The just-drinks Interview - Paul Varga, CEO of Brown-Forman - Part II

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In the first part of just-drinks' interview with Paul Varga, the CEO of Brown-Forman discussed the company's portfolio and prospects in emerging markets. In this second - and final - part, Varga details the company's take on the mergers & acquisitions scene in the global spirits industry, and the roll of innovation as an alternative to M&A.


It has been around six years since Brown-Forman last made a sizeable acquisition: In 2006, the company bought the Chambord raspberry liqueur brand, followed by Tequila Herradura five months later. Since then, it's been all quiet on the shopping front.

Paul Varga, chairman & CEO of Brown-Forman

“One of the things that I've witnessed, particularly since around 2007, is that very little is available,” notes Varga. At the same time, the watch-word for Brown-Forman, it would appear, is 'endurance'. “We've been around for 142 years, and we'd like to do another 140 years or so,” Varga says. “What we're looking for are enduring opportunities. When studying the landscape of where one might get enduring growth, one of the first places you go is the whisk(e)y category. For us, in American whisky we're relative newcomers. We've learnt so much over the last 20 years about the appeal of Jack Daniel's and what might be on the horizon for American whiskies. But, we've also been able to witness the large interest in – and the consumption patterns associated with – both Scotch whisky and Irish whiskey.

Without a presence in either of these categories, then, when can we expect Brown-Forman's first foray into Scotland or Ireland? Varga smiles. “How we enter it is always the interesting question,” he says, “but that's something we famously keep confidential. (When it comes to acquisitions) we work to four A's: Is it attractive? Is it available? Is it advisable? Is it affordable?”

All four of these, I suggest, could be on offer in the form of Whyte & Mackay, the Scotch whisky unit of India's United Spirits that is sure to come under the anti-trust microscope some time soon. “I won't speculate on that individual speculation,” says Varga. “Each opportunity has to be evaluated on its own merits. I, like you, have read a lot of speculation around that, but that's all I can really say.”

A couple of months ago, an analyst at Nomura posited that Brown-Forman is sitting on an acquisition warchest of around US$3bn. “Clearly, we can afford to buy with our balance sheet today,” concedes Varga.

“There are many wonderfully attractive brands around the world. Every deal has its own dynamics as to whether they're advisable. But, it requires patience: We have that patience. We're controlled by a family that wants to be in this business for a long time.

Here's Varga's last line on the matter: “We've made a few larger acquisitions, like Finlandia (in 2000) and Casa Herradura,” he says. “But, a study of the modern history of our acquisitions wouldn't show a 'betting-the-ranch' approach. We've long said that acquisitions are a wonderful opportunity rather than a necessity.”

Okay, let's turn this around, shall we? If Brown-Forman doesn't broaden its spirits footprint, I ask, could it become a target as part of the industry's consolidation trend? One need only look at recent speculation surrounding domestic rival Beam Inc – also a big Bourbon and American whisky player – to see what size of company the big boys are looking to swallow next.

“I won't deny that our company is attractive, in an enormously attractive industry,” Varga says. “That evidence has been borne out since the onset of the global economic crisis – look at how well this industry and our company has held up.

"We certainly have brands that others long for, we know that. But, our ownership by the Brown family is an enormous asset for us. They've been very well-rewarded for their controlling ownership of Brown-Forman. Today, we have many members of their fifth generation inside the company. We take great heart from the fact that they are so committed to it.”

(For the record, according to the company's proxy statement earlier this year, the Brown family controls about 69% of the company’s A shares, which are the voting shares. Therefore, the family keeps control of the company with that majority ownership. The proxy does not state the amount of B shares (non-voting shares) that the family owns, however.)

All this talk of consolidation within the spirits industry, however, has been over-played, according to Varga. “I also think that there are trends that are prevailing today that are simultaneous to some of the consolidation trends,” he says.

“It's our experience that the degree of concentration in the industry is not moving nearly as rapidly as everyone would have forecast back in 1991. In the US – the world's most valuable distilled spirits market – the business has become less concentrated in the top five since 2007. Part of that is because of the mid- and smaller-sized entrepreneurial companies are significantly out-performing the larger companies.

“It's undeniable that, since 2007 and 2008, a lot of these smaller companies have performed better than the likes of Diageo, Pernod Ricard, Brown-Forman, Beam and Bacardi. This group has lost share to these smaller firms. That's a trend worth observing as well: As un-consolidated as the global market is, in critical markets like the US, the actual performance trends would dictate that they're becoming less concentrated.”

Varga is thankful to these smaller players for opening his eyes to the possibilities afforded through innovation. 

“Observing these trends a couple of years ago, sparked us to focus on innovation,” he says. “One of the results was Jack Daniel's Tennessee Honey [launched last year], which showed a more innovative and organic approach to competition. That's not to say it has to come at the direct expense of acquiring things, but when you're losing share or there's nothing available, necessity creates some of that innovation.

“There are alternatives to growing beyond just acquiring.”

To read the first part of this interview, click here.

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