Taste for M&As in the beverage alcohol (BevAlc) sector has evolved with consumer preferences, which have drifted over the years constantly whether it is from international beer brands to craft beer or value spirits to premium spirits, or simply from alcoholic to low-/no-alcohol Better For You (BFY) drinks. Deal matchmakers have also had to find newer avenues to create tangible value – through mergers and acquisitions (M&As).
Simply put, the criteria for M&As has shifted from consolidation and trend incubation to strategically filling portfolio gaps and focusing on profitable growth. This is in response to the increasing volatility in the sector, where growth is getting limited to specific areas. Innovative BevAlc trends, often backed by celebrities, have driven rapid but short-lived surges in consumer demand.
As the outlook of M&As within BevAlc evolves, companies looking to make M&As accretive need to focus on five success factors: effective integration, preserving brand “magic,” identifying right growth areas, strategic product placement and leveraging supply chain synergies. Notably, Kearney research found that to maximize strategic and financial synergies from M&As, supply chain of individual companies has played an increasingly critical role far beyond what has traditionally been centered around cost take-out.
Changing Flavors of M&A in the BevAlc Sector
There has been a healthy but declining volume of M&As within BevAlc over the past 7-10 years. The industry has yet to reach the pre-pandemic highs in number and value of deals (in line with macro-economic turmoil), however, the average deal size has stayed relatively strong over the years. To better understand the evolution of M&As, we categorized the journey into three phases: Big Consolidation (pre 2018), Growth Incubation (2018 – 2022) and Cherry Picking (2022 onwards).
The first phase, Big Consolidation, spanned the early 2010s until 2017. During this period, M&As were large scale, focusing on increasing market presence, expanding geographies and gaining substantial economies of scale. Notable deals included:
- Suntory’s acquisition of Beam in 2014, which created the world’s third biggest premium spirits company and granted Suntory access to the American consumer
- AB InBev’s acquisition of SABMiller
- Bacardi’s acquisition of Patron
This era marked sector consolidation, reduced competition and formed beverage giants with a strong global presence.
Post 2017, the Incubating Growth phase emerged, characterized by a test and learn approach to M&As. Larger companies, partially driven by lower interest rates and capital availability, began incubating and nurturing smaller, promising brands to align with growth trends. Players such as Pernod Ricard, Suntory Global Spirits and Diageo strategically expand their portfolios to capitalize on trends like RTDs, embracing high-potential brands like Skrewball and Casamigos to leverage their experience for growth.
While aggressive growth was a main driver in the past, M&A transactions in recent times, the Cherry Picking phase, indicate a trend of refining portfolios, plugging strategic gaps and driving profitable growth. Refining the portfolio has meant both adding complementary products across price points or product categories (e.g. Constellation & Domain Curry) and shedding underperforming product segments (e.g., AB Inbev’s craft brewery sell off) to focus on the core. Additionally, recent deals such as Constellation & Sea Smoke, TWE & DAOU, Kirin & B9 and Asahi & Octopi reflect premiumization and strategic market entry to foster profitable growth.
Creating Value in the BevAlc Sector Through M&As
As we look at different phases of BevAlc M&As, it is important to crystallize how value gets created. On one hand, large players have sought to accelerate their competitive advantage, whether it be expanding market share in previously untapped regions, capitalizing on newer product segments absent in their portfolio or staying ahead of omnichannel consumer needs.
On the other hand, these companies have looked to continue to drive greater shareholder value from deals, centered around productive growth, increased core focus and lower end-to-end costs.
To this end, Kearney has developed a framework to understand M&A value in BevAlc. Total value can be categorized into two main sources: Strategic and Financial, which can be further broken down into more granular components. Figure 2 below illustrates the M&A value framework.
Strategic Value and Financial Value
Strategic value, often realized through increased sales, typically materializes within 1-2 years post-deal as companies capitalize on existing processes and relationships. In contrast, financial value — particularly cost-to-serve synergies — emerges over a longer period of 2-4 years, due to integration and transformation efforts necessary to create efficiencies.
Strategic and financial value avenues should not be viewed as mutually exclusive; they often coexist and collectively create a business case. However, strategic value offers an additional competitive advantage beyond economic desirability. M&A value was anchored around market access and cost-to-serve synergies, but recent deals are increasingly focusing on additional value from portfolio rounding, speed to market and profitable growth.
Our research indicates that a linchpin to harnessing maximum value from BevAlc M&A deals is the supply chain of individual companies. The supply chain’s contribution to overall M&A value has elevated, becoming a permanent fixture in value creation. During the “Big Consolidation” phase, the supply chain was largely viewed through a cost reduction lens, focused on lowering expenses in procurement, manufacturing and distribution to fund growth initiatives and enhance shareholder value. At that time, the supply chain was of interest primarily to operations executives looking to streamline costs.
