The announcement that US giant Brown-Forman has taken a 10% stake in Glenmorangie has once more brought into question the long-term future of the smaller Scotch producers. Dave Broom, renowned drinks writer and Scotch expert, examines the deal's implications and the threat to the industry it reveals.

After 18 months of speculation, Brown-Forman (B-F) has at last confirmed it has taken a stake in Glenmorangie plc. On 17th May, the family-owned US drinks giant (the parent of Jack Daniel's, Southern Comfort, Canadian Mist, Fetzer, Sonoma-Cutrer and Korbel) took a 10% stake in the Scotch firm. The move not only gives Glenmorangie a cash injection, but means that B-F will act as an international "representative" for the Glenmorangie portfolio, which includes the eponymous single malt and Ardbeg.

B-F, which has distributed the single malt brand in the US since 1991, will now represent the Glenmorangie and Ardbeg brands in Europe, the Far East, Australasia and South America, and will also handle the remaining Glenmorangie plc brands, Glen Moray, Bailie Nicol Jarvie and Highland Queen on a selected country basis.

"The agreement will enable Glenmorangie plc to develop its brands in key markets more rapidly as well as extending its reach across a greater number of export markets," said the Scotch firm's managing director Paul Neep. "Our objective is to develop leading international malt whisky brands and this agreement is a very important step towards further growing our brands. We will benefit fully from Brown-Forman's global sales and marketing infrastructure, allowing Glenmorangie plc to focus on brands strategy and marketing."

Glenmorangie is showing sustained growth in the US. It is up in excess of 20% over the past seven years; is closing quickly on the brand-leader single malt, Glenfiddich, in the UK; and is currently the world's third-largest selling single malt brand. However, it was always going to be difficult for a relatively small player to have the resources to build an international distribution network in order to grow the brands globally.

Even though the malt category is the only sector of the Scotch market showing any growth, volumes are still small. The link with B-F ties Glenmorangie plc into a firm which posted sales for the year ended 30 April 1999 of $2 billion, with profits of $200m.

One industry source saw a further reason for the link-up. "Most of these arrangements occur when a smaller firm links with the larger in order to get access to its distribution network," the source said. "But given that B-F prefers to use third party distribution (including UDV and Bacardi-Martini) outside the US, the inference is that this agreement is as much about giving Glenmorangie plc a cash injection as it is about distribution agreements."

It also follows in the wake of Highland Distillers' new parent, Edrington Group, taking the firm private. A major factor in Edrington's takeover of Highland was its belief that a firm reliant on Scotch wasn't compatible with the demands of the City. Edrington directors said that the move into the private sector would allow the firm to start long-term planning and investment, which was becoming increasingly difficult in a financial culture that demands improved results every six months.

Industry sources agree that the fact that the Glenmorangie plc/B-F link follows closely on from the Edrington buy-out suggests that it is becoming increasingly difficult for Scotch-only firms to cope with City demands.

The nature of Scotch demands that firms have to lay down stock and have it tied up for a minimum of three years - in practice much longer. With the blended market (which still accounts for 90% of Scotch's global sales) continuing to decline, the City is jittery about long-term prospects. While industry sources agree that long-term marketing is needed, the City is demanding short-term growth.

Major drinks firms such as B-F can use their white spirits and/or wine divisions to spread the financial burden. But Scotch-only firms like Highland or Glenmorangie are becoming increasingly exposed.

"Glenmorangie is in the right part of the market where there is more chance of creating dynamic growth," said one source. "But if you were a small, independent, blend-reliant firm the task would be much more difficult."

While B-F insists that it is not launching a takeover bid for Glenmorangie plc, most in the industry believe it will increase its stake in the Scotch firm in time.

Dave Broom