UK FMCG Market Analysis: Arts Alliance acquiring Lambs Rum - Case Study Example

UK F.M.C.G Market Analysis – Arts Alliance acquiring Lamb’s Rum

Introduction

Arts Alliance is a London based venture capitalist that invests in the early stages of businesses of varied sectors ranging from technology to retail (Arts Alliance, 2016). Currently, they are planning to acquire Alfred Lamb’s Rum from Allied Domecq. Alfred Lamb’s, an alcohol producer and seller of Canada, is famous all over the United Kingdom and outside for the smoothness and fineness of the Rum they produce (Lamb’s Rum, 2016). In the present scenario, Lamb’s Rum is facing issues related to market penetration and sales. With the help of Arts Alliance the company can gain a better position.

Before acquiring Lamb’s Rum, the investors of Arts Alliance should consider the current market conditions and trends of the UK based FMCG market. This is because they need to calculate their Return on Investment and plan their promotional program accordingly. The paper aims at assessing the UK FMCG market, especially the alcohol market so as to aid Arts Alliance in their investment decision.

UK Alcohol Retailing Analysis

The alcohol industry mainly derives its definition from the corporations engaged in production and sales of the beverage (Jernigan, 2009). The major participants industry comprise of the suppliers, producers, distributers and wholesalers, vendors and contractors (IAS, 2016) employing approximately 512,000 jobs, 69% of which depend directly on the activity of the market (WSTA, 2014). The following figure describes the value chain of the UK alcohol retail market:

Figure 1: Value chain of UK based alcohol retail market

(Source: IAS, 2016)

Vendors working in these markets consists of both on-license vendors like clubs, pubs and restaurants and off-license vendors like shops and supermarkets that sell all alcohols including wines, spirits and ready-to-drink beverages (IAS, 2016). The alcohol industry of the United Kingdom comprises mainly of the beverages like Vodka, Whisky, Flavoured Spirits, Gin or Genever, Rum, Brandy like Tequila, Cane and National Spirits (O'Brien and Kypri, 2008). The following figure describes the market share acquired by each form of alcohol independently all over the United Kingdom:

Figure 2: Market Share of alcohol in the UK

(Source: WSTA, 2014)

A majority of the ready-to-drink market is owned on lease by the distributors and distillers of the retailers selling spirits. The strength of the market is decided mainly by that of the beverage by volume. The minimum alcohol-by-volume remains around 15% and the general level of alcohol-by-volume is around 37.5% (Anderson, Suhrcke and Brookes, 2012; Wilson, 2016). Beverages forming the basic units of the United Kingdom based retail market of alcohol are produced by world famous manufacturers including Foster’s (beer), Hardy’s (wine), Strongbow (cider), Grouse (whisky), etc. (Wilson, 2016). The table below summarises the top ten United Kingdom based brands of alcohol:

Table1: Top 10 UK brands of alcohol

(Source: Wilson, 2016)

Apart from selling alcohols produced in their own country, the vendors of the United Kingdom also import alcohols from the major suppliers of the world. They have been observed to import alcohol from the companies producing in Australia, Italy, France and the United States.

As a result, the average household consumption of alcohol came up to £350 at Retail Sales Price in 2015 in the UK. Among all kinds of alcoholic drinks, the expenditure on consumption of beer was the maximum followed by wine, cider and perry. The least expenditure on consumption has been observed in case of spirited drinks (Key note, 2016).

Taking only the consumption of Rum into consideration, it has also been observed by the researchers of Key Note that the value based on current prices of the retail market has increased from a level of £500m at Retail Sales Price in 2011 to £590m at Retail Sales Price in 2015 (Key note, 2016). The growth of the United Kingdom based alcohol industry can be observed with the help of the rate of sales of the beverage. Increased sales value infers increased customer interest in alcohol (Bakke and Endal, 2010). The following figure shows the increase in consumer sales of alcohol in the United Kingdom:

Figure 3: Growth in popularity of rum among its customers

(Source: Key note, 2016)

Among the famous Rum producers and sellers of the United Kingdom, there exists brands like Wiser’s, Polar Ice, Lamb’s, McGuiness and Pike Creek. All these brands are consumed within the UK as well as are exported to foreign consumers (Corby, 2013). The figures below show the ratio position of Lamb’s Rum with respect to customers, both within and outside the UK, in comparison to the other brands:

Table 2: Popularity of Lamb’s Rum in and outside the UK

(Source: Author’s Creation)

Figure 4: Ratio of Lamb’s Rum’s popularity among the UK Retail Market

(Source: Author’s Creation)

From the above figures, it is quite clear that Lamb’s Rum enjoys much popularity among its customers, residing both in the United Kingdom as well as outside the country. Also, it can be commented from the ratios thus shown by the study, highlights that the Lamb’s Rum has to face healthy competition from brands like Wiser’s, Polar Ice and Mc Guiness.

