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Competing with Multinationals: Strategies of the Portuguese Alcohol Industry

Published online by Cambridge University Press:  13 December 2011

Teresa da Silva Lopes
Teresa da Silva Lopes
Affiliation:
TERESA DA SILVA LOPESN is senior lecturer in international business at Queen Mary, University of London.
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Abstract

This study looks at the formation of multinationals and relates that process to the emergence of institutions favorable to economic growth. It compares the development of such institutions from 1960 in four European countries: the United Kingdom, France, the Netherlands, and Portugal. The focus of the study is a global industry—alcoholic beverages—in which brands, marketing knowledge, and distribution channels have been critical. In order to understand why some nations succeed in developing multinationals and others do not, different views of the determinants of national wealth, such as trade, institutions and organizations, and corporate governance, are examined. Whereas three of the countries developed leading multinationals in alcoholic beverages, Portugal did not succeed in doing so. The study concludes that, in marketingbased industries, both the type of product and the institutional environment influence the ability of firms to become leading multinationals.

Type
Special Section: Networks in the Trade of Alcohol
Information
Business History Review , Volume 79 , Issue 3 , Autumn 2005 , pp. 559 - 585
Copyright
Copyright © The President and Fellows of Harvard College 2005

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References

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2 See, for example, Fortune 2004 Global (July 2004). While a similar situation applies to Portuguese multinationals from other industries, the alcoholic-beverage industry was historically very important. Hence the argument presented here helps explain why even the leading industries in countries may fail to develop multinationals.

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20 It is estimated that in 1950 the proportion of the GDP was still 4 percent, although by the end of the 1970s, that figure had decreased to 0.5 percent, mainly as a result of the development of other industries that incorporated higher levels of technology. See Girão, José António, Natureza do Problema Agrícola em Portugal, 1950–73 (Oeiras, 1980)Google Scholar. During the decade from 1960 to 1969, Portugal, with a consumption level of 12.58 liters of pure alcohol, was the world's third largest per capita consumer of alcoholic beverages after France and Italy. During the 1990s, it kept its position in the world rankings, after Luxembourg and France, with a per capita consumption of 10.93 liters of pure alcohol. Numbers were calculated using data from World Advertising Research Center, World Drink Trends (Henley-on-Thames, 2000)Google Scholar.

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26 See the article in this issue by Paul Duguid, entitled “Networks and Knowledge: The Origins and End of the Port Commodity Chain, 1703–1860.”

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28 Unwin, Wine and the Vine.

29 Pernod Ricard was one leading firm that followed this type of strategy through the acquisition in 1989 of the Australian wine Jacob's Creek, which also had important distribution operations. Interview with Thierry Jacquillat, former CEO of Pernod Ricard (London, 20 Jan. 2004).

30 The fact that Portugal was a corporatist state from 1933 until 1974 also had an impact. Corporatism proclaimed as superior a system of professional and occupational groups and bodies (corporations) that would promote cooperation and harmony between capital and labor. Bastien, Carlos and Cardoso, José Luís, “Corporatism and the Theory of the Firm: Lessons from the Portuguese Experience,” Journal of the History of Economic Thought 26 (2004): 197–219CrossRefGoogle Scholar.

31 Office International de la Vigne e du Vin (2004).

32 World Advertising Research Center, World Drink Trends.

33 See, for example, the case of Heineken. Jacobs, M. G. P. A. and Mass, W. H. G., Heineken History (Amsterdam, 1992), ch. 6Google Scholar.

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36 There were, however, many Portuguese-based firms set up with British capital, which had wholly owned distribution channels abroad. An example is Sobral & Pinto. Duguid, Paul and Silva Lopes, Teresa da, “Institutions and Organizations in the Port-Wine Trade, 1814–1834,” Scandinavian Economic History Review 47 (1999): 84–102CrossRefGoogle Scholar.

37 See, for example, Ramos Pinto, which dominated the Brazilian port market from the late nineteenth century until the 1930s. Since then, the barriers created to imports (as a way to protect domestic production) and the expanded production of other domestic alcoholic beverages made of various fruits and beer—which had low alcohol content, were better adapted to the requirements of consumers living in tropical climates, and were cheaper—led to the collapse of trade in this market. Pereira, Gaspar Martins, O Douro e o Vinho do Porto de Pombal a João Franco (Porto, 1991)Google Scholar; Silva Lopes, Teresa da, “Os mercados do vinho do Porto,” in Pereira, , ed., 0 Vinho do Porto; José Augusto França, Adriano Ramos Pinto, 1880–1980 (Ramos Pinto, 1987)Google Scholar.

