Allied Domecq: No merger but Bowman's aim is true

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Under Philip Bowman's command, Allied Domecq is showing the growth potential shareholders have been expecting for some years now.

Glancing at the latest six months figures, many will be pinching themselves to make sure they have not slipped into a trance and picked up Pernod Ricard's results by mistake. Profits from its spirits and wine division up 9% (£207m to £225m); the overall group's profits up 16%; and Allied's finance director, Graham Hetherington's startling news that "for the first time, the international QSR (quick service restaurants) business has traded without any losses."

The only hiccup has been the agave crisis which has ravaged the Tequila market and hit one of the company's core brands Sauza. The brand, and Giro, Allied's lower grade Tequila, has fallen back 12% and could drop further because of supply problems. "To put it in perspective," said Bowman, "this time last year agave was one peso per kilo, today it is eight pesos a kilo, a rise of 800%. No one can forecast where the market will go next." Allied has invested £3m so far by investing in research and equipment to optimise the production yields of agave, and implementing better husbandry of its existing plantations and new plantings on leased land to the company. "We have accepted that this £3m is a loss and a final figure of £8m is not out of the question. The shortfall will continue for around three years," Bowman admitted. Price increases in Mexico and the US are also expected.

For the other three core brands, the past six months has seen continued growth. Ballantine's Scotch whisky remains the flagship brand with volumes at 2.7m, up 6%; coffee liqueur Kahlua's volume has reached 1.6m, an increase of 11% led by the success of its ready-to-mix brands in the US; and Beefeater gin at 1m nine-litre cases and growth of 8%.

Crucially, the reason for the improvement has been the increased marketing investment of the spirits and wine division, up 11% to £155m. Beefeater has certainly benefited from the "Be Alive" campaign in core markets such as Spain and the US and some old favourites have been revamped such as Tia Maria, endorsed by Hollywood star Stephen Dorff in the "Princess of Darkness" TV and cinema campaign. Tia Maria volumes are up 8% worldwide, with a giant 17% leap in the UK; Maker's Mark volumes are up 10% (US +14%); and indicating a recovery in Asia and the US for the Cognac market, Courvoisier volumes rose 8% in both VS and premium.

A new Ballantine's malt launched in France last month has been a "great success in a difficult market," David Scotland, Allied's president of European operations, told, and the company "will be rolling it over the rest of Europe very soon," he said.

At a time when Paul Walsh, Diageo's CEO, is seriously contemplating the sell-off of its Pillsbury business, Allied's food and QSR business is bucking the trend. Trading profit is up 58% and the international business has turned round a loss of £5m to break-even, and the US rose from £17m to £19m. Dunkin' Donuts and Baskins-Robbins have been revitalised by new advertising campaigns in the US, and the ice-cream stores have accelerated through a new rationalisation programme focusing on key brands in key markets.

To merge or not to merge...
Bowman would not be lead on the perennial merger issue saying only: "I do believe further consolidation is inevitable." Industry sources have said that if any merger were to take place "it will be Stateside". With Chip Reid's surprise departure from Bacardi-Martini last month due to frustrations with the family over its IPO plans, this leaves only Seagram and Brown-Forman. Further losses at Seagram could point to a quick fix arrangement between Bronfman and Bowman but Brown-Forman, the family-owned bourbon business, is on the prowl and has enough ready cashflow to bid for Allied on its own.

Bowman also mentioned his ambition to "acquire a vodka if a good brand were to come on the market." He denied that the company was bidding for the Altia Group's Finlandia, claiming it "was not for sale", or any of the Polish vodkas up for grabs such as Wyborowa and Zubrowka. A company spokeswoman said: "Philip would have loved to had the chance to create Allied's own vodka brand but knows that the market is too saturated and it would be too costly."

Costs savings created by the sale of its pubs and retail operations last year, the closure of the Portland Place headquarters in London and efficiency drives at the Dumbarton distillery in Scotland and all sectors of the business have helped Allied become a more profitable business, Bowman said.

Allied will retain its 25% stake in Britannia Soft Drinks until "a really good offer is made" but said the decision was "upto Bass PLC because it owns 50% of the company," Bowman said.

Elliot Lane
Managing Editor

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