Brown-Forman Sees 3-5% Average Growth for Jack Daniel’s Over 10 Years

What’s next for Jack Daniel’s, a brand family that has shown a 5% average annual growth in shipments over the past 30 years?

Brown-Forman’s approach to brand building is “continued thoughtful innovation,” Mark McCallum, EVP/President, Jack Daniel’s Brands, told an investor conference hosted by Jack Daniel’s parent, Brown-Forman Corp., which has led to three innovations in 12 months:

  • In Australia, B-F has launched Jack Daniel’s American Serve, a half-size can, 10% ABV “a little bit of mixer and a lot of Jack.” Early signs are “quite promising.”
  • In the spring of 2017, Brown-Forman will test launch Jack Daniel’s Tennessee Cider, a mix of JD and cider, in the UK. “We have a high level of confidence it will do really well.”
  • And in the fall of 2017, it will introduce JD Tennessee Rye.

Looking ahead 10 years, McCallum said Brown-Forman believes the Jack Daniel’s Family of Brands will grow anywhere from 3% to 5% a year, for an average of 3.4%.

Jack Daniel’s hasn’t any present plans to add a third flavor to Tennessee Honey and Tennessee Fire, he said.

The key to Jack Daniel’s strategy is globalization and a determination to innovate the product, he explained.

McCallum noted that in terms of innovation, there were just two Jack Daniel’s brands in 1985.  Now there are eight brands within the Jack Daniel’s family.  That’s not quite as many as Johnnie Walker, McCallum suggested, which was able to ride the Scotch whisky wave around the world and currently has 14 brands.  But it’s a lot better than Jim Beam, which has two brands and a much flatter growth rate, although it’s now beginning to expand through innovation.

Looking ahead at future opportunities, McCallum noted that while Jack Daniel’s is in 32 markets worldwide, 7 billion people around the world have yet to try Jack Daniel’s, which he said creates “a very large opportunity.”

In addition, some 1.6 billion LDA middle-income consumers will enter the market by 2025, which increases the possible opportunities.  Jack Daniel’s, he said, is “quite possibly the most valuable spirits brand in the world.”

Strategy for Other B-F Brands

The acquisition of Finlandia and Herradura, opened up the opportunity for accelerated growth in Mexico and Poland, “giving us a runway for Jack Daniel’s to penetrate areas we hadn’t penetrated previously.”

Over the last seven years, we established our own infrastructure organizations in Germany, France, Turkey, Brazil and Canada, and in most cases have seen an acceleration of the JD business.

We believe the work of the last 10 years has established a foothold and has us poised to leverage capabilities we’ve developed in the last decade to drive growth.

Turning to innovation, McCallum noted that Gentleman Jack was in response to the emergence of Crown Royal in the U.S.  In Australia, some 3-4 million cases of Jack Daniel’s are offered in a ready-to-drink can format.  In the last five years Brown-Forman introduced Tennessee Honey and Tennessee Fire.  They are distinct brands, with distinct architecture, “and we are managing them that way – not just as line extensions,” he said.

To achieve the growth Brown-Forman anticipates, he said, Jack Daniel’s will have to remain a special brand.  It’s an iconic name and package. (Prof. Dag Halt suggests that sometime in the 1950s, Jack Daniel’s became iconic in U.S. culture.)  It’s an informal product, less formal than Scotch, available everywhere.  “You met real people from a real place.”  It has a distinct voice, a lack of pretension, that connects with global consumers.  Humanity as a race is enamored of authenticity.

The fact Jack Daniel’s can add brands with minimal cannibalization also makes it special, he said.  It has a focused and dedicated route to consumers.  In many of the 31 countries where it is sold, it’s the only B-F brand the company sells.

Finally, it’s an excellent business model.  It’s industry leading in terms of return on capital and industry margins.

“Our role as brand stewards as we look to the future is very well defined.”

Active Portfolio Manager of Brands

Lawson Whiting, EVP/chief brands and strategy officer, noted that for a company with a very strong lead brand, B-F has used a disciplined approach to brand value creation.  “Over decades B-F has been an active portfolio manager.  We want the portfolio to lift the company’s margins.  We want to maintain a focused premium portfolio, and have a history of excellent brand building.  We are able to think in longer terms than a lot of companies” because of the company’s stable shareholder based.

The company disposed of Lenox china and Hartmann Luggage as well as popular priced wines, Southern Comfort and Tuaca.  At the same time, it bought new brands, including Herradura, “which is a much better place,” as well as acquiring BenRiach, Slane Irish Whiskey.

Only Remy has a more focused, premium portfolio, Whiting said.  B-F’s portfolio is centered in the $20-$30 price point.

Woodford Reserve has become the second most valuable brand in the B-F portfolio.  Key to that has been 150,000 people going through the Woodford Reserve distillery, “giving them a deep dip where they can see it, touch it, taste it and we can hopefully sell it.”

