M&A breathes new life into brand portfolios for spirits companies

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.

Sheltering in place with new brands

Tuck-in deals flourish

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.

After the 2020 slowdown, deal value set to pick up in 2021

Spirits deals: Four considerations

M&A deals in spirits may be affected by multiple factors unique to the sector. 

1. Prepare in advance for rapid market reach

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:

  • Open states: Least restrictive of the states (e.g., California); the government does not intervene with liquor distribution but does still require brand registrations.
  • Control states: Regions in which state governments control and profit from liquor distribution, and only allow quarterly price changes. Idaho and Oregon, for example, have long lead times.
  • Franchise states: States in which distributors have assigned territories and own the distribution rights to brands (e.g., Georgia). If the buyer’s distributor is misaligned with the seller’s, there are change considerations to keep in mind (i.e., setting precedence, potential brand trades).
  • Price posting states: States that require suppliers to post prices every month. (e.g., New York and Massachusetts). Oklahoma has a longer lead time (approximately 45 days).

2. Physical inventory varies in both product life cycle and route to market

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.

  • Aging liquid (e.g., whiskey or wine in barrels): These products may require commercial production or warehousing agreements between buyer and seller to keep inventory in place and allow for the aging process to conclude before bottling and sale.
  • Production / Distribution warehouses: Deals may require providing temporary access to the seller’s warehouse management systems and customer relationships, supported by physical inventory counts near closing. Distributor changes require close monitoring to avoid conflicts during inventory wind-down or ramp-up processes, and for maintaining relationships with retained brands.
  • Bailment inventory (i.e., at state warehouse): Inventory is typically managed independently by brands and may require new inventory management processes as states draw down for store replenishment.
  • Bonded inventory: Inventory in designated warehouses specifically dedicated to international or airlines sales may require standalone or updated controls and support systems to manage against triggering import and export tax penalties.
  • Committed inventory: Distributors often make annual commitments on volume and may require advanced communications and coordination if buyers are planning to discontinue certain products.
  • Working capital: Growth brands require growth capital, not only in the form of readily available inventory, but also a supply chain and an order-to-pay system to fund that growth. Investment needs to be factored into the deal.

3. Deal close dates may differ by state

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.

4. Communication is essential

A successful deal requires continued communication with both internal and external stakeholders:

External stakeholders

Internal stakeholders

  • The street: Make sure your investor communications and public-relations outreach highlight the deal’s positive impact on your broader company strategy.
  • States and liquor boards: Be aware that brand registration and price change deadlines are important for a successful commercial (re-)launch.
  • Suppliers: Support your suppliers by clarifying changes to purchase orders, payment processes and supply chain and logistics. 
  • Customers: Consider how the deal may change your overall customer service strategy.
  • Consumers: Brand ownership is not always perceivable by the consumer, but being aware of the relationship between brand and consumer, and the importance of that perception, is critical to preserving and leveraging the acquired brand equity.
  • Company-wide: Confirm that leadership outlines the deal-specific strategy in the context of your long-term vision.
  • Sales team: Clarify account coverage, brand awareness and sales incentive plans in advance.
  • Employees: Plan ahead for employee retention decisions and onboarding. Develop strategies to align the cultures of your company and your newly acquired brand.

Looking ahead

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.

Contact us

Michael Giguere

Principal, PwC US

John D. Potter

Deals Clients & Markets Leader, PwC US

Emre Sucu

Partner, PwC US

Steven Treppo

Partner, Strategy& US

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