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The continuing woes of the US economy have affected every player in the drinks industry with a stake in the market, and this week's two subjects Allied Domecq and Brown-Forman have been no exceptions.  However, as Chris Brook-Carter reports, despite the tough times both have made considerable steps in the right direction.

Allied Domecq

Another year with Philip Bowman at the reins and another year of transition for the Bristol-based drinks company and world number two. Much of the year has been spent integrating the £1 billion worth of acquisitions Allied Domecq has made since it pulled out of the race for Seagram’s wine and spirits business at the back end of 2000. So far, 14m cases of wine, the rights to Stolichnaya vodka, distribution assets in Germany and Malibu have been added to the Allied portfolio.

“On the surface it appears to have acquired a mixed bunch of companies, but those chosen have been selected for a number of different strategic reasons,” says Canadean in its Company Watch report. “Whether or not they fulfil these aims remains to be seen.”

Allied has changed considerably as a company in the last two years. Most obviously the acquisitions are estimated to contribute 20% of profits in the current year. However, there has been a noticeable change in culture at the company as well, not least since the appointment of Kim Manley as chief marketing officer.

In Bowman’s own words Allied is now focused “on the profitable growth of (its) brand assets rather than simply chasing volume at any price.” As Canadean says: “Not before time!”

Allied has been at great pains to stress that it is primarily a marketing-led rather than production-led company now. And integral to this has been Manley’s overhaul of Allied's strategy towards its brands, markets and operations. Though not a completely new direction it is a radical overhaul of the existing one, with marketing investments more closely linked to categories and markets that generate sustainable growth or local brands that provide scale in strategically important markets.

The portfolio has been split into what is becoming a familiar shape for the modern drinks company, with a group of top profit-spinners – in Allied’s case these have been identified as Ballantines, Kalhua, Beefeater and Sauza – a set of local market leaders, such as Stolichnaya in the US and Teachers in the UK, and the rest of the portfolio.

The strategy certainly seems to be paying off.  For 2001 the spirits and wine division trading profit rose by 8% on turnover up 8%, helped by price increases and improvements in the mix. And in the first half of 2002, the company exceeded forecasts by reporting a 6% rise in profits. Analysts had expected Allied to come in with profits between £238m and £249m. In fact, the UK-based drinks group achieved first half pre-tax profits of £251m (US$364.5m).

However, there are still concerns, not the least of which is the task Allied has set itself in creating a coherent global wine strategy. David Scotland has been given this unenviable task. Although he has some good brands to work with, Canadean suggests that some of the wine acquisitions appear to have been “driven by the old production-led Allied Domecq strategy, rather than seeking the best wines that the consumer wants.”

Despite the challenge, expect Allied to pursue further acquisitions in wine, particularly in Australasia. And Canadean predicts that other add-on acquisitions, which might improve distribution volumes in local markets, will also be pursued.

Expert Analysis

Company Watch - Allied Domecq

A comprehensive look at world-wide activities and brands, together with an analysis of company strategy and brand portfolio.


In all, despite an acknowledgement from Bowman that the economic outlook is uncertain and that there has already been slowdown in some markets, if the current culture change continues and the right acquisitions are made, Allied should be able to look forward to a future of more soundly based growth.


Alarm bells have been ringing for many in the drinks world for some time, as the global economy slumps and the US in particular slows. And, while in 2001 Brown-Forman produced record results, the unusual challenges following September 11 managed to temper the growth even of this recently strong performer.

Earnings per share for the fiscal year 2002 were down 2% to US$3.33 from the previous year. Meanwhile net income fell from US$233m to US$228m and gross profit fell to US$1.133 billion from US$1.153 billion.

However, the company's drinks business weathered the storm far better than its consumer durables operation, which has again led to suggestions that the company could benefit from disposing of this side of the business in order to to concentrate on drinks.

Wine and spirits revenues and operating income were both up 3%, and on a constant exchange basis, revenues were up 4%, while operating income achieved a 7% growth rate.

Brown-Forman has focused hard in recent years on upgrading its portfolio with new packaging and higher investment in its brands. Nowhere has this investment been more heavily rewarded than with the company's flagship product Jack Daniel's. For the tenth consecutive year Jack Daniel's continued to experience global growth and worldwide depletions increased 2.5%. Outside the US the brand grew 6%, with strong performances in the UK, Spain and Italy particularly. However, in the US depletions were essentially flat due to the slowdown in the on-trade.
Meanwhile Southern Comfort has also carried on its encouraging performance of the last couple of years with record worldwide gross profits. The brand was repositioned as the "Spirit of New Orleans" in the US and depletions were up 2% in this market. However elsewhere the performance was mixed as strong Western European growth was balanced by less spectacular trends in Asia and duty free.

The Brown-Forman strategy can be simplified into a three-pronged approach. Firstly the group has been focused on dedicated brand building, particularly for Jack Daniel's, which has included new products at both ends of the price spectrum. This year saw the launch of Jack Daniel's Hard Cola, which is to be sold in the US with Miller Brewing. Positioned with a more masculine slant than other RTDs and as a cola- rather than citrus-based product it will have a real USP over the other RTDs currently on the market.

Secondly, Brown-Forman is working on broadening its geographical reach. Its distribution contract with Suntory in Japan was renewed during the fiscal year. And, in addition to joint ownership of the group's Australian distributor, Brown-Forman expanded its relationship with Allied Domecq in much of Central and Eastern Europe. Perhaps most significant though was the expansion of the group's relationship with Bacardi-Martini.

In the US this saw the two family-controlled drinks companies form the strategic alliance, Gemini, which will boost their distribution power in the country. While the partnership will help both parties jointly manage relationships with brokers and beverage alcohol boards, building greater distribution muscle in a rapidly consolidating market will be the key to its success.

And as of the beginning of August, Brown-Forman has begun selling directly in the UK, ending its distribution relationship in the country with Diageo. It will do so, however, in a cost-sharing arrangement with Bacardi. "By sharing the cost of the Bacardi sales force and administrative systems, we will significantly lower distribution expense in our second largest market," CEO Owsley Brown said in a statement recently.

Lastly the company wants to widen its portfolio; Finlandia and Glenmorangie are recent examples of this.

Signs that an underlying strength continues to run through the Brown-Forman business are apparent in its most recent first quarter results for 2003. Although earnings per share were down to US$0.53 from US$0.57 a year earlier, the lower earnings reflected a one-time reduction in trade inventory levels in the UK following the change in distribution.

"The underlying strength of Brown-Forman's core spirits brands was encouraging during the period, although the environment for both wines and consumer durables remains challenging," the company said. And, the earnings were consistent with an outlook for the full year earnings growth of 9-12%, Brown-Forman stated.

"On the assumption that 'if it ain't broke, don't fix it', Brown-Forman's management has little reason to shift direction," Canadean says in its Company Watch on the company. "Brown-Forman is likely to out-perform most of the rest of the industry for more years yet."

Expert Analysis

Company Watch - Brown Forman

A comprehensive look at world-wide activities and brands, together with an analysis of company strategy and brand portfolio.



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