I. Given the industry environment and Suntory’s resources and capabilities, was the acquisition of Beam the right path to enter the global spirit market?
Overall, the industry enjoys high profit margins even as growth is declining in some markets. BRIC nations with their rising disposable income and favorable consumption habits in Asia offer opportunity to grow Beam Suntory revenues. Barriers to entry from regulations and capital intensity are both high making an acquisition of an established brand with distribution channels a more attractive option for Suntory versus building production from the ground up in different markets.
However, Suntory already has a rich history of creating high quality spirits so any new products, either from Suntory alone or in collaboration with Jim Beam, will benefit from this capability. Additionally, yen to dollar valuations could continue to make it possible for Suntory to leverage financial resources at low interest rates and use higher-value US dollar revenues to pay down debt making it possible to pursue other acquisitions later that grow their presence in the global spirits market. The threat of substitutes is high so having a broad range of products from unique bourbons and spirits to even more focused small batches allows Beam Suntory to compete across different price ranges and tastes.
The younger generation poses a challenge for the industry as they gravitate towards healthier beverages, or cannabis.
II. Was the high price paid for Beam worth it? Was there too much debt involved?
The level of debt was certainly a risk if they failed to achieve the economies of scale or realize revenues in their now expanded market reach. Much like Harley Davidson, the Jim Beam brand is well recognized in the US market and has a history that dates back to Prohibition. They were known for their small batch bourbons that were undiluted. In 2017 they were the number one selling bourbon globally and had a diverse portfolio of products from Maker’s Mark to a neon-colored liqueur sold in Canada.
Combined, this would make Beam Suntory the third largest spirits brand in a heavily consolidated industry. The Jim Beam brand was strong at the time and could justify the 25 percent premium. Some of Japan’s fiscal policies at the time made it advantageous for Suntory to acquire financing for an acquisition. A weakened yen and lower interest rates make it easy to borrow and then leverage their strong US dollar based revenues to pay down debt.
III. How should Beam Suntory resolve its cultural differences and accelerate the integration to realize potential synergies?
On the surface of the deal, it seemed the unique storied histories of each firm should have been a fit. However, those same traditional beliefs are difficult to change if each firm believes they confer inimitable advantage. A rival firm could create their own spirits or attempt to copy the recipe but it is more challenging to copy the many generations of heritage going back as far as the 1900s.
Communicating the ‘why’ behind questions or suggestions for improvement can ensure teams understand the justification and there is less of a culture war. Even if they disagree on the specific change, being able to articulate the other side’s reasoning could help to soften some of the culture wars and open the door for ideas to be proposed that combine their individual capabilities into synergistic combinations.
IV. How should Suntory approach Beam to achieve the optimal level of post-acquisition integration?
Thinking back to the value chain analysis framework, are there areas the firms could focus on in terms of achieving efficiencies that aren’t as tied to the history and heritage of how they make spirits? Have they looked at technologies for better tracking of ingredients, regardless of what mix of ingredients each uses in their products? Are there logistics frameworks that can better serve their global distribution goals and create better efficiency.
Focusing on operations cost centers where they can find agreement may help ease the sort of conflicts that come from efficiencies, like the water purifying suggestion, that directly impact a product’s recipe. Also, hiring a consulting firm experienced in post-acquisition integrations could provide change management support needed to ensure teams are part of the change and understand the change.
Communicating the ‘why’ behind questions or suggestions for improvement can ensure teams understand the justification and there is less of a culture war.
V. Going forward, what challenges is Suntory facing, and how should the company tackle them?
The younger generation poses a challenge for the industry as they gravitate towards healthier beverages, or cannabis. Low revenue growth as predicted by IBIS World remains a threat for the industry along with the high capital requirements for distilleries. Tariffs in certain markets like the EU could be impactful by driving up the price of imported whiskey for consumers. However, premiumization remains an opportunity if the two firms can continue to develop their collaborative skills to launch other joint products like their Legent bourbon. Jim Beam craft bourbons have also been popular and prompted a $60 million investment in 2019 to expand distillery capacity and increase production. More such collaborations and launches will strengthen their uniqueness and differentiation in the market.
