Rabobank analyst Stephen Rannekleiv said: “The spirits sector has been under intense pressure as a result of the global recession, forcing companies to alter their strategies.”

“In light of these changes, Western spirit companies have often been forced to choose between sacrificing margins or sacrificing sales volumes. What we have seen from this study is that focusing on maintaining margins was generally a more effective method for creating value. Additionally, the study also finds that acquisitions are generally value accretive, although returns may be weighed down in the near term,” he said.

The Dutch bank’s latest report focuses on 21 spirits companies with minimum annual revenue of EUR 50 million, looking at the evolution of their returns (operating profit) relative to total assets, referred to as return on assets (ROA).

It maintains whether looking at the group as a whole or at subsets of similar companies, the evidence points to a similar conclusion: driving improvements in EBIT has been a more effective strategy for creating value than driving improvements in asset turnover, even if some sacrifice in asset turnover is required. Pricing pressure on spirits suppliers remains intensive within the EU, but aggressive price reductions and discounting to maintain volumes and market share appear to be counter-productive to creating real value.

Rannekleiv said  some companies a focus on margin growth may be difficult to achieve. Small companies with brands focused on categories that are in decline (e.g. brandy, bitters, etc) may find it difficult to push for margin growth on an organic basis and may need to look to acquisitions of stronger brands with better margins to improve their portfolios.

He says acquisitions themselves appear to have been generally value accretive for the acquirers, but only over the long term. In the near term, heavy asset levels on the balance sheets of potential acquirers pose a tangible challenge to profitability. Many companies that have made significant acquisitions in recent years, such as Pernod Ricard, have ROAs that significantly lag their peers. Nevertheless, the research indicates that while acquisitions may reduce profitability in the short term, they will generally leave companies better positioned to generate greater value in the future