Philip Duff – Global drinks business part II

This article featured in the December issue of Australian Bartender magazine.

By Philip Duff
After Sydney BarShow Week Philip went on to speak at San Francisco Cocktail Week, Art of the Cocktail (Canada), Bar Convent Berlin and Portland Cocktail Week. He is now hibernating in a cave with an IV drip full of nutrients and headphones playing soothing whale music. philip@liquidsolutions.org

The Real Money is in International Brands

* The figures that Philip is referring to below come from Drinks International’s Top 50 Spirits & Wine Brands by Value research published March, 2011. drinksint.com

If you rate a brand the same way that you calculate a credit rating for a company, all the usual suspects; Johnnie Walker, Bacardi, Chivas Regal etc are present in the Top Ten – and all are globally distributed. If you crunch the numbers a little bit more however the story gets even more interesting: dividing a top brand’s case sales by it’s brand value gives a brand-value-per-case-sold and teaches us that the world’s most lucrative spirit is Glenfiddich.

They built a brand value of $275million on the back of just 700,000 cases a year of the familiar triangular bottle. Interestingly is that spots nine and ten are taken by baijiu brands – Drinks International noted their inclusion ‘as a couple of surprises’ – who have managed to crack the puzzle of being both mega best-selling and premium-priced products.

No-One’s Getting Rich

*AUD amounts have been converted from supplied EUR amounts using xe.com

We all know liquor is not that expensive to make, but did you know exactly how not-expensive it is? Let’s lift the veil and investigate just what the cost is of producing one 700ml bottle of un-aged spirit actually is. Grain alcohol comes in under $1AUD (grape alcohol is 30%-50% more), a standard bottle (satin finish with silkscreen label and window) is a tick over$1.66 and the screwcap, bottling, case and divider sit around $1.12: total per bottle less than 4000 cases is about $3.70, and drops to $2.80 for more than 4000 cases.

Now, I know you’re thinking back to that great training session with the kindly-faced master distiller who patiently explained that their ‘special strain’ of wheat, type of grapes, breed of potatoes etc cost up to eight times more than most types. But that was balls. Grapes, grain and potatoes are commodities, traded in one of the world’s most open and transparent markets. They are cheap to buy, cheap to ferment, and cheap to distil. Reducing cost-of-goods is a religion in any business. In the above example, reducing bottling costs by just 10 cents per bottle would result in a million dollar savings for a million-case brand without affecting quality or image.

Bottling Blues…what happens when it’s bottled.

In the above example, the bottle has yet to leave the distillery (or, to be correct, the bottling plant), so let’s see what happens when it does. Let’s say the cost of producing our one bottle of un-aged spirit is around $3.13AUD, what’s the ‘value chain’ of one 700ml bottle of un-aged spirit? Including; production costs, producer’s profit, marketer’s profit, distribution costs, distributor’s profit and retailer’s profit (given at 30%) the cost to a consumer in a liquor store is around $28.20. For a consumer in a bar the cost is raised to around $118 (with the bar’s profit given at 83%).

Speaking as a bar owner, I can confirm that an 83% gross profit will not have you buying your Mercedes just yet. Bars need to hit a 75% gross profit margin to make any money at all and usually, at the end of the year, less than 10% is left over when everyone has been paid including the taxman. That 75% GP target is for the entire beverage program not just un-aged spirits. Many items such as more expensive wines and spirits and cocktails featuring expensive, obscure spirits, are sold for less than a 75% margin. This is to exude cachet, inflate cash-flow and offer a wider range of products for the discerning guest.

A bar that turns over $675,000AUD a year is lucky if they have $67,000 left over at the end of the year. Usually this figure is substantially less as ‘unplanned’ expenses like; air-conditioning, repairing and replacing machinery and maintaining and refurbishing the interior have to be taken into account. Paying more than $20AUD for a bottle essentially means that you’re financing that brand’s advertising and promotions (A&P) budget, or perhaps helping pay for an especially ‘blinging’ bottle.

And so we have it: the only way to make decent money in the drinks business – whether you distil it, sell it, wholesale it or serve it to customers or guests – is to be an absolutely penny-pinching maniac, earn modest margins, expand your business so you have economies of scale and tell a nice story about a fine product in an attractive bottle, sold for the right price and in the right way, to anyone who’ll listen.

Marketing. It makes our world go round.