The global liquor market has changed immensely in the last 20 years. Since the early eighties, people have discovered that it is better for their health if they drink in moderation, as opposed to heavy drinking. Due to this change in consumers drinking habits, people generally drink less liquor than they used to. According to our text, the per capita consumption of liqueurs (liters per person over 18) dropped from 1 liter in 1986 to 0.90 liters in 1990. In addition to consumers drinking less, liquor makers, like Baileys, were faced with increasing tariffs and taxes.
At the time of this case study, the tax margins between retailer and distributor were fairly close in the US: 15-20% for retailers and 10% for distributors. The United States also imposed a $22 per case import duty, and state excise taxes were as high as 20%. If you were a foreign liquor producer at the time and you sold a case of liquor at a price of $150 to a retailer in the US, you would see $128 after the import duty, which forces liquor makers to greatly increase their prices up to $177. For example, the retailer has $177 case of liquor that he has to pay a 20% Paddington tax, which makes the case cost him $212.40. Now the retailer gets to add his or her profit margin to the case of alcohol, lets pretend that the retail price of the case is $250. In this case, when the consumer finally gets to buy this product he or she has to pay for the $62.40 in taxes thus far plus an additional 20% in taxes on the final retail price. Basicly a case of liquor that originally costs retailers $150, now costs consumers about $305. American companies also have all of the taxes, just not the import duties, which can cause enough of a price increase to urge consumers to buy American. For Baileys Irish Cream, the problem was not just the US but every country in Europe had similar taxes and tariffs; in the international market it is just something that must be dealt with.
Another issue in the global liquor industry is dealing with copycat competition. Due to all of the expenses involved with developing a foreign market, it is easy for other companies to make a similar product within a given country for substantially less. Five years after Baileys had been introduced to the market, their market share had dropped considerably. A market that they created was now so large that they barely owned 50% of the market share in the US.
Just as flavors of food are different in each culture, drinkers in different regions have different tastes. As discussed in our text, Cheetos changed the flavor and color of their “cheesy” product in the Asian market because they like the taste of teriyaki more. Does that mean that it is not a Cheeto any more? No. According to Cheetos, the ingredients that make a Cheeto a Cheeto are the crunch, the shape, and the fun. For Baileys, they needed to have the US flavor of Irish Cream more chocolaty than the flavor of European Irish Cream.
It seems that Baileys is focused too much on the magic number of 4,000,000 cases rather than having set a realistic goal based on current industry trends. For the company to reach its sales goal, there needs to be at least a 10% sales increase in both the US and Europe. Tara and Ken feel that it will not happen, but the odds are better for it to happen in Europe due to recent growth in the southern countries such as Spain.
Ken and Tara should start doing their homework to prepare for their meeting. They need to prepare a concrete presentation to show realistic sales objectives and reasons for their conclusions. Only from analyzing the state of international economies, competition, sales trends, and consumer trends in the drinking industry can one come to somewhat of a realistic sales goal.
As the case’s appendix suggests, in the early nineties the dollar was weaker than it had been, this caused inflation in import liquor prices. The inflation coupled with higher