About 85% of Brown-Forman Corp.’s sales growth over the last 10 years has come from markets outside the U.S., Don Berg, CFO, told investors yesterday.
“We think Brown-Forman has a long runway for growth,” he added, noting that Brown-Forman currently has only 1% of the global spirits market.
Brown-Forman has a targeted focus, with less than 20 trademark families, unlike some other major spirits companies with hundreds of products not only in spirits but also in wine and beer, said Paul Varga, chairman/ceo. “We’re known for our ownership of the Jack Daniel’s Distillery and trademark, but we’re growing our geographic diversification and routes to consumers,” he added.
“We work very hard to think about the company’s future,” and the company will mark its 150th anniversary in 2020, “but we view our job as building forever. We’re very proud of our consistent performance in good times and bad.”
Indeed, over the last 35, 25, 15, and 10 year periods, Brown-Forman consistently returned high single-digit growth, typically between 6% and 8%. But the last five years, saw growth drop to the mid-single digits, with sales growing 5% a year, gross profit rising 4% and operating income 6%. Of course, the last five years included the deepest recession since the Great Depression. But, Varga said, the company has returned to its historical performance levels.
One reason, Lawson Whiting, senior vp/chief brands officer, said, is that Brown-Forman has divested a number of lower-growth or lower-return businesses, including Lenox China and some wineries.
Jack Daniel’s represents about half the company, and Whiting said one of the company’s objectives is to accelerate growth of brands other than Jack Daniel’s. Southern Comfort, which is the No. 2 B-F brand — and one that has been struggling — is on track to return to growth, Whiting said. “We’ve revamped the entire marketing program,” he added.
Brown-Forman’s vodka business, largely Finlandia, has a 10-year growth rate. It’s the No. 1 premium vodka in Russia and Poland. The company has also acquired the Maximus brand.
Early Times is growing again in the U.S., Russia and Japan, he said. Woodford Reserve, an ultra-premium bourbon, “is at the tipping point and is starting to accelerate. Priced in the low-$30s, it has really good margins and line extensions, including one at $100 a bottle.”
Whiting noted that Jack Daniel’s is the fourth largest spirits brand in the world, and is poised to surpass Bacardi.
One reason, said John Hayes, senior vp/managing director, Jack Daniel’s, is that the Jack Daniel’s Distillery in Lynchburg, Tenn., is America’s oldest registered distillery. The brand “gets it’s credibility from a real history and the fact it’s made by real people, in a real place.” Also: It’s “a unique tasting whisky, unlike any other.”
While many brands pay for product placement in movies and elsewhere, Jack Daniel’s hasn’t, Hayes said. “We just let it happen. It’s an iconic brand, with enormous value and equity worldwide.”
Sales have grown from 200,000 cases in a few state in 1956, when Brown-Forman acquired it from the Motlow Family, to 12 million cases today in 160 countries around the world.
Compared to other distilled spirits, Jack Daniel’s Black Label is uniquely powerful. To be sure, Bacardi and Smirnoff both sell more cases — Bacardi around 12 million cases a year and Smirnoff around 15 million. But they are priced substantially below $20 a bottle.
Jack Daniel’s Black Label is priced around $27 a bottle, and sells about 12 million cases a year– substantially more than Chivas Regal (3 million cases, $35 a bottle) or Johnnie Walker Black (6 million cases, $34 a bottle). This gives Jack Daniel’s Black Label a uniquely rich value, Hayes said.
Jack Daniel’s is marketed as a Tennessee Whiskey. But “outside the U.S., whiskey means Scotch Whiskey,” Hayes said. Jack Daniel’s “is at the intersection of Scotch and Whiskey,” he added, possessing many of the characteristics of each. Its advertising seeks to capitalize on that, declaring, “It’s not Scotch. It’s not Bourbon. It’s Jack.”
In 1990, Jack Daniel’s was “essentially one brand,” he said. Now, “12% of Jack’s volume is something other than Black Label. In 1990, 80% of Jack Daniel’s was sold in the U.S.; now, 54% is outside the U.S.” Jack Daniel’s biggest export markets are the UK, Germany, Australia, Japan and France. “We’re the No. 1 on-trade whiskey in the U.K., outselling Scotch. We’re seeing rapid growth in emerging markets, especially Russia, Poland, Turkey, Brazil and China.”
Key goals for Jack Daniel’s are to recruit new consumers and to increase loyalty among existing consumers. “So we need to introduce new products and grow existing product,” Hayes said. “But we expect Old No. 7 to be the foundation of our portfolio.”
Jack Daniel’s Tennessee Honey was the No. 1 new spirit of 2011. “Many consumers have an affinity for what Jack Daniel’s stands for, but frankly don’t like the taste of full-strength whiskey — especially women.” Tennessee Honey is attractive to that market.
