No Summer – No Sales

Magners Cider owned by Irish drinks group C&C has been described as a “triumph of marketing” and since its launch in 2003 has grown rapidly in popularity. C&C’s share value grew just as rapidly from €2 to nearly €14 earlier this year. They built their product distinction on the new idea of Cider Over Ice and sales grew strongly during three successive summers and this year’s early Spring heat wave.

Suddenly in July came two profit warnings in rapid succession. C&C said trading "deteriorated at an unexpected rate" and warned that first-half operating profits were likely to fall by 35pc compared with last year's €113.5m. They said there was "a degree of uncertainty" about the outlook for the second half. C&C blamed a collapse in sales on the wet weather and growing competition from rival Scottish & Newcastle's Bulmers who had launched their own over-ice cider brand last year and re-taken 20pc of the market.

The share price dropped to €6 so C&C's market value has more than halved over the past two months amid growing concern that Magners is just a craze. Liam Igoe, an analyst at Goodbody Stockbrokers in Dublin, said: "The question is whether sales are down because of the floods or because people are moving away from the concept." Paul Walsh, chief executive of drinks giant Diageo, said that the "boom" in cider was not a "sustainable proposition".

However Maurice Pratt, chief executive of C&C insists that Magners was not just a fad in the UK."I believe these are exceptional circumstances and don't believe our medium-term model in Britain will be compromised by these difficulties," he says.

These different opinions are not that helpful to anyone wanting to assess where C&C and its share price might go from here. They may not even be truly helpful to the board of C&C. However if we apply a “Competitive Strength Perspective” then further insights can be gained.

It is clear that C&C did a great job on both coming up with the Magners Cider product and in marketing it. However their strategy now is to redirect much of C&C's €40m annual marketing spend towards promoting cider over ice as an all-seasons drink – as a winter favorite no less - to reduce the apparent dependence of their sales on a warm summer. Although this response indicates that the marketing dimension of the business may be strong, the question must be asked whether that is all they really have to try to build a “sustainable proposition”? How often has “Sell It Louder” really changed a lost sales situation? C&C risk looking, and sounding, too much like a “one product, one idea” company.

The Competitive Strength Report, and the research from Vinod Singhal that it is based on, shows clearly why excellence in just one dimension is not sufficient to build a high level of Competitive Strength. In spite of C&C’s excellence in marketing and its importance in the sector in which it competes it still was not enough to overcome adverse weather conditions and a big competitor.

C&C enjoyed a new product “honeymoon” in which the markets, and possibly even they themselves, believed they had “Excellent” Competitive Strength – hence the inflated share price of €14. It was only when the lack of substance underwriting this perceived Competitive Strength became apparent that the markets recognised the reality. Actually C&C look much more as though they are in a “Comfortable” Competitive Strength condition and consequently the €6 share price was almost certainly about right all along. The sales and share price collapse, together or apart, was always going to happen; it was just a question of when and why.

If the markets could have applied the Competitive Strength perspective to an assessment of C&C’s performance perhaps they could have worked this out before the share price got chased up to unsustainable levels. If C&C truly understood their own Competitive Strength position, they may be addressing the competitive situation with a more fundamental shift – or possibly exploited the brief sales and profits bonanza more beneficially for the long term future of the business..

The other question this all raises is, what about Scottish & Newcastle? They appear to have been able to come from behind, bring out a new product and grab 20pc of the market. They were a bit slow off the mark, they let Magners have three years – 3 years! – but now they have hit the nail on the head utilizing their greater depth in distribution and business to business marketing. They have demonstrated a Competitive Strength well above “Comfortable” – possibly even heading towards “Excellence” – does this means that there is more to come? Maybe their shares are worth a look!