Trends Analysis

Trend analysis of any particular aspect of a sector refers to a form of technical analysis that is undertaken by the analysers with an aim of predicting the future movement of any industry with relation to past information (Partal and Kahya, 2006). The general industry trends of a particular market can be evaluated with the help of a number of indices, the most important of which is the Consumer Confidence Index (CCI) (The Conference Board, 2011). It is an indicator that points out the level of consumer confidence enjoyed by a particular economy. This indicator expresses the level of optimisation of a consumer that he or she has on the economic condition of the nation. This optimisation is expressed indirectly through their activities of spending and saving money for the future (The Conference Board, 2011).

As per the global consumer confidence index of Nielson, out of ten top economies of the world, the five economies that enjoy optimistic scores of 100 or above include India (133), the United States (106), the United Kingdom (106), China (106) and Germany (100) (Nielson, 2016). The following figure shows the worldwide score of economies on the Consumer Confidence Index:

Figure 5: Consumer Confidence Index score of worldwide economies

(Source: Case, 2016; Nielson, 2016)

As a result of the above mentioned CCI score, it is observed by the researchers of Deloitte that though there exists headwinds in the country in terms of a broad geopolitical uncertainty and risk associated with foreign exchange, positive signs are evident in terms of activity growth. Therefore, it is expected that global investments will not lose their interest in investing on industries of the United Kingdom (Deloitte, 2015). It has also been observed by the researchers of Deloitte that in 2014, the economy of UK had experienced a growth of 2.6%, which is close to the score of 2007 (3%). As a result, the national inflation can be expected to have overtaken by the country, for the first time after 2010 (Deloitte, 2015). In addition to it, the study has shown a steady growth in unrestricted income of the citizens of the United Kingdom that has helped them to gain confidence on the country’s economic development in the long course. This fact can be proved with the help of the following graph of the ‘UK GfK Major Purchases Index’:

Figure 6: Report of UK GfK Major Purchases Index showing climate for major investments

(Source: Deloitte, 2015)

From the total income, 22% money is spent on beverages that comprise wine, spirits and alcoholic drinks when compared with technology and household items (PwC, 2014; The Connected Shopper, 2014). This can be clearly observed from the data given in the following figure.

Figure 7: Categories in which money is spent by the worldwide earning population

(Source: Connected Shopper, 2014)

Based on the research done by the researchers and market analysts of Nielson, PwC and other major organisations, it can be observed that the main value drivers of the alcohol industry of the United Kingdom are per unit price of the drink, units of drink consumed on every major occasions, number of occasions celebrated by each buyer and finally by the rate of market penetration of the drink (Jahiel and Babor, 2007). Apart from these, household purchase and consumer loyalty also act as important factors of sales and gain or loss. The role of each of the sources has been described in the following figure:

Figure 8: Contribution of different factors in deciding gain or loss of a vendor

(Source: Case Study, 2016)

It has been observed from the behaviour of the consumers that when alcoholic drinks are compared with all other spirit beverages, people tend to consume more of it. As per a study of Key Note, it can be observed that a particular consumer purchased spirits of £10,000 at Retail Sales Price in 2011 and purchased alcohol of approximately £42,000 at Retail Sales Price in the same year (Key Note, 2016). This value has gradually increased every year, thus, denoting overall growth of the alcohol market of the United Kingdom. The following figure shows the growth of the United Kingdom based alcohol retail market:

Figure 9: Growth of sales of alcohol in the retail market of the UK

(Source: Keynote, 2016)

Besides the above observation, it has also been detected by the analysers that a significant growth has been experienced by the overall retail market of alcohol in the United Kingdom during the period of 2014-15 (Wilson, 2016). The figure below shows the sales volume of alcohol at key retail price points of the mentioned financial year:

Figure 10: Sales volume at key retail price points at the UK

(Source: Wilson, 2016)

Apart from retail sales of alcohol in the market of the United Kingdom, the researchers of Keynote has also observed that there has been a significant growth in of the beverage in the household environments too. From a trend analysis report of the period 2011 to 2015, the growth of household consumption of almost all kinds of alcohols like beer, spirits, wine, cider and perry has been observed to be gradually increasing, the maximum consumption being for beer, wine, cider and perry.

