitor International shows that Diageo is highly likely to lose its position as the world's leading spirits producer by volume in 2011 to the Indian giant UB Group and that it could even fall as low as third position behind Pernod Ricard, although it will remain number one by value for the foreseeable future.

Asia Pacific strength makes an impact
The main reason for its position is that, unlike its two closest rivals, Diageo lacks a strong presence in the booming Asia Pacific region, especially in India, but also in China, where Pernod Ricard enjoys strong sales.

The Indian spirits market, which is dominated by low-value local spirits, remained unaffected by the economic crisis and has seen double-digit volume growth year-on-year since 2006. UB Group, the leader with over 42% of Indian spirits volume sales in 2010, and second-placed Pernod Ricard (8% volume share) have been able to exploit this growth. Both companies have managed to either exceed or closely match the continued strong growth seen in the Indian market. Diageo, in contrast pulled out of the market in 2002, and, while it has attempted to re-enter the market through a joint venture with Radico Khaitan, signed in 2006, this has failed to take off.

With the Indian market expected to grow by over 10% in volume again in 2011 and with UB Group only 0.1 percentage points behind Diageo in terms of volume share in 2010 and Pernod Ricard even less, Diageo could end up as the world's number three company by volume by the end of the year.

Diageo grows, but at what cost?
Diageo's over reliance on the mature and poor performing North American and Western European markets makes it's growth, especially in 2009, an achievement. Yet, this growth could potentially damage the company's long-term prospects in these markets. Much of the company's growth in 2009 and 2010 has been driven by heavy price promotional activity in its core markets, especially the US and the UK. This risks the margins and long-term value of its key global priority brands, such as Smirnoff and Johnnie Walker, in these markets.

While Pernod Ricard has not been immune to price cutting (eg Absolut in the US), it seems to have done far less than Diageo, such as refusing to discount heavily in the UK. Part of this is undoubtedly a difference in strategy between the two companies, but at least part of it is due to Pernod's greater geographic balance, which means it has been able to resist the need to drive revenues from poor performing markets by discounting its brands in them.

While Diageo will be able to benefit from its relatively strong position in other fast growing regions of Latin America and Eastern Europe in the future, as well as its growing presence in Asia Pacific, so will Pernod Ricard. So, while Diageo will see good growth again, growth is likely to be slower than that of not only UB Group but also that of its major international rival Pernod Ricard.

1 November 2010 - Felicity Murray