June 6, 2008 / 12:25 AM / 9 years ago

Italy's Campari eyes developing markets for growth

CANALE D‘ALBA, Italy (Reuters) - With an eye on evolving tastes in developing markets, Campari is hoping to buckle a gin brand onto its belt as the sixth biggest player in wines and spirits pursues growth despite a downturn.

<p>A worker monitors an assembly line at a factory making Campari aperitif in Novi Ligure, Italy in this undated handout picture. With an eye on evolving tastes in developing markets, Campari is hoping to buckle a gin brand onto its belt as the sixth biggest player in wines and spirits pursues growth despite a downturn. REUTERS/Gianni Pucci/Campari/Handout</p>

Campari, a nearly 150 year-old business which guards its secret recipe for Italy’s well-known bitter red aperitif jealously, is looking to grow through acquisitions in emerging markets, like eastern Europe, Latin America and potentially Asia.

“There is a migration where the population passes from a drink of a lower level to a higher one, this is an interesting market,” said Chief Executive Bob Kunze-Concewitz during a visit to the cellar for Campari’s Enrico Serafino wines.

At the international level of the spirits industry, the most premium brands represent a strong profitability and growth.

“In Brazil, we’re seeing consumers moving away from cachaca into more premium local brands,” he told Reuters, referring to a rum. “In eastern Europe, China and India, you have western premium brands which are growing quite fast.”

In its Italian home market, Campari -- which has doubled its turnover in the past five years to just under 1 billion euros ($1.56 billion) -- is benefiting from an “extended aperitivo,” where younger consumers get together for a drink and food at a bar rather than going to a restaurant.

The Campari business began at a cafe in Milan when drinks maker Gaspare Campari invented the Campari aperitif -- made from an infusion of bitter and aromatic herbs, plants and fruit in alcohol and water -- some time between 1862 and 1867.

In 1976, the last descendant of the Campari family left the firm to Domenico Garavoglia, whose son Luca is chairman now.

The company has a portfolio of over 40 brands and is partly growing through acquisitions -- 12 in the last 12 years -- beginning when the sector was consolidating in the 1990s. It has a “war chest” of 600 million euros ($936 million).

Competing with top players like Diageo and Pernod Ricard, its cabinet contains a mix of several takes on the original Campari, Cinzano wines, Cabo Wabo tequila, Glen Grant whisky, Skyy Vodka -- as featured in the just released “Sex and the City” movie -- and a range of soft drinks.

But it does not have a gin brand, and has indicated it is interested in acquiring Plymouth Gin, a unit of Swedish spirit company Vin & Sprit, from the company’s new French owner Pernod. Pernod expects to close its purchase of state-owned Vin & Sprit this summer, after winning an auction in March.

“Everyone knows we are present. We have a very good reputation ... we are quick and we do not have antitrust problems,” Kunze-Concewitz said.

SECRET RECIPE

Campari, which floated on the Milan stock exchange in 2001, posted a 6.9 percent rise in net profit in 2007 to 125.2 million euros ($195.3 million) on sales of 957.5 million euros ($1.49 billion).

Analysts say Campari has a good track record for acquisitions, investing some 1 billion euros in 12 years for buys including Glen Grant whisky, Skyy Vodka minorities and an 80 percent stake in Cabo Wabo tequila from singer Sammy Hagar.

“Campari is a mid-size player in an industry with a few giants. It could play an active role in the mergers and acquisitions arena,” Santander analyst Andrea Paladini said.

“The company is a success story for its ability to integrate acquisitions, which have not been overpaid.”

Campari paid $80 million for the Cabo Wabo stake -- 11.8 times expected 2007 EBITDA or earnings before interest, tax, depreciation and amortization. This compares to Pernod agreeing to pay 20.8 times 2007 gross operating profit for Vin & Sprit, an expensive price for what is seen as a key asset.

New additions are likely to remain within Campari’s dominant spirits range. “Spirits is the core business, the priority is in the core business,” Kunze-Concewitz said.

And this core business is steeped in tradition.

More than 20 ingredients make up the Campari aperitif, but only two people in the world know what they are: one employee and Luca Garavoglia, the company chairman.

A copy of the recipe is locked up while the privileged employee travels to Campari factories to make the drink. Only this employee knows how to weigh the ingredients, which are numbered and not named, so as to not reveal their identity.

“People may try to make it but they will not succeed,” said Kunze-Concewitz.

CONSUMER SLOWDOWN

Despite investor fears of slowing consumption in the United States -- which represents 25 percent of sales for Campari -- Kunze-Concewitz has said he sees no slowdown in the spirits market there.

However the group expects “some effect” as people move from going out to bars and restaurants to buying drinks at stores.

“The way the markets are going does not help us, but it depends on the (share) in the market,” Kunze-Concewitz said.

He pointed to what he called the “cocktail culture” in the United States, which has been driven by films and television series such as “Sex and the City.”

“It is spreading out from the U.S. into ... other Anglo-Saxon markets, ... big metropolitan cities,” he said. “Today we don’t talk about barmen, we talk about mixologists.”

Kunze-Concewitz sees this trend continuing: Campari has even opened an academy for such mixologists in Germany.

The world’s second-biggest wines and spirits group Pernod, which raised its profit guidance in February, has said it was on track to meet its full year financial target.

“In 2008, the sector faces a more difficult environment, which implies that we do not expect Campari to be able to largely exceed its 5 percent organic growth target,” Cheuvreux analysts said in a note.

Campari has a mid- to long-term forecast for annual organic revenue and earnings growth of 5 percent. It confirmed this target last month.

Additional reporting by David Jones in London

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