38 For instance, between 1960 and 1964 roughly 26 percent of Portuguese wines were exported (this figure does not include sales to the former Portuguese colonies). In 2002, table wines made up 22 percent of Portuguese wine exports and port comprised 84 percent. Institute Nacional de Estatística, “Estatíscas de Vendas e Comércio Externo,” 2003; World Advertising Research Center, World Drink Trends (2005); Institute to Vinhos do Douroe do Porto, “Estrutura da Comercialização de Vinho do Porto por Mercados,” 2005.

39 Hurst, Wendy, Ed Gregory, , and Gussman, Thomas, Alcoholic Beverages: Taxation and Control Policies (Ottawa, 1997)Google Scholar.

40 It lowered the duties on wine and expanded the sale of alcoholic beverages through retail outlets. Gladstone's cuts were, however, very much in response to the Anglo-French Treaty of 1860 and were designed to encourage free trade. Unwin, Wine and the Vine; McGowan, Richard, Government Regulation of the Alcohol Industry (London, 1997)Google Scholar.

41 Moreira, Vital, O Governo de Baco (Porto, 1998)Google Scholar; Schneider, Susan, O Marquês de Pombal e o Vinho do Porto: Dependência e Subdesenvolvimento em Portugal no Século XVIII, trans. Marques, Jorge Oliveira (Lisbon, 1980)Google Scholar; Maxwell, Kenneth, Pombal: Paradox of the Enlightenment (Cambridge, U.K., 1995)Google Scholar; Pereira, O Douro e o Vinho do Porto de Pombal a João Franco.

42 Until the 1980s, investments in marketing were not well regarded in the industry among managers, since they were considered to go against a “gentleman's business.” Interview with Manoel Pintão, chairman of Poças Junior (Porto, 19 Jan. 2000); interview with Bernando Campos, former director of A. A. Ferreira (Porto, 20 Feb. 2000).

43 All investors were required to gain approval from the government in order to make any substantial investments, including the establishment of a new firm or even of a new factory for expanding production. Barreto, António, “O Vinho do Porto e a Intervenção do Estado,” Análise Social 24, no. 100 (1988): 373–90Google Scholar; Reis, Jaime, O Atraso Ecónomico Português, 1850–1930 (Lisbon, 1993): 9–32Google Scholar.

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48 The French firm Pernod Ricard illustrates this situation. Although the company's chairman and CEO, Patrick Ricard, is a family member, its executive managers, Richard Burrows and Pierre Pringuet, are hired professionals. They were appointed as joint managing directors in 2000. Richard Burrows had previously been chairman of Irish Distillers, and Pierre Pringuet had previously been chairman of Pernod Europe. Pernod Ricard, Annual Report and Accounts (2000); interview with Thierry Jacquillat, former CEO of Pernod Ricard (London, 20 Jan. 2004).

49 Lopes, Global Brands.

50 Even though the Portuguese capital market is very small, it does not make sense for its firms to set up headquarters abroad in order to be quoted in foreign stock exchanges and increase funding, because they are too small.

51 Pereira, Gaspar Martins, Sogrape: Uma História Vivida (Porto, 2003)Google Scholar.

52 Casson, Mark, “The Economics of the Family Firm,” Scandinavian Economic History Review 47 (1999): 10–23CrossRefGoogle Scholar.

53 Allied Domecq was acquired by Pernod Ricard in 2005, after this article was submitted to Business History Review. Cockburn, previously part of Allied, was slated for possible sale to Fortune Brands.

54 These marginal businesses can complement brewing activities and therefore function as important platforms for brewers to gain access to distribution channels with their beer brands. For example, in becoming international, Scottish & Newcastle invested in Portugal. As well as acquiring Centralcer, it took over Luso, the leading local water company. Interview with Tony Froggatt, CEO of Scottish & Newcastle (Edinburgh, 11 July 2003).

55 These differences can also be found in the concentration of sales to the markets where those brands are sold. While Diageo's Johnnie Walker was sold in twelve markets, Sogrape had five main markets for the brand Sandeman. Calculations are based on data from “Company Watch,” Canadean (London, 2003)Google Scholar. The number of equivalent markets (1/H) is the inverse of (H), the Herfindahl Index frequently used in industrial economics to measure the concentration of industries. In this case, the index is adapted to measure the concentration of sales in terms of each firm's markets of destination.

