Acquisitions will Kyndal fire for growth
A year on from its management buyout from Jim Beam Brands, the Kyndal whisky business is emerging from the "setting up" phase and looking to make its mark. Chris Brook-Carter met chief executive, Brian Megson, who spoke frankly about the challenges and opportunities ahead.
Like the rest of the spirits world, the management team at the Scotch whisky company Kyndal could never have anticipated the terrible events of September 11th last year, nor its consequences on the global economy over the following 12 months.
However, the company's exposure to the subsequent financial upheaval was greater than most, having completed barely two weeks after 9/11 the management buy-out from the US giant Jim Beam Brands, which marked its birth.
In a little over two weeks, Kyndal, which owns among others the Whyte and Mackay brand, will report on its first year of trading. And, while chief executive Brian Megson is careful to point out that this past year has been a "setting up period", he is also confident Kyndal will meet its targets.
If Kyndal does as Megson expects, it will justify the faith the management team and its investors have shown in what they believe to be the underlying strengths of the business. It will also be particularly satisfying given the doubts many others had for their prospects of turning around an operation that had floundered while in the arms of the far more powerful JBB.
Strangely, it was perhaps as a consequence of 9/11 and the growing economic uncertainty - which had been creeping up on the world even prior to the attacks on the US - that Megson was able to persuade a German bank and a property developer to invest behind him. "We really had to go looking (for investment)," says Megson. "It wasn't easy to get the money."
But as he explains: "There is a huge asset backed nature to the business. They (the investors) liked the nature of its longevity. Go back 12 months and this was a bit of a safe haven."
As Megson wryly notes, the price was pretty good as well. Kyndal negotiated the buy-out for £200m, an absolute song compared to the £582m JBB's parent company Fortune Brands (then called American Brands) paid over the years putting the business together.
However, the knock down price is also a reflection of just how desperate JBB was to get rid of its Scotch operation. Fortune Brands CEO Norm Wesley called the deal a "positive strategic development" for his group and described the unwanted Scotch arm as offering low returns and even lower growth.
Megson, though, is convincing in his defence of the MBO, the performance over the last 12 months and the prospects for the future.
"Under JBB, strategically our business was focused on wines and Bourbon. But the priorities were not our core competencies"
He interrupts himself, as he does on a number of occasions in the interview, to defend JBB's handling of the business. Megson explains how JBB had inherited Whyte and Mackay from what was then the American Brands parent company, without ever really wanting the business or understanding how best combine it with its own priorities. His argument is an intriguing balancing act, as he must convince why Kyndal can succeed where JBB's management failed while also being aware that JBB remains an important strategic partner.
In fact, Kyndal's relationship with JBB includes the production and bottling of After Shock, the distribution of Canadian bulk whisky outside the USA, and the granting of exclusive rights to Jim Beam Brands of the Dalmore trademark in the US.
Megson goes on: "We are going back to our roots. We have started to refocus, particularly in the branded business. We didn't have responsibility for our Scotches outside Europe and they withered because of it."
Kyndal has also begun to invest in its infrastructure, which, Megson says was never a priority before unless "there was a huge return staring you back in the face." But the management has now spent some £5m on the blending operations, "which will give us tremendous efficiencies in areas that weren't open to us before."
And the same freedom has allowed Megson to start scouring the horizon for potential acquisitions, alliances and new opportunities for his portfolio of brands.
Though Megson admits that Kyndal has been looking at potential purchases for 11 months, nothing has materialised so far.
"It would be nice to get brands with good positions that we could benefit from. There have been huge changes recently so you might think that there would be some fallout. That's the sort of thing that really appeals," he says.
"We have turned down maybe twenty opportunities to buy something. But we have also gone after things that we haven't got. But clearly it will come soon"
However, while Kyndal's luck on the acquisition market has so far been poor, its list of global allies continues to grow. Strategic alliances hadn't been encouraged under JBB, but they are playing an important role in taking the new entity forward.
Most significant of these has been the tie-up with Shaw Wallace in India, an opportunity that wouldn't have been available under JBB as India wasn't a strategic priority.
The deal will see Shaw Wallace bottling and manufacturing Kyndal brands in the country, which will include the launch of Vladivar and Veba in the near future. It also allows Shaw Wallace access to the Kyndal manufacturing facilities and distribution network in Scotland.
And while the dust settles in India, Megson says he is also keen to keep expanding into new or under developed markets, such as Latin America and Korea, which he describes as "not on our radar before".
Closer to home, Megson has kept the company's links with the Maxxium distribution system - a move many hadn't expected because of the clash between The Famous Grouse and Whyte and Mackay.
The relationship has been scaled back, as the Isle of Jura and Glayva brands have been taken in-house. But Maxxium UK still has a five-year deal to sell and distribute other Kyndal brands, such as Whyte and Mackay, Claymore, Vladivar and Veba.
This will prove an important relationship. Under JBB, Scotland had been the focus, so Whyte and Mackay in particular suffered in England and Wales. It seems Megson has been able to convince Maxxium that there is enough in the way of differences between Grouse and Whyte and Mackay to allow them to sit comfortably in the same portfolio. And the Kyndal brand will be returning to England on the back of a new TV ad campaign.
But of course, Kyndal's doubters would have found far less to shout about had the business been down to its brands alone. But much of the fear was grounded in the fact that Kyndal generates close to 50% of its business in the own-brand sector.
The question that rose its head twelve months ago and which still hasn't gone away is whether the new owner can run a primarily non-branded whisky business at a profit at a time when the world is becoming increasingly branded. The own-label/value-for-money category may generate volume, but profitability is low. It is a notoriously cut-throat sector, with suppliers jostling to undercut each other in order to get lucrative deals with supermarkets.
There is no doubt the own-label market has improved as supply and demand balance out for the first time in a number of years, but Kyndal's real trick will be if it can push prices up by £1 or £2 a case.
"At the cheaper end pricing has been very disappointing. Some rationalisation might stiffen up prices"
"There has been a lot of talk but no action," he says. "There are a lot of family companies that have very different aspirations to public companies, driven by different motivations."
Despite this Megson seems confident Kyndal will be part of an inevitable consolidation of own-label and says he is "heavily committed" to the sector.
"There ought to be more value, the pricing levels are just not sustainable. The laws of business say eventually returns will get so bad that something will happen," he says.
"The retailers are very strong, the customer base is rationalising, the premium brands are rationalising. We have to."
A disaster aside in the September figures, it looks as though year one will have passed by with targets completed. That the business has even achieved that in such a tough year is promising. But if the first year was a setting up period, to truly convince, Megson must start delivering in terms of growth.
"We are very keen to grow the business and for the first time in 10 years we have investors who want to do the same," says Megson. Then by way of a mission statement he says: "Investing in brands is slow, but acquisitions can make a sea-change to your business."
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