Republic of Ireland
From a macro perspective, key economic measurements appear to be improving in Ireland. The country is gently re-emerging from the shadows of recession and austerity and we believe the future trajectory is broadly positive rather than negative, albeit there may well be periods of volatility along the way.
In this financial year, our Irish business has seen volume and revenue growth for the first time in seven years with the Bulmers brand outperforming the wider LAD market. The Irish business was undoubtedly helped by a summer period of sustained warm weather although we are also starting to see the benefits of our acquisition of the Gleeson group and the impact of broader customer access.
Over the past 12 months, we have undertaken an initiative to combine our existing Republic of Ireland business with the Gleeson group to produce a single Irish business. We have consolidated our sales, marketing and distribution functions, and have combined and relocated the back office and finance functions for the new business to Belfast. At the front end, C&C now has direct access to around 7,000 on-trade outlets in the island of Ireland, from a total population of just under 10,000, as well as the ability to service all off-trade multiple and off-trade convenience stores. This will allow C&C to provide customers with a multi-beverage portfolio encompassing Bulmers, Tennent’s, AB InBev brands (for which we have the distribution rights in the Republic and Northern Ireland), Finches soft drinks, Tipperary water, as well as our owned wines and spirits brands and agency brands. The construction of a craft brewery at Clonmel will also allow us to harness the growing demand for local, Irish craft beers.
Ultimately, the ambition for our Irish business is to be the pre-eminent bonded wholesaler in the island of Ireland with enhanced customer service and geographic coverage such that we become the drinks supplier of choice to the licensed on and off-trade. This evolution in our Irish business model from a mono-branded FMCG company to a multi-beverage drinks producer and wholesaler brings stability to our earnings and cash flows whilst also positioning our Irish business with the opportunity to deliver moderate growth in what is ultimately an ex-growth alcoholic drinks market. The island of Ireland delivers approximately half of the Group’s profit and most of this converts to cash, explaining why we see the Irish business as one of the two domestic pillars of the overall Group.
C&C’s second domestic pillar is the Tennent’s business in Scotland which, with the investment in Wallaces Express, is moving in a similar strategic direction to the Irish business.
Economically, Scotland is outperforming the rest of Great Britain in terms of GDP growth, unemployment and consumer confidence. This makes Scotland an attractive market in which to trade and explains our continued investment behind the Tennent’s business. Investment in Scotland extends beyond Wallaces Express to include direct lending to the pub trade.
In the last 12 months, within the independent free trade our total beer volumes are up 13% and volumes of Magners are up 12%. This represents an outperformance versus the overall market. The strength of our brands in Scotland combined with our customer access have allowed us to successfully introduce new products such as Caledonia Best and Heverlee, a premium imported lager proposition from Leuven, Belgium. Caledonia Best grew by 37% over the past 12 months and it has quickly become Scotland’s third largest draught ale by volume from a standing start just over two years ago. Heverlee is now sold in 262 outlets throughout Scotland and Ireland with throughputs ahead of the market leading competitor.
During the year, we continued to invest behind our brands with sponsorship of Glasgow Celtic Football Club (Magners), Glasgow Rangers Football Club (Blackthorn), T-in-the-Park, Scottish Rugby (Caledonia Best) and Tennent’s Vital.
We will continue to develop and invest behind new brands and offerings. In particular, craft brewing in Scotland is in growth and we are investing over £1 million in Drygate Brewing Company, a craft brewing facility adjacent to Wellpark brewery. This will be a joint venture with Williams Bros Brewing Company, recognised as the leading family craft brewer in Scotland, and Drygate’s management team and will be operational in May 2014.
Over time and in line with our Irish business model, the post year-end acquisition of 100% ownership of Wallaces Express will enable C&C Group to offer a portfolio of drinks to on and off-trade customers including Tennent’s, Caledonia Best, Magners, Blackthorn, Heverlee, AB InBev brands for which we have the distribution rights as well as our owned wines and spirits brands and factored brands. In Scotland, there are approximately 10,000 pub licences and, as with Ireland, the independent free trade represents the majority of these licensees. This is a channel where we have dedicated significant financial and commercial resource because, plainly, it is an important part of the Scottish alcoholic drinks sector.
Our Scottish and Irish businesses deliver over three quarters of the Group’s earnings and cash. It is important that they are stable and well invested and we believe they are set-up for moderate revenue growth over the next few years.
Despite improving conditions in the UK and positive forward steps in terms of economic recovery, the beer and cider market continues to be extremely competitive.
Distribution in GB is highly consolidated with a small number of retail groups holding the majority of potential distribution points in the on and off-trade retail channels. This power of the retailers is compounded by the four global brewers fighting for share of distribution in one of the world’s most competitive beer and cider markets. Ultimately, this leads to commoditisation of brands at the distribution level.
The GB cider market was in slight growth in the financial year in both volume terms and value terms (Nielsen/CGA). The on and off-trade performed slightly differently. In the on-trade volumes were down by 2%, with standard draught cider making a partial comeback and pear down by 10%, whilst flavoured ciders grew by 19%. In the off-trade there was growth for flavoured ciders, which boosted year-on-year cider volumes by 5%.
Over the past two years, a number of major cider launches have impacted C&C’s position in GB. Ultimately, the Magners brand, having been the original ‘founder’ of premium over-ice cider ten years ago, remains in good health. The brand has been historically well invested relative to its peers and a fresh new TV campaign was launched in the spring of 2013. However, for reasons mentioned previously, whilst the brand’s distribution is broadly static, wholesale pricing is coming down.