56 Wine is usually made from the fermented juice of grapes. But it can be also be produced from other commodities. For example, in Asia it is made from rice and in Africa from palmtree sap. There are many different types of grape wines, varying according to the specific characteristics of the blend of grape varietal used. These can produce different flavors, colors, and chemical composition. Processing methods also lead to major differences in the end product. In most wine-making, the carbon dioxide generated during fermentation is allowed to escape. In some cases, however, escape is prevented, and sparkling wines—most famously champagne—are the result. Similarly, in most cases, fermentation proceeds until most of the sugar in the grapes has turned into alcohol. In some cases, however, spirit is added to preserve some of the sugar. This process results in fortified wines, such as port or sherry.

57 Line extensions use an established brand name for a new offering in the same product category. Reddy, S. K., Holak, S. L. and Bhat, S., “To Extend or not to Extend: Success Determinants of Line Extensions,” Journal of Marketing Research 31 (1994): 243–62CrossRefGoogle Scholar. Based on data from “Company Watch: LVMH” and “Company Watch: Sogrape,” Canadean (London, 2003)Google Scholar.

58 Fernando Guedes, in an interview, “Fighting Flask,” published in the Times (London), 31 Oct. 1991Google Scholar; Pereira, Sogrape: Uma História Vivida.

59 First Sogrape acquired the largest producer of table wines in the Dão region. It also acquired table-wine producers in the Bairrada and vinho verde regions. In 1987, Sogrape acquired the port-wine firm A. A. Ferreira, which also carried Barca Velha, the most prestigious brand of Portuguese table wines. Subsequently it acquired various vineyards and centers for vinification in the main wine regions of Portugal, including the Douro, Dão, Alentejo, Bairrada, and Vinho Verde. This move allowed Sogrape to diversify into the production of quality wines made of grapes denominated by area of origin. Barca Velha was launched in 1952 by Fernando Nicolau de Almeida, who worked for the Ferreira firm. Pereira, Sogrape: Uma História Vivida.

60 By 2002, after the acquisition of Sandeman, 40 percent of Sogrape's sales volume was generated by the port-wine business, 36 percent by table wines (including Mateus), 8 percent by sherry, 4 percent by its business in Argentina, and 12 percent by licensing agreements for the distribution of foreign companies' brands, such as Cutty Sark, Glenrothes, and Glengoyne (owned by Berry Brothers & Rudd) in the domestic market. “Cutty Sark Gets New Handler in Surging Portuguese Scotch Market,” Impact International 31 (2001)Google Scholar; “Boa Rolha para a Sogrape,” Semanário Económico (3 May 2003).

61 Heublein, Annual Report and Accounts (1965, 1971); Grand Metropolitan, Annual Report and Accounts (1986).

62 Conceição Andrade Martins, “Survival and Renewal of Portuguese Family Wine firms, 1820–1999,” paper presented at annual conference of the European Business History Association, Bordeaux, 15–16 Sept. 2000.

63 Plato Logic Limited, World Beer Report, 2004.

64 “75 Aniversário da Cerveja Super Bock,” Revista dos Vinhos (Oct. 2002).

65 This consortium, called VTR SGPS, was formed by the holdings of a Portuguese familyowned bank. Its members were Banco Espirito Santo, Parfil, Fundação Bissaya Barreto, Olinveste, and Fundação Oriente.

66 Viacer-Sociedade Gestora de Participações Sociais owned 56 percent, and Carlsberg owned 44 percent. Unicer, Annual Report and Accounts (2001).

67 For a more detailed analysis of the topic discussed in this section, see Silva Lopes, Teresa da, “Brands and the Evolution of Multinationals in Alcoholic Beverages,” Business History 44, no. 3 (2002): 1–30CrossRefGoogle Scholar.

68 Allied Breweries, Annual Report and Accounts (1961); Gilbey's, Annual Report and Accounts (1962).

69 Interview with Michael Jackaman, former chairman of Allied Domecq (Somerset, 19 June 2000).

70 Monitor Group, Vini-Portugal: Initiatives for Action in the Portuguese Wine Cluster (29 May 2003).

71 With this acquisition, the leading Canadian multinational was able to enter the Portuguese market through established distribution channels and to acquire one of the very few Portuguese global brands. In 1973 Seagram also acquired the brandy firm Macieira. Interview with George Sandeman, former CEO of Sandeman (Porto, 19 January 2000).

