Insight - Brown-Forman warns on price pressure
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Price pressure is growing more intense on the US spirits market, Brown-Forman has warned, despite posting a rise in half-year profits.
Lower prices from top players Diageo and Pernod Ricard have intensified pressure on the market during the holiday season in the US, Brown-Forman chief financial officer Don Berg said in a results conference call with analysts today (8 December).
"There's no doubt we've seen more and more pressure, particularly on the pricing side," said Berg, who is also executive vice president of Brown-Forman.
"Two of the five largest suppliers have really taken down their price mix, anywhere around 2% - that would be Diageo and Pernod - whereas the other three, across [Brown-Forman], Fortune Brands and Bacardi have continued to try and find ways to create additional value to the pricing mechanism," said Berg, citing recent Nielsen data.
Consumers have continued to trade down to cheaper brands in the recession, Brown-Forman said today, as it reported a 5% drop in half-year net sales but a 16% rise in profits due to cost savings.
Berg told one analyst that recent growth for the firm's Finlandia vodka brand follows a decision to "take the price down on a permanent basis" in order to compete with rivals.
Brown-Forman raised its full-year profits guidance today, but warned that it "remains concerned about the impact on consumption from a soft on-premise channel, consumer trading-down, and heightened competitive activity".
Berg said: "We do believe that the on-premise busines will eventually stabilise and growth will return, although that certainly is not in sight yet."
Both Berg and Brown-Forman's CEO, Paul Varga, said that they remain optimistic that consumers in North America will return to levels of premiumisation seen in spirits before the economic downturn.
"Hopefully over time we'll get back to that point," said Berg. "But I think it'll probably be pretty gradual. From some of the data that we've seen recently, two of the categories doing particularly well at the higher end are whisk(e)y and Tequila, which suits us very well."
Varga said that emerging markets around the world were likely to recover a taste for premium spirits more quickly.
"In the emerging world, the degree of premiumisation may be even stronger than what we would have experienced in the US or Europe over the prior ten or 20 years, as economies grow and middle classes emerge [with] greater access to disposable income," he said.
Brown-Forman also said today that it is currently reviewing its distributor contracts in Europe. Group executives declined to comment further on the situation.
Diageo has launched an ad campaign for its Ciroc vodka brand for the US market featuring Sean "Diddy" Combs and an up-and-coming comedian....
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