After a lackluster year in which many companies took a wait-and-see approach, 2021 is ripe for deals in the spirits sector. In 2020, shelter-in-place mandates depressed sales of alcohol in restaurants and bars, while home consumption ticked up.
In the wake of the pandemic, many states also revised laws to permit bars and restaurants to sell alcohol to go. With vaccines on the horizon promising a return to on-premises sales, a robust recovery awaits.
Overall, sales of spirits grew 4.8% over the past five years, outpacing beer and wine sales by 2.4% and 1.4% respectively. Industry research indicates an expected increase in worldwide spirits sales for the years ahead, reaching $502 billion in 2023—up from $443 billion in 2019.1
Meanwhile, consumer trends already in place—including a shift to premium brands, ready-to-drink (RTD) products and direct-to-consumer (DTC) business models—accelerated over the course of 2020. PwC's own Emerging Consumer Sentiment research has found that among other changes, consumers were willing to try new brands.
1 PwC analysis of data from Statista, Distilled Spirits Council of the US and Mergermarket.
Beverage alcohol companies have responded to these trends through acquisition of premium growth brands and RTD companies, and by adopting variations of the D2C model, where possible. New entrants continue to challenge incumbents with innovation or consumer-centric attributes that disrupt the POS and take advantage of the more accessible consumer. Significant recent deals include Diageo’s acquisition of Aviation Gin, Beam Suntory’s acquisition of On the Rocks Cocktails and Constellation’s acquisition of Gary Vaynerchuk’s D2C wine brand, Empathy Wines.
PwC analysis reveals steady, significant deal activity between 2016 and 2019, with an average of 43 annual global deals. The focus for acquirors during these years appeared to be on smaller brands, with 80% of reported deal value attributable to a scant 11 deals. While the pandemic slowed deal volume in much of 2020, volume did pick up by Q4: Of the 36 deals announced through December 31, 2020, a third occurred in Q4, signaling that deal volume is poised for growth in 2021.
M&A deals in spirits may be affected by multiple factors unique to the sector.
Market reach at speed requires advanced preparation: When acquiring or divesting brands in the alcoholic beverage industry, specific regulatory and commercial considerations will impact the buyer’s ability to immediately distribute the product. The following must be considered:
Whether a business is acquiring or divesting, brand inventory will impact Day One planning across finance and accounting, information technology, supply chain and logistics and overall go-to-market strategy.
In certain states (particularly control states), a deal’s close date may not coincide with the date on which the government liquor board recognizes a brand’s new owner. The notification period may extend up to 90 days after a deal’s close—while the seller continues to collect sales. As a buyer, your finance and accounting team will need a process in place to monitor sales until the brand is formally recognized by the state liquor board. This also may need to be addressed via the purchase agreement to ensure economics transfer and legal transfer align with the deal terms.
A successful deal requires continued communication with both internal and external stakeholders:
Brand tuck-ins vary widely. In fact, specific pitfalls exist in spirits deals, particularly those related to regulations, inventory and distributor relationships. To help close a successful deal while avoiding value dilution, employ a well-defined M&A playbook that encompasses all four considerations.