72 Interview with Jack Keenan, former CEO of Diageo (London, 20 Oct. 2003); interview with Thierry Jacquillat, former CEO of Pernod Ricard (London, 20 Jan. 2004); interview with Julie Massies, business developer of Pernod Ricard (Paris, 11 June 2003).

73 Unwin, Wine and the Vine.

74 Interview with Michael Jackaman, former CEO of Allied Domecq (Somerset, 19 June 2000).

75 Interview with Colin Campbell, director general of Moët-Hennessy (Paris, 22 Nov. 1999).

76 Interview with Jack Keenan, former CEO of Diageo (Cambridge, U.K., 14 May 2003).

77 Interview with Cathryn Sleight, managing director of Allied Domecq Spirits and Wines, Harpers, 5 Apr. 2002.

78 After selling the brand, the Portuguese family firm, whose name was originally the same as the brand, changed its denomination to J. P. Vinhos SA.

79 There was, however, an important merger wave in port wine in the late 1950s. In 1955 Ferreira (previously Companhia Agrícola e Comercial de Vinhos do Porto) created a consortium, Consórcio Vinícola do Porto Lda, jointly with J. H. Andresen and Soc. dos Vinhos do Porto Messias. This consortium acquired several very small port firms, which were subsequently split up between its members. Messias did not absorb any of the firms, since it left the consórtium early. Two of the firms acquired by the consórtium were Morgado & Silva, G. H. Sellers & Ferro. Both companies were acquired in 1955, when they were still part of the group Valente Costa. Soc. dos Vinhos António Ferreira Menéres was acquired in 1958. Documents of the Consórcio Vinícola do Porto Lda, A. A. Ferreira Archive, Porto. Interview with Bernardo Campos, former director of A. A. Ferreira (Porto, 20 Feb. 2000). See also Lopes, Internacionalização, 38–39.

80 See note 59.

81 Interview with Fernando Guedes, CEO of Sogrape (Porto, 4 July 2003); “Company Watch: Bacardi,” Canadean (London, 2003)Google Scholar.

82 “Grupo Taylor compra a Croft e a Delaforce,” Jornal de Notícias, 4 Sept. 2001.

83 Interview with Fernando Guedes, “Vamos fazer na Argentina Vinhos Varietais com a Marca Mateus,” Revista de Vinhos (Nov. 1998).

84 This consortium was formed by Sogrape, José Maria da Fonseca, Caves Aliança, Quinta da Aveleda, Caves Messias, Finagra–Herdade do Esporão, and J. P. Vinhos.

85 Among the brands distributed by the consortium was Esporão, owned by Finagra, and the leading brand of vinho verde (green wine), Casal Garcia, created in 1947 and owned by Quinta da Aveleda. “G7 com 75% das Exportações,” Diário Económico, 8 Apr. 2003.

86 The port firms that were part of this consortium were Barão de Vilar, Vinhos C. N. Kopke, J. H. Andresen, Manoel D. Poças Junior, Sociedade Quinta do Portal, and Wiese & Krohn.

87 For example, Allied Breweries diversified into wines in 1966 with the acquisition of Harvey's, and into spirits in 1975 with the acquisition of the Scotch-whisky firm Teachers. Allied Breweries, Annual Report and Accounts (1967,1976).

88 Few leading wine firms invested in the brewing sector. Those that did never achieved economic success. An example is Suntory, the leading Japanese producer of wines and spirits, which entered the brewing business in the early 1960s as an oligopolistic reaction to competitors like Kirin and Asahi Brewery. Interviews with Yoshi Kunimoto, vice president executive of Suntory, and with Kunimasa Himeno, manager of the International Division of Suntory International (Tokyo, 16 Sept. 1999).

89 They focused on a restricted number of traditional grape varietals that can be combined, such as Touriga Nacional, Touriga Franca, or Tinta Barroca in the Douro region. da Costa, Cincinato, O Portugal Vinícola (Lisbon, 1900)Google Scholar; Domingos Soares Franco, senior oenologist of José Maria da Fonseca, interviewed by Wine and Spirit International (June 2002).

90 In this regard, the United Kingdom may be more the exception than the rule. Among the leading multinationals from the Netherlands and France, the global alcoholic beverage industry remains predominantly family owned though professionally managed.