Whilst Magners is our largest brand in the UK market, it has reached a point where the operating profit generated from Magners in other markets is higher than the operating profit generated from Magners in England and Wales, which accordingly has become much less relevant in terms of the Group’s total profit. That said, Magners is still our leading international cider brand and has strong awareness – we will continue to invest behind it.
When volumes and the top-line come under pressure, a company naturally focuses on its cost base. Consequently, we have right-sized our England and Wales business which now operates out of the Shepton Mallet cider mill in Somerset. Over the past 12 months, we established the Shepton Mallet Cider Mill division with a new management team and a collaborative sales and marketing set up with Green Light Brands. The division is focused on our craft, heritage English cider brands and in particular those from the West of England. Performance in the first year looks promising and is in line with internal expectations. Our Shepton Mallet business allows us to participate in niche areas of growth such as craft and speciality ciders and play in less competitive spaces such as premium strong cider with brands like K Cider. In addition we are making steady progress with Addlestones and the English craft portfolio and new product packaging development.
We will continue to focus on pockets of the market where sustainable value is clear and we can develop a profitable business, leveraging our English cider assets.
The International business unit has developed from being a business reporting losses five years ago, to a business generating €16.0 million operating profit over the last 12 months.
During the financial year, our business in the USA has probably experienced the greatest disruption as a consequence of business integration.
The steps towards integration were staggered based on what was most critical to continue operating. At the start of the financial year, the Magners operation based in Boston was closed and all order capture and back office functions were transferred to Vermont. This allowed the team in Vermont to immediately service wholesaler needs and orders for all of C&C’s US brands. The second step involved re-organising the sales structure to accommodate the combined sales forces from VHCC and Magners USA. Concurrently, our American team was busy deciding on the optimum distribution footprint for the entire country. VHCC already had national distribution and long-standing relationships with wholesalers all over the country. In addition, Magners (and latterly Hornsby’s) had their own separate distribution footprint albeit less developed. In some instances, there was overlap and consistency. In others, it was concluded that having the entire C&C cider portfolio under one wholesaler’s roof would be optimum. There were 50 instances where we have instigated wholesaler consolidation over the past 12 months. For the avoidance of doubt, this does not mean 50 states; there can be multiple wholesalers in a specific state. We believe that this is almost entirely complete now and we can focus 100% of our efforts on selling and marketing again after 12 months of disruption. We are very pleased with the quality of our distribution network and the commitment and passion of our partners towards our brands. Indeed, c.$15 million was paid out by incoming distributors to their predecessors to gain the brand rights, confirming real interest in the brands.
Whilst these internal business issues invariably caused us disruption, it is fair to say that the competitive threat from other cider entrants has been the strongest the team in Vermont has seen throughout their history as a company. For 10 years, Woodchuck has pioneered American craft cider. Innovation and authenticity have been VHCC’s key strengths, allowing the Woodchuck brand to prosper at both a retailer and consumer level. However, over the past 18 months, a number of large beer players have recognised the attractiveness of the cider category and a number of new brands have been invented, created and launched.
The two combined factors of integration and competition resulted in a challenging year for our brands in the USA, in particular Woodchuck. According to the US Beer Institute, the total cider category grew by 67% in the 12 months to December 2013. In our financial year, Woodchuck, Magners and Hornsby’s declined by 1%, 17% and 40% respectively. Whilst we are pleased to see that the US cider category is gaining genuine traction and our investment thesis remains valid in terms of cider internationalisation, we are clearly disappointed by the fact that we are not growing with the market.
This is something we will focus on over the next 12 months with the major hurdles of business integration under our belt. We will focus on a number of commercial and business initiatives to try and reverse these trends. In particular, we will open a new cidery during the course of 2014 in our hometown of Middlebury in the state of Vermont. The new cidery cements our position as a founder of American cider and affirms our commitment to craft cider making and investment in the future.
I should also highlight the fantastic contribution that Bret Williams has made to VHCC. Ten years ago, Bret pulled together all the money he had and raised further funds from close family and friends. Bret bought VHCC when it was losing money and turned it into a major success story of the US alcoholic drinks industry. For the past 10 years, Dan Rowell has been working closely alongside Bret as the Vice President of Operations and CFO. In February, Bret stepped down from the day-to-day operations of VHCC as CEO and President. Bret will remain involved with the company and will sit on our local US board of directors, alongside Dan Rowell, who replaces Bret and will take the company to the next level. I would like to thank Bret for his contribution during our ownership and wish Dan all the best with his future role.
Other export markets
In volume terms, our key international markets outside the USA are Spain, Australia, Canada and France. The business relies on strong distributor relationships and management of these relationships. We have limited exposure to areas of political instability and uncertainty.
During the financial year, in volume terms the Magners brand grew internationally (excluding the USA) by 13%, driven by growth in Canada of 27% and Australia of 8%. In January 2014, we transitioned distributors from Suntory in Australia to Bacardi Lion. It was felt that a partner with a stronger portfolio and draught experience would be required to share in the recent growth of the cider category in Australia. It is too early to remark on the results of this change although we are very positive about the Bacardi Lion organisation and a sales force which is considerably larger than our previous distributor.
Although small in terms of scale, Asia is worth mentioning. In the financial year, total C&C branded volume grew by 108%. From no volume last year, India became the fifth largest export market for C&C, driven by K Cider, one of our English ciders.
In terms of beer, we are now exporting Tennent’s, Caledonia Best, Heverlee, Tennent’s Stout and Tennent’s Beer aged in Whisky Oak. In Italy, our largest beer market, we experienced growth versus last year of 12%. Beer will be an area of focus over the next 12 to 18 months as we look to market abroad the history and heritage of our Scottish beers and the Wellpark brewery.