Drinks industry plays political risk

As the global spirits industry has consolidated over the past decade, the opportunities for giant takeovers such as the dismemberments of Allied Domecq and Seagram have diminished.

Today, companies such as Diageo and Pernod Ricard are seeking niche acquisitions in strategic countries that give them not only a significant local brand but also an enhanced route to market for their global products.

But while such deals have attractive profit potential, they do come with political risks attached. Take Diageo’s $2.1 billion purchase of Mey Içki in Turkey just two years ago.

Not only did Diageo buy the country’s biggest producer of raki, the national drink, which has an 82% market share and an 80% gross margin, but by using Mey Içki’s network Diageo has increased its share of the Turkish market for Scotch whisky from 20% before the takeover to more than 50% today. That sort of rapid growth puts smiles on the faces of shareholders and analysts, especially when it comes with enormous growth potential.

At just 1.5 litres a head, the Turkish population has one of the lowest alcohol consumption rates in Europe and more than 80% of the 80m-plus Turks do not drink at all. So as the country increases its international outlook with an eventual aim of joining the European Union, the opportunities for profitable sales expansion, especially to the burgeoning tourism sector, are significant.

But at the same time, shareholders’ smiles can be turned to frowns by sudden changes in the national political climate, which themselves can be caused by an unpredictable event.

The recent riots in Istanbul and other Turkish cities were sparked by popular opposition to the granting of planning permission to build a shopping mall (backed by the prime minister’s son-in-law) in one of central Istanbul’s few remaining green spaces. Police overreacted to the protests and the situation turned ugly, so much so that one of the measures rushed through parliament to quell the tension is anti-alcohol legislation.

This would ban retail sales after 10pm, prohibit all advertising and sponsorship by alcohol producers and prevent restaurants and bars within 100 metres of any school or mosque from offering drink. Only the president’s signature on the proposed law is required for it to be enacted.

The measure was promoted by the Islamist-leaning government party and has the vocal backing of hard-line muslim opposition factions, so it is well supported. Delicate negotiations are underway to limit its effect on the economy and interested parties such as Diageo.

In a rare public statement, Diageo’s chairman, Dr Franz Humer, is reported as saying to reporters in Abu Dhabi that he hopes “an acceptable solution” can be found. “We are disappointed by the regulation that is currently before parliament and the president for signature,” he said. “We will continue to work with Turkish officials and the government in order to protect and develop our business in this country [Turkey].”

None of this means that Mey Içki’s basic business is under mortal threat; there are obvious loopholes in the proposals. But, if enacted, the restrictions will dampen the likely growth rate, especially of global brands that are promoted by heavy advertising. Simply, payback on Diageo’s $2.1bn investment will be delayed marginally, to the disappointment of shareholders.

With the giant groups trawling African and Central and South America for niche takeover candidates, awareness of political risk is always a factor in the equation. As Turkey shows, governments are prone to blame alcohol for internal turbulence and protest. Meanwhile, Scotland is ploughing ahead with minimum pricing as a sop to the health lobby. Even stable regimes are wont to slap on extra duties when their coffers are running dry. Look no further than Westminster for a prime example.