Jack Daniel’s Sinatra Select is the brand’s latest innovation, and is aimed at celebrating Frank Sinatra’s 100th birthday. Sinatra was a huge fan of Jack Daniel’s. Sinatra Select is currently on sale only at the Las Vegas airport duty free store. “You have to leave our country to buy it,” says Hayes. It’s pricey, too: $150 a bottle. It will roll out next month in Heathrow, Dubai, Singapore and the Jack Daniel’s visitor store in Lynchburg, Tenn.
“Frank is still very cool to young and old alike around the world,” Hayes added.
International Routes to Market
Mark McCallum, executive vp for Europe, Africa, Asia-Pacific and Travel Retail, noted Brown-Forman has deliberately sought to “internationalize” the company. In 1992, he said, the U.S. accounted for 86% of Brown-Forman’s sales. Now, the U.S. accounts for just 31%.
“From a handful of markets 20 years ago, we now have scale — more than 50,000 cases — in 40 markets. Jack Daniel’s has been key — it’s an incredible trademark — but the acquisition of Finlandia and Casa Herradura have both added to our ability to grow internationally.”
In 2002, 88% of B-F’s international business was through third party agency partners. But the company’s expanded product line now competes with more brands of overseas producers. “It’s hard to get the attention of third party distributors needed to develop our brands when they have competing brands,” Hayes said.
So third-party distributors now represent just 34% of sales, while company-owned distributors account for 52%.
“Not that everything will move to owned distributors. It depends on the market how we set our route to market. But we want to be sure in priority markets we have the influence we need to be competitive,” Hayes said.
Taking Care of Shareholders
Over the past 10 years, Brown-Forman has earned $4.6 billion, and returned $3.1 billion to shareholders in the form of dividends and stock buybacks. “We reinvested one third of our profits and returned two-thirds to shareholders,” Berg, the CFO, said.
“We look to reinvest in organic growth, grow our dividends and do acquisitions that make sense,” he added. The company reinvests 2% to 3% of sales in capital expenditures. “We believe dividends are important to shareholders. We’ve paid dividends for 69 years, increased them every year for the last 29,” he said.
“Like other family-controlled businesses, we focus on delivering the greatest return for shareholders while reducing risk. In the last 10 years, 292 companies have outperformed the S&P 500, and one was Brown-Forman. Only 139 companies had lower risk/higher return ratio than the S&P 500 as a whole, and only 6 achieved higher returns than Brown-Forman, but at lower risk. In other words, Brown-Forman outperformed 494 of the S&P 500 in delivering higher returns at a lower risk,” Berg said.
“We think Brown-Forman is a great long-term investment,” he added.
How the Brown Family Exercises Control
The Brown Family is active in the company, a factor Varga has often cited as a positive. Garvin Brown IV, executive vp and chairman of the board of directors, explained the family’s involvement.
“What interests us at Brown-Forman? We follow the share price, are interested in the financial success of the company. We’ve had to live through things in the marketplace, like the dot-com boom at the turn of the century. When we went to cocktail parties, we felt so unfashionable.
“BF is something that approaches the timeline we like for our investment. We understand Jack Daniels, we get Jack Daniels, we get Lynchburg and we understand Kentucky. In the rest of the portfolio, we stubbornly see a Jack Daniels way to breakout. We look for Chambord on the back shelf. We want to see line extensions.
“We don’t all run into Paul’s office to share our views on the Chambord package change. Instead, we put a lot of time and energy into how to organize for the future.”
In 2007, there were a number of family controlled companies that came under siege, including Dow Jones, publishers of The Wall Street Journal. The Brown Family decided it didn’t want to see the company suffer the same fate as Dow Jones, and, a year later, Anheuser-Busch.
So it organized a family committee which has several subcommittees. Agendas for family meetings, which are held twice a year, seek to develop the family fluency of essential topics through lifelong engagement with a comprehensive shareholder education curriculum that focuses on four areas:
- Brown-Forman and the beverage alcohol industry, to provide a comprehensive understanding of and engagement with Brown-Forman and the beverage alcohol industry.
- Governance, focusing on the policies, processes and guidelines that facilitate shareholder engagement with the company.
- Ownership, developing the skills and tools necessary to preserve, protect and grow the family’s legacy and stewardship of Brown-Forman and why this is of critical importance to maintaining the strength of the family-company relationship.
- Family and community, fostering a connection between the family’s past and its future, the evolution of its values and purpose and how these are expressed in the communities in which family members live and work.
The family has also adopted a formal Brown Family Constitution, which states the constitution’s purpose is “to perpetuate our family’s commitment to Brown-Forman Corp.’s long-term growth and independence through the family’s control.”