The just-drinks interview: Con Constandis, CEO, Corby Distilleries
Few companies felt the shockwave of Allied Domecq's sale more than Corby Distilleries. But the Canadian company has shrugged off the doubts and concerns about its future to emerge a stronger and more focussed operation. Con Constandis, the company's CEO, talks to Olly Wehring about this evolution, the sale of an iconic brand and his international aspirations.
Formed in the 1850's, Canada's Corby Distilleries has grown to account for 25% of its domestic spirits market. But it was its role in the Allied Domecq/Pernod Ricard acquisition two years ago that brought the company firmly into the global limelight, especially when it agreed to sell its stake in liqueur brand Tia Maria to the French company.
When Pernod bought Allied, the company took over a 45% holding in Corby, with the balance split 50-50 between institutional shareholders and the Canadian public. This suggests that Pernod holds quite some sway over Corby's actions. Con Constandis, Corby's CEO, plays down the level of control Pernod exercises, however.
"Pernod has always said publicly that they have a very decentralised management structure," he says. "They actually exercise it - they believe very much in autonomy and allowing that entrepreneurial ability to come through from their senior managers. So, apart from their role on the board, which ensures a consistent long-term strategy for Corby, there is very little if any 'interference' or involvement on a day-to-day basis. We're left alone to do what we have to do, and they respect our governance model, given that we are a publicly-traded company, with minority shareholders."
Two years ago, when Corby sold its stake in Tia Maria for C$72m (US$70.3m), it looked to some like the company had slain its golden goose. Corby had previously held a 45%-ownership interest in the global liqueur brand, with the balance being held by Allied. Year-on-year, Corby had to record an equity in the earnings of Tia Maria, because its ownership interest was past a certain threshold.
"We were picking up earnings on an equity basis, but the reality was that the business was completely managed by Allied - investment decisions, markets they would expand into," Constandis notes. "What Corby had was a very erratic earnings stream, from our perspective. When there were years when Allied was not investing behind Tia Maria, or expanding its franchise, Corby would get a nice earnings stream coming in." In the early part of this century, however, AD decided to expand the Tia Maria franchise and invested in line extensions and in markets. That depressed the earnings stream, so Corby's equity was coming through very thin, even recording losses at some points.
"This was an earning stream we didn't control, that could make up to a 10% swing effect on our earnings," he says.
The sale of the stake, Constandis feels, "cleaned up" Corby's revenue stream. "We don't have this equity in earnings - as a non-cash item - distorting our income definition. We, in effect, offloaded a non-strategic asset that had a value we couldn't unlock. If we weren't receiving dividends in cash, then it really wasn't of any value to us. So, we basically traded that off for a very active income stream that we can control. They got what they wanted, while we got a bit more control of our destiny. We have a low capital model, so cash is very key for us, and we can focus on that more now."
In return for selling the brand, Corby took over full ownership of the Seagram Coolers trademark in Canada, international ownership of the Lamb's rum trademark and a 15-year representation agreement to distribute Pernod's brands in Canada.
"This was critical, as this distribution deal means Corby has a very secure earnings stream I know we can build on over 15 years," says Constandis. With the balance of C$72.5m being paid in cash, the sum value of the proceeds was around C$110m.
Corby's sales of around 4m cases of spirits a year in Canada - whilst owning or representing eight of the country's top 25 spirits brands - suggests that the company is going great guns domestically.
"It's like a good news, bad news situation in Canada," says Constandis. "The Canadian market has been strong for a number of years thanks to the country's economy. As a result, our business has been strong - 3-4% growth in spirits for a number of years, wine growing at 7-8% year-on-year for at least five years, even RTD being flat to 1%, which is better than most markets. So, thanks to the economic situation, premiumisation is showing through in Canada. Also, we've got the portfolio to approach it."
The company has its competitors in the country, however. "In Diageo, which has a slightly higher share than us, we have a major competitor. Our other competitors are smaller, but more focused. So, our challenge is to be as focused as our competitors to drive value for our shareholders. We've had to switch gears from a company trying to dominate market share to a company trying to focus on share value and value creation. That's the challenge, but not one we're trailing in by any stretch. So, the dynamic in Canada is focus, focus, focus."
As in most other developed markets, a further pressure comes from the country's authorities. Constandis is well aware of the Government's desire to tax the steady revenue stream generated by alcohol in the country. "If the Government tries to pass something down, we'll pass it on to the consumer and then they can stand up and explain to them," he says. "A third challenge, like everywhere else, is a combination of social responsibility and the environment. If you support Government initiatives, then you're seen as a constructive partner. Helping them look good in the public eye never hurt."
So, with the company seemingly on the ball domestically, is Corby looking to grow internationally? Constandis believes this is a valid path to greater profitability, but wary of the perils and pitfalls. "It (international markets) is a priority," he says, "but in a balanced way. I've worked in the European markets and internationally. I know the cost of failure, and it's high. We've got about 5-7% of our business coming from exports - principally Lamb's, Wiser's and Polar Ice. I want to build that, but I don't want to just jump into a market before I've got an idea on the cost of playing those markets. So, it will be managed growth, but the export market is critical for us and we will increase our presence there."
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