Figure 11: Retail UK market growth of alcohol based on household consumption

(Source: Key note, 2016)

The growth of sales and consumption of alcohol is opined, by the scholarly analysist of the world, to be dependent on a number of drivers. Value of all the drivers vary with time. It has been observed that in the first quarter of 2014, the number of occasions attended by each buyer resulted in the decline of the rum market by almost 150,000 units while this same driver brought progress in the industry in the second quarter of the same year (Case Study, 2016). Again, market penetration was highest during the first quarter of 2015 while it was negative in the last quarter of the same year. A more elaborate explanation of the role of these key drivers have been provided in the following figure:

Figure 12: Role of key market drivers in growth/decline of consumer purchase metrics

(Source: Case Study, 2016)

Therefore, it can be stated that the gain or loss of a particular manufacturer and seller of rum in the United Kingdom retail market depends upon value of the product (leading to market penetration), consumers’ preference of brands (leading to specific repertoire), and consumers’ varying buying capacity (leading to varying weight of purchase) and shifting of customers from one brand to another (Case Study, 2016). In addition to it, the availability and consumption of alcohol in the retail market of the United Kingdom also depends upon the quantity of alcohol imported from Australia, Italy, France and the United States. Trends show that this process of import and sales has been gradually gaining popularity when observed during a period of eighteen years, from 1998, when the first barrel of wine was imported to the UK till 2015 (Wilson, 2016). The following figure describes the trend of this process:

Figure 13: Import of wine from famous producers

(Source: Wilson, 2016)

Taking into consideration the value drivers of the alcohol market, the gain and loss of the vendors can be assessed. The following figure gives an idea of the above mentioned value sources particularly in case of golden rum:

Figure 14: Contribution of value sources in the gain/loss of Golden Rum sellers

(Source: Case Study, 2016)

From the above studies, it is clear that the business of manufacturing and selling rum in the UK retail market leads to lesser chances of loss when compared to other forms of alcohol like beer, blends, cognac, spec drinks, ready-to-drink beverages, etc. (Case Study, 2016) Moreover, the trend of alcohol consumption has been observed to be maintaining a steady expenditure since 2014, as shown below:

Figure 15: Alcohol consumption by the UK market

(Source: Statista, 2016)

As a result of the above trend analysis, it can be concluded that to invest in this particular business model will be a correct decision for Arts Alliance.

Recommendation

By acquiring and investing on Lamb’s Rum from Allied Domecq, Arts Alliance definitely aims at maximising its Return on Investment. For this, the authorities of Arts Alliance should take into consideration the intangible resources of Alfred Lamb’s, like that of goodwill, brand value, customer loyalty, etc. while avoiding the negative features of the brand. Alfred Lamb’s has a good brand image both in and outside the United Kingdom along with a strong customer base and public relations, therefore gaining the no. 1 position in the UK based dark rum market. Arts Alliance should take the advantage of it while promoting for the campaign. Also, Lamb’s Rum claim to prepare their drinks with genuine Demerara rum, hence carrying a mellowed smooth flavour in every bottle. This feature of the brand should be considered by Arts Alliance, while promoting their acquisition campaign for strengthening the customer base of Alfred Lamb’s as well as stepping into the alcohol market thus diversifying their own brand all over the world.

Conclusion

Arts Alliance, a body of investors that acquire companies at such a stage when there arises problems in the organisations and added funding is required. Alfred Lamb’s is famous all over the United Kingdom and outside for the smoothness and fineness of Rum, they manufacture (Lamb’s Rum, 2016). Currently, the company is funded by Allied Domecq from whom Arts Alliance has aimed to purchase Alfred Lamb’s. This decision can prove to be a very profitable one for the company. This is because the UK based alcohol industry has shown a steady growth in the last few years. Also, the economic condition of the UK shows that the country will prove to be a productive one as far as the ‘UK GfK Major Purchases Index’ is concerned. Therefore, it can be suggested that it is the best time for Arts Alliance to invest on Lamb’s Rum.

Reference List

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