The two faces of US whiskey and their effect on Brown-Forman - Analysis
The Jack Daniel's portfolio saw its organic sales growth slow to 3% in YTD 2017
For a drinks company that relies heavily on its American whiskey brands, a boom in the sector means two things for Brown-Forman: More consumers and more competition.
In its year-to-date results this week, the group reported a slip in net sales and a near-4% fall in net profits. In their notes to clients following the results, analysts warned that fiscal-2017 has shaped up to be tougher than expected for Borwn-Forman.
It wasn't all doom and gloom, however. Whiskey, it appears, is a segment with two halves for Brown-Forman: A slowing mainstream and a burgeoning super-premium.
"We have previously written of our worry that the growth in mainstream US whiskey may be slowing, and that the continued introduction of flavours will eventually struggle due to the strength of flavour of the underlying spirit," writes Societe Generale analyst Laurence Whyatt. "This hypothesis appears to be coming true."
Digging into the whiskey numbers, Whyatt points out that the Jack Daniel's family of brands "has slowed to 3% organic sales growth". In the corresponding period a year earlier, the Jack Daniel's stable posted a 7% jump in organic sales.
"Tennessee Honey's growth has further slowed to 3%, although Fire's growth is still double-digit," he adds. "We are cautious on whether the overall growth rate of US whiskey, as well as the growth in line extensions, can be sustained."
Meanwhile in the US, Brown-Forman's largest market that accounted for 46% of total net sales in fiscal-2016, Cowen & Co's Vivien Azer says pricing "continues to be muted", as competition from the vodka sector hampers the company's ability to increase core Jack Daniel's prices.
"US spirits competition remains intense," writes Azer, pointing to craft spirits as well as "robust growth for imported beer".
However, away from core Jack and its flavours, there is some scope for higher prices and good growth, with Whyatt highlighting "particular success at the super-premium end".
"Encouragingly," adds Azer, "with high-end Bourbon competitors like (Beam Suntory brand) Booker's having taken pricing, we were encouraged to hear that (Brown-Forman's) Woodford Reserve raised prices, while Old Forester raised prices even more meaningfully - given inventory shortages."
Moreover, the super-premium whiskeys are "growing very well with Woodford Reserve up 20% and Old Forester [growing] even faster," says Whyatt.
There's always room at the top, it seems.
Brown-Forman Corp in Spirits (World)
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