Old Forester “is a brand we didn’t talk about for a long time.”  In the 1970s, it was a 1 million case brand that went on a very long and sharp decline.  But in the last four or five years, there’s been a 27% CAGR. “Old Forester is now a really good growth driver for B-F.”

Why?  It relates to consumers, Whiting said.  It’s a great product at a reasonable price.  When the Old Forester Distillery opens in Louisville, in 2018, “Old Forester will be the first one they go to.”

Turning to the Tequila portfolio, Whiting said growing Herradura is “all basic blocking and tackling.  Now it’s going, we’ve got our margins where we want them, and it’s growing.”  Tequila is growing at the premium price points in the U.S.

Mexico is more difficult, because price points are lower.  “We’ve been aggressively taking prices up double-digits every year.”

El Jimador “doesn’t deliver as much profit.”  It was a million-case brand in Mexico, “which we have driven down aggressively – and now it makes more money.”  In the U.S. Jimador has been growing with good margins.  “We think the business can now be profitably grown from here.”

Looking to the future, Coopers’ Craft is a response to requests for brands aimed at Texas, California and New Mexico.  “We believe in taking our assets in Kentucky and scaling up, not in buying products elsewhere.”

Slane Whiskey will be available in the U.S. next summer.   It will be at a higher price point than Jameson.

GlenDronach is the core brand in the BenRiach Distillery.  “We love the single malt space, very premium, can be very profitable when you’re getting the prices we are.”

High Finance

Jane Morreau, evp-chief financial officer, talked about the company’s business model and the aspirations B-F has about creating shareholder value.

“We think about our business model in terms of growth, margins and capital efficiency,” she said.

“We’ve had consistent revenue growth over a long period of time, typically in the 5-6% range.  The latest five years showed a reported revenue growth of 4%, impacted largely by the disposal of lower-priced California wines.  Looked at from an underlying viewpoint, the last five years’ growth has been at the 7% rate.

Operating margins have been improving over the last five years, a result of the sale of the low-margin wine business, the growth of Herradura and Woodford Reserve, and successful innovation.  Operating margins have grown to 34% from 30% over the last five years.  “Brown-Forman has the highest industry operating margins,” she noted.

Long-term operating income growth has been in the 7% range, she said.  In the last five years, reported growth was 5%, but on an underlying basis it was 10%.

“We’ve been investing in our business,” she said, “laying down whiskey to meet demand we see coming, expanding our capacity.”

If you had invested $100 in Brown-Forman stock 10 years ago, it would be worth $319 today.

Looking forward, Brown-Forman’s aspirations for 2025, based on growing the company’s present business without any acquisitions, projects a mid-single-digit growth from Jack Daniel’s and even faster from other brands.

“We expect U.S. business to grow, but we’ll grow even faster in emerging markets,” which will approach 30% of total revenue, she said.

Brown Family Perspective

George Garvin Brown IV, chairman of the board and member of the family that control’s Brown-Forman, discussed the family’s perspective.

“This is our investment,” he said.  “We’re still an operating family with an operating business.”

On the corporate culture side, B-F has won awards for sustainability, human relations.  For the family, “we get Lynchburg, Tenn.  It reminds us where we’re from.  At some level, we all believe we are distillers, and we’re from Kentucky.

“Culture’s important, but we also like to win.  We consider ourselves a business family, and we like to win.  We’ve been winning with B-F for decades, and that matters.  It’s the balance between return to shareholders and investments in the business that strikes us as a good business strategy.’

“Walking away from the revenue of Southern Comfort to make a long-term bet in Scotland and Ireland is something we think we can help with our long-term time lines” as a family.

Paul Varga, chairman/ceo, summarized the presentations by saying, “We try to pursue outsize rewards with lower levels of risk.”

In a question-and-answer session at the end of the investor presentation, McCullum talked about price gap management.  In the U.S., we expect to continue price increases.  In a number of markets around the world, we’re able to take price increases.

Varga said that four years ago, because of the success of JD Tennessee Honey and others, we were pretty aggressive with pricing across the globe for 18-24 months.  Then we hit the pause button.  “That topic is a huge planning topic as we look ahead to 2018.”

In Mexico, the agave spot market has almost doubled, and “we hope that will put upward pressure on pricing in that market,” Lawson said.

On legalization of cannabis, Varga said it’s way too soon to be able to evaluate it impact on alcohol.   “The most growing consequence thus far is that it will extensively be off-premise.  What it means for competition, we’re in a study mode.”

Brown-Forman has a dual share class structure, Brown said “we don’t spend a lot of time looking at that.  From the family perspective, we have been able to meet liquidity needs without shaking the family’s position to the voting shares.”

Family members keep an eye on the health of the brands and the cash flows, Garvin Brown said.  The board also looks at the share price.

This story originally appeared in our Dec. 14 issue, emailed to clients.


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