Christopher Niesche: $1b for Independent Liquor would be Erceg's last coup

Among the 1200 mourners at Michael Erceg's funeral last November were dozens of bottle-shop owners with whom the Independent Liquor boss had done business over the years.

That so many mom-and-pop operators came to see him off shows how much Independent Liquor and Erceg were one and the same.

And it raises questions about what the business is worth without its founder and driving force.

It's not yet clear whether Independent Liquor is for sale after Erceg's death in a plane crash last November. The family - probably still adjusting - are said to have put off any sale while they were busy with the peak selling season of Christmas. With no apparent successor for Erceg, the business will probably come up for sale in the next few months.

But there are doubts about how well such a one-man business would fit with a major corporate liquor-maker and what it would be worth to one. It's hardly a bolt-on acquisition.

What made Independent Liquor so successful was Erceg's innovative genius, which saw him carve out niches in two segments of the liquor market that didn't exist before he came along.

The former university maths lecturer saw the potential of the ready-to-drink market, or RTDs, and quickly moved to fill that gap. Erceg's RTDs - cheap spirits and cheap mixers in a can - weren't popular with parents and alcohol safety bodies, but they were a huge hit with the under-25s.

Erceg also saw how premium beers - such as DB's Heineken and Lion Nathan's Stella Artois - were gaining sales in a shrinking beer market. DB and Lion had spent a fortune on advertising and marketing to create the premium beer segment and Erceg just rode in on their coat tales for free.

He secured the rights for Carlsberg, Tuborg and Grolsch which had all the prestige and cachet of established brands for none of the advertising costs - and differentiated his product by selling them for $3 or $4 less a case and giving good margins to retailers.

Within five years or so, Erceg had established the RTD segment and what has become known as the sub-premium beer segment of the liquor business.

But his minuscule advertising spend is now proving to be a weakness. While the European beer brands are established, Independent Liquor has them only under licence. The brands Erceg actually owns aren't at all established and so aren't worth much.

Try naming one. Independent Liquor's Woodstock Bourbon and Cola is the best known, but Purple Goanna and Vodka Cruiser are hardly household names. Erceg's reliance on price rather than brands has made his businesses vulnerable to any rivals who want to enter the market.

Another strength of Independent Liquor's business that will be a weakness when it comes to be sold is its agility. As the owner of the business, Erceg was answerable to no one. If he saw an opportunity, he could quickly exploit it, and it is said that he could have a new product on the market within a couple of months.

Once the business is sold to a corporate competitor that advantage - and Erceg's eye for a chance - will be gone. Any product launches or innovations will take months to get to market after all the marketing and consumer research, the testing and formulation of the product, devising an ad campaign, and so on and so on.

In that sort of timeframe, Erceg could easily have launched a product then pulled it if it wasn't working.

Also lost in any sale will be all the strong relationships Erceg had personally formed with so many liquor retailers and the ensuing benefits - there's a big difference between dealing with a sales rep and the business owner.

Nonetheless, there's likely to be significant interest when Independent does come up for sale.

A possible buyer is Lion Nathan, which could quickly get a foothold in the spirits market in Australia with the purchase of Independent Liquor's business there and boost its own RTD business here. Also, Lion's brewery in Newmarket is stretched to capacity, so Independent Liquor's own site at Papakura would give it valuable new capacity.

Further afield is South Africa's SAB Miller, which manufactures and distributes beer around the world, but has no footprint in Australasia. Independent Liquor would give it a relatively inexpensive entry into this market.

So what's Independent Liquor worth?

Figures of $600 million to $1 billion have been bandied about, but it is an indication of how successful Erceg was in guarding his privacy that no one really knows.

A price tag of $1 billion seems a bit rich, however, given that Independent Liquor is still only a minor player in the $1 billion take-home liquor market in New Zealand and it's unlikely the Australian business would make up that shortfall.

True, the company has come from nowhere to having several hundred million in revenue (we think) in just five years or so. But growth like that can't be sustained and the next five years' gains won't be anywhere near as strong and will be much harder won.

Still, Erceg made a successful career out of surprising people. Perhaps his last surprise is that he built a billion-dollar business in so short a time.