A Lucrative New Market for These Companies
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Early in 2011 international liquor and sprits giant Diageo (NYSE: DEO) entered into a joint venture with Vietnam’s Halico, buying a 23.6% stake in the country’s biggest branded spirits producer. Halico is the producer of Vodka Hanoi, the market leader in Vietnam. Later in the year Diageo raised its equity stake in the privately-held company to 30% paying nearly $11 per share in the OTC market, more than twice the current price at the time.
Johnnie Walker Diplomacy
Vietnam’s alcohol consumption is estimated to rise by 13 to 15% for the next few years and the partnership model has been used by Diageo in a number of foreign markets, including Indonesia. Diageo maintains an impressive array of internationally recognized brands of beer and scotches, and their advertising prowess couples well with Halico’s distribution network and market dominance in Vodka.
Their scotch business is unchallenged throughout the Asia Pacific region with a 45% market share which is growing over their competition yearly. Providing the market scotch at every price point from $11 to $3000 per bottle, Diageo is seeing their strongest growth, however, in the emerging Asian markets with projected CAGR rates for their high margin scotches at 8% through 2015. By combining Halico’s Vodka Hanoi with Diageo’s Smirnoff brand their position is unmatched in Vietnam’s rapidly growing vodka market which saw compounded annual growth of 9.7% between 2004 and 2009 and shows no signs of slowing down.
With seemingly a grade of Jonnie Walker for every occasion, Diageo has the entire market covered with a highly reputable product. Diageo gained an advantage on the ground in Vietnam having an in-market company that allowed them to develop a particular brand of Johnnie Walker, Gold Label Reserve, specifically for Vietnam which flew off the shelves in the first year, 50,000 cases.
The Last Frontier of Beer
It’s not only Diageo that sees opportunity in Vietnam and the rest of emerging Asia. Japanese brewer, Sapporo (NYSEMKT: EWJ), closed down its business in China due to flat sales growth potential with a rapidly aging population and no pricing leverage but is moving into Vietnam. The demographics of a far younger population are just too enticing. Beer sales in Vietnam are likely to top $4.6 billion in 2012, a 20% increase over 2011, while volume expanded by nearly 16%.
Heineken, which makes up 5% of the MSCI Netherlands Index Fund (NYSEMKT: EWN) and whom Diageo has joint ventures with in Africa as well as Malaysia, owns about 8% of the market share for beer in Vietnam. They were the first foreign brewer to open up production in there in the early 1990s. According to their research beer fetches nearly twice the price that it does in China, even though the market is about 10% of the size of China’s. At 15-20% growth rates, though, and a population that is producing millions of new beer drinkers every year it’s not hard to see why the brewers are looking there. Disposable incomes are rising in the region between 1.5% and 3% per year, with Vietnam on the upper end of that scale. Local brewer, Sabeco, dominates the market with around 35% while Carlsberg’s three brands make up around 10% of the market.
Diageo’s success with Guinness in Indonesia started with a partnership with local conglomerate DIMA, similar to their partnership with Halico. It is through DIMA’s extensive local knowledge and distribution chain that Diageo had Guinness gain 3% market share per year in 2009 through 2011 with double-digit revenue growth. Indonesia represents the sixth largest market for Guinness in the world.
Their multi-tiered approach to the beer market in Malaysia has them holding a 60% stranglehold on the market across their four brands there. They have a joint venture with Heineken to produce it locally. Along with Heineken, Guinness, Tiger and Anchor beers hit four completely different market segments. Malaysia’s demographics for alcohol surpass Vietnam’s with their higher growth rate and 58% of the population below the age of 30. It is second only to Singapore as the wealthiest nation in the region and the engine for growth in the entire region. Because of this the iShares MSCI Malaysia Index (NYSEMKT: EWM) is weighted higher in both consumer services and discretionary than many of the ETFs in the region at 23.5% of total AUM.
Diageo’s aggressive approach to Southeast Asia has it well positioned to grow with the region. They very adroitly anticipated the changes happening in the market to blaze their own trail while designing products that create their own demand, such as the super deluxe scotch variants. It is the strength of their local partnerships that has allowed them to achieve the kind of market share dominance they have by utilizing firsthand knowledge and existing distribution networks to integrate their products into the local gestalt.
Peter Pham has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