However, well into “Incubating Growth” and the recent “Cherry Picking” phases, the supply chain has emerged as a pivotal driver of value across both financial and strategic dimensions. Today, a broader array of stakeholders, including c-suite executives, commercial and financial teams, recognize the supply chain’s potential as a cornerstone of competitive advantage to generate larger synergies.
Our analysis reveals that the supply chain now contributes to at least a 5-10% increase in overall M&A value compared to prior deal phases. Moreover, while the supply chain’s impact on financial value remains predominant, its role in driving increased strategic value has noticeably expanded, now influencing a broader spectrum of value creation.
This shift is predominantly due to companies’ ability to address their strategic gaps through an efficient, responsive and agile supply chain — one that can sense consumer trends, enable enhanced consumer engagement and service levels, accelerate customer fulfillment, leverage existing assets for scale, and optimize labor-intensive processes.
Notably, the supply chain’s role has expanded to uncover previously untapped value across four critical areas: Speed to Market, Market & Customer Access, Portfolio Rounding and Profitable Growth.
- Speed to Market. Segmented fulfillment capabilities for traditional and omnichannel customers through right assets, inventory deployment and delivery partnerships combined with appropriate consumer insights improves product’s speed to customer. For instance, Diageo’s investments in D2C assets enables efficiency and agility for its acquisitions like Aviation Gin. Similarly, Treasury Wines will look to access the vast online consumers of DAOU, through the DAOU+ platform.
- Market & Customer Access. Having the right physical assets, like warehouses and complementary processes to scale operations, can integrate new distribution partners, unlock additional PoDs and bring in new customers. Scaling D’Ussé (Jay-Z backed Cognac brand) to the U.S. or Suntory to Japan exhibits Bacardi and Suntory’s robust supply chain capabilities.
- Portfolio Rounding. An agile supply chain responds to portfolio innovations and extensions by leveraging existing relationships and infrastructure to efficiently source raw materials, streamline production, swiftly cycle product across the value chain and precisely place them at points of consumption. For example, E&J Gallo acquired and expanded variants of RTD brands to broaden their portfolio. Similarly, Kirin’s investment in New Belgium Brewing not only expanded their craft beer portfolio, but also helped Kirin to bring the production of its beer in-house from ABInbev.
- Profitable Growth. A superior digital supply chain features a holistic approach to forecasting and is aligned with sales, marketing, distribution, retailers and e-commerce. When complemented with consumer behavior data, this supply chain can inform strategic decisions around product mix and inventory placement, ultimately boosting sales, margin and marketing effectiveness. To illustrate, as major companies like Diageo, Pernod Ricard and Bacardi continue to invest in digital solutions — such as flavor printing, sales effectiveness and price elasticity prediction — they will look to integrate their start-ups into these platforms to boost profitable growth.
Outlook & Success of M&As in the BevAlc Sector
Looking forward, we see four key factors that will shape M&As in the BevAlc sector. First, M&A activity will align with consumer trends, gliding from premiumization to alternate formats (RTDs) and Better-For-You drinks. Second, macro-economic trends, such as interest rates and geopolitical tensions will influence deals and exits. Third, large players will aggressively pursue strategic deals with startups to elevate capabilities and fill portfolio gaps. Finally, companies will chase financial synergies, so expect more carve-outs and consolidation to sharpen portfolio focus and revitalize brands.
Now, just one question is left: What should executives do to ensure their M&As are accretive? Our analysis uncovers five success themes:
- Effective Integration. Conduct thorough diligence to evaluate end-to-end value chain integration and address gaps early to prevent mishaps like Blue Button Distillery’s divestiture from Constellation Brands.
- Preserving Brand “Magic.” Identify and retain what resonates with consumers from individual brands. Individual brands “should not be killed” at the cost of synergies and ROI, like Anchor Steam.
- Identifying Growth Areas. Methodically scale acquired brands to new markets based on capabilities, competition and demand to avoid setbacks and eventual fallout like Lagunitas and Anchor Steam.
- Strategic Product Placement. Strategically cross-/up-sell individual brands in new markets and channels to maximize returns. Not every product, premium wine and craft beer is suitable for all points of sale.
- Leveraging Supply Chain Synergies. Use individual external relationships as well as internal assets and capabilities to rationalize processes, assets and organization. Similarly to the way Bacardi & Patron and TWE & DAOU did, this can help create a streamlined operation, navigate complex regulations and generate synergies.
M&As can be a powerful tool to navigate a complex BevAlc sector to craft a perfect cocktail, shaken or stirred, so long as the ingredients are expertly used and combined.
Authors:
Arun Kochar, Partner, Kearney
Greg Portell, Partner, Kearney
Jesse Chafin, Partner, Kearney
Nandan Katte, Manager, Kearney
Dhaval Mishra, Manager, Kearney
Prateek Nadkarni, Associate, Kearney
