Comment - Spirits - Diageo Making the Best of a Bad Job with Bushmills, Don Julio deal?
Diageo is exiting the Irish whiskey category with the sale of Bushmills
Diageo has surprised some with its move to sell its Irish whiskey brand Bushmills in return for control of Don Julio Tequila. Here our columnist, Richard Woodard, analyses the thinking behind the deal
In a neat piece of symmetry, Don Julio and Bushmills shifted 230,000 cases each in the US in 2013, posting healthy sales rises of 15% and 9.5% respectively, according to Impact Databank figures.
One is a high-end Tequila, the other a heritage-rich Irish whiskey – two of the sexiest spirits categories out there. Of the two, Irish whiskey is by far the fastest-growing. And yet Diageo wants Don Julio, but not Bushmills. How come?
There are lots of reasons, but let’s start with some home truths about the two categories. You can buy a bottle of Bushmills 10-year-old single malt in the US for just under US$50 and, as the label says, it’s been matured for at least 10 years in cask; for the same price, you can buy a bottle of unaged Don Julio Blanco Tequila.
Don Julio Reposado, matured for eight months in oak, retails for about $53; the Añejo, which spends 18 months in cask, is $60. Need I go on? It ain’t quite luxury vodka, but the contrast in relative returns on investment could hardly be greater.
This is reflected in the relative performances of the two brands. Sure, they go toe-to-toe in volume terms in the US, but let’s dig deeper. On a global basis, Bushmills seems to have the edge, selling 800,000 cases to Don Julio’s 590,000 in Diageo’s last fiscal year – but it’s a gap that’s closing fast at current growth rates (+14% for Bushmills, +22% for Don Julio).
The value equation is more compelling: Don Julio may only have 75% of Bushmill’s case sales, but its revenues are nearly double that of the Northern Irish brand. On a balance sheet, there is no comparison.
But if we accept that Don Julio is more valuable to Diageo than Bushmills – which it clearly is – then it still doesn’t explain why Bushmills specifically was the fall guy when Diageo negotiated to regain full control of Don Julio from the Beckmann family.
There’s some history here, which dates back to 2012 and the talks between Diageo and the Beckmanns over Jose Cuervo. However, Diageo’s potential $3bn acquisition of the brand fell through in December.
Bushmills was slated as a makeweight in a deal that never took place, but the Beckmanns, it seems, hadn’t forgotten the brand. So, when talks started about Diageo buying that 50% Don Julio stake, one of the bargaining chips was already on the table.
As Diageo CFO Deirdre Mahlan told just-drinks this week: “In every transaction, there’s always a question of what both parties are trying to achieve…as we went through and came out the other side, it was clear what we were both pursuing.
“Clearly, they wanted to expand their participation in international spirits, while we wanted to cement our position in premium Tequila.”
So, to sum up, this is a smart move by Diageo, bolstering its position in a high-margin, high-potential category in the biggest spirits market in the world and paying the necessary price for that privilege. Right? Well, not quite…
It may be a winning strategy – time will tell on that one – but it’s a strategy rooted in failure. Failure in the brand management of Bushmills over the past nine years, and failure of Diageo’s broader Tequila strategy.
Bushmills first. Diageo paid GBP200m for the brand in 2005 as part of the fallout from Pernod Ricard’s acquisition of Allied Domecq, making all the usual promises about international growth potential, etc, etc.
It hasn’t worked. According to Euromonitor International figures, Bushmills’ share of the Irish whiskey market in the US has slumped from 17% in 2008 to just 8% in 2013.
Yes, the brand is still growing, but at a much slower pace than its competitors – most notably the ubiquitous Jameson, which hogs about two-thirds of the market. Is it any wonder that Diageo CEO Ivan Menezes might want to wash his hands of the whole thing and let the Beckmanns have a go instead?
Now for Diageo’s Tequila strategy. This was simple: buy Jose Cuervo from the Beckmanns, or at the very least negotiate a much-improved deal on marketing and distribution.
When that fell apart, Plan B was effectively to “make do” by prioritising value and sacrificing category leadership – hence the focus on Don Julio and the acquisitions of high-end brands Peligroso and, with Sean Combs, “mini-Cîroc” DeLéon.
But hang on a minute. Just over a decade ago, Diageo owned Don Julio outright, having acquired the brand as part of the Seagram deal in 2000. The company then sold a 50% stake to the Beckmanns in 2003, allowing them to take over the brand in its native Mexican market.
I don’t know the price differential between what Diageo charged for that stake, and what it had to pay to buy it back this week – but I’m guessing it ain’t pretty.
But the consequences of the loss of Cuervo have reverberated beyond the Tequila category. One of the almost overlooked clauses of the Don Julio/Bushmills deal is that the Beckmanns will give up, earlier than planned, the rights to produce and distribute Smirnoff in Mexico.
Mexico ought to be a decent emerging territory for Smirnoff, and in 2011 the brand was nearing market leadership, but sales have slumped in the past two years – pretty much since the Cuervo talks fell apart. No wonder Diageo wants Smirnoff back in-house.
So, taking all of this into account, was buying Don Julio outright and selling Bushmills a good deal or a bad deal? A better description might be a pragmatic deal, a deal of drinks industry realpolitik.
Or, if you prefer, simply making the best of a bad job.
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