Keep it in the family
With the acquisition of Allied Domecq, the wave of consolidation that has dominated the spirits industry for the best part of a decade may have hit an impasse. The families that control the next tier of distillers continue to refuse to sell out. In a new series, just-drinks and industry research group, Canadean, look into the futures of these drinks industry dynasties, beginning with US-based company, Brown-Forman.
For almost 10 years, the call of the investment community within the drinks industry has been "Get big, or get out". With companies the size of Diageo, Pernod Ricard and, until recently, Allied Domecq aggressively grabbing size through acquisitions, leading to valuable distribution muscle and huge economies of scale, it was a war cry that made sense.
But it was also a strategy that has sat uncomfortably in many corners of an industry that still prides itself on heritage and history. As a consequence two distinct spheres have arisen in the global spirits market. A combined Pernod Ricard/Allied Domecq entity is over-shadowed only by Diageo on the world scene. A considerable distance off sits a cluster of spirits groups, all of which have brands others would love to possess, but who have either been unwilling or unable to join the great consolidation circus.
That they have been unable to fight with parity when bidding for the likes of Glenmorangie or more recently Allied Domecq is unsurprising given the financial firepower of their rivals. However, that the likes Brown-Forman, Jim Beam Brands, Bacardi or Remy Cointreau have, as yet, refused to merge with anyone else in order to gain the scale many believe they need is more intriguing. The fact that all of them are family-run or have substantial family shareholdings goes a long way to explain this phenomenon.
"For all these years that I've worked to build brands, my new job is about building this brand, about building the Brown-Forman brand," said incoming Brown-Forman CEO, Paul Varga, at the company's recent annual meeting.
These words may sound a little clichéd, but this was Varga's first chance to address shareholders since the announcement of his appointment to succeed Owsley Brown II, great-grandson of company founder George Garvin Brown, as CEO. And, his message was clear, Brown-Forman is here to stay.
It was a sentiment that was hammered home when he went on to discuss the sale of long time rival Allied Domecq. "The moment the transaction is complete, the Allied Domecq corporate brand - just like Seagram's and Mondavi and many companies before it - will cease to exist. It'll vanish," he said. "All the heritage and their enduring themes and their commitment and culture will go away. That is a fate that your management, and me in particular, find unfathomable for Brown-Forman." Brave words indeed, but are they realistic?
The short and medium term answers appear to be yes. At the recent AGM, Brown told shareholders that the fiscal year to the end of April had been "a record-breaking year", with earnings per share rising by 21% to US$2.52, and flagship brand, Jack Daniel's, registering volume gains for the 13th consecutive year. Within that, Brown-Forman Beverages (the company also runs a consumer durables division) enjoyed a 10.2% rise in turnover and a 15.9% increase in operating profits. Moreover, Brown added, the company is enjoying a very strong start to the 2006 fiscal year.
Brown-Forman's stated ambition is to become the best brand builder in the industry. And, according to Company Watch Report - Brown-Forman, recently published by industry research group, Canadean, it is an ambition that remains "on-track".
"Brown-Forman is perhaps best described as a 'neat' operation: it is a medium-sized business that operates a largely successful, concentrated portfolio of consumer brands. Consistent annual growth, in both volume and value terms, is evidence to this fact," the Canadean report says.
There is no doubt the group holds an enviable portfolio of brands, particularly Finlandia, Southern Comfort and, the flagship, Jack Daniel's. In addition, it boasts the super premium whiskey, Woodford Reserve, which the company is looking to for significant value growth. "With sales of 50,000 cases in 2004, this could be the brand to watch," says Canadean.
Outside its portfolio of brands, Brown-Forman's primary strength has arguably been its ability to identify its weaknesses and do something about them. In fact, far from playing to the image of a staid family business, Brown-Forman has demonstrated a capacity to move quickly and with purpose on the strategic front.
As Canadean points out, an over-reliance on the US for drinks sales is being remedied by a strong focus on export markets, while the failing consumer durables business is currently under review, with the sale of major operation Lenox Inc. a possibility in this year.
Furthermore, Brown-Forman has found ways round the issue of scale by developing a knack for partnerships with other spirits groups. "Brown-Forman remains adept at initiating J-Vs either for cost-saving reasons e.g. the distribution agreement with Bacardi-Martini in the UK, or for gaining greater access to brands, most notably Finlandia," says Canadean.
Its long-term partnership with Bacardi across many markets is one of the most successful worldwide, whilst its partnership with Altia for the Finlandia brand proved such a success that Brown-Forman eventually acquired the whole operation.
In short, Brown-Forman has struck a good balance between the independence its family shareholding gives it and a need to keep with the times, demonstrated by the recent appointment of the non-family member Varga as CEO. "As echoed by Dominique Hériard Dubreuil of Rémy Cointreau, this move is indicative of a willingness not to allow family ambitions to impede company progress," says Canadean.
Encouragingly for Brown-Forman, Canadean's report suggests that it is difficult to spot the weaknesses in what is evidently an adaptable company. However, Brown-Forman's long-term future does face threats.
"With three incredibly high profile profitable brands in its collection, Brown-Forman must be careful not to overlook its mid-priced, less dynamic drinks, such as Canadian Mist and Early Times. Brown-Forman should also guard against becoming complacent over the success of its Jack Daniel's brand. In March 2005, Diageo relaunched Bulleit bourbon in the UK on-trade, supported by a £2m advertising campaign and, significantly, in direct competition with Jack Daniel's," says Canadean.
At the macro level, Brown-Forman has tried and failed twice in the last year to buy scale, once through a bid for Glenmorangie and once as part of a consortium to acquire Allied Domecq, illustrating both that Brown-Forman is not completely comfortable with the yawning gap in size between it and its larger rivals, and that it lacks the financial muscle to do anything about it.
However, the company remains optimistic. "Every time somebody thinks that's the last acquisition, there always seems to be another," Oswald Brown said in an interview recently. That scale may still come then. However, it looks certain that it will not occur at the expense of the independent future of the group.
For more details of Canadean's Company Watch reports, visit /store/products_detail.asp?art=29819&lk=ss
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Diageo is to launch a new global advertising campaign for Smirnoff Ice. The first ad in the global campaign, 'Garden', launches in Great Britain on April 11th on terrestrial and satellite TV. ...
Fideuram Wargny has upgraded its rating of Pernod Ricard to 'buy' from 'hold'. Its analysts argue that the merger talks with Allied Domecq is a catalyst for share growth....
Diageo has completed another share buyback transaction....
Brown-Forman has restructured its distribution set up for Europe, entering into new agreements for its spirits brands in a number of countries, including Italy, Spain, and Germany....
Fortune Brands has started making moves to acquire in the European drinks industry, according to press reports....
E&J Gallo has announced a number of appointments within its European division....
Diageo's Smirnoff Signatures line of premixed cocktails is now available nationwide in the US....
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