Agave Leaves a Mark on B-F
Brown-Forman experienced the same changing trends as other spirits companies in the recent period, namely a worsening economy and shift to the off-trade, but one thing was notably different: agave. A combination of bad weather and questionable farming practices left B-F short on the agave fruit that is vital in producing tequila in the first quarter.
CFO Don Berg said the company understood the volatility of an agricultural product when it acquired Casa Herradura. However, B-F experienced an abnormal loss rate of 25% in the quarter which is not entirely unique to the company. The recent agave glut has driven prices down. As a result, many farmers are leaving fields untended and instead producing corn which is in high demand.
The company owns a few agave fields, but most of its supply comes from land owned by others, in which B-F owns the plants and is responsible for the farming.
Berg pointed out that the majority of B-F’s agave plants are healthy, and that the company is “actively taking steps to prevent further plant losses.” He said the situation will not constrain the company’s “ability to build our tequila brands to their full potential.”
The company is re-launching el Jimador as a 100% agave product, and plans to expand distribution of the Herradura and el Jimador brands. Paul Varga, ceo, also said tequila is doing well in many U.S. states, not just the traditional California and Texas markets.
EFFECTS OF CONSUMER TRENDS. Spirits companies across the board, including B-F, have reported that consumers are shifting from the off-premise to the on-premise. As a result, Jack Daniel’s depletions were flat in the quarter and Southern Comfort was down mid single digits. Price increases partially offset Soco’s declining numbers.
"It is unlikely that SoCo trends improve near-term as we expect on-premise to remain weak," said Kaumil Gajawala of UBS.
After reporting disappointing results for Jack Daniel’s and Southern Comfort, B-F said it was confident the trends would pick up with increased off-premise promotional activities and discount programs. Recent Nielsen trends in the four weeks to July 26 reported 8% growth for Jack Daniel’s.
“We believe the first quarter had a fair amount of noise in it which depressed reported quarterly depletions in several key markets around the world. Every quarter has some of this noise in it, but this one seemed unusually high to me,” said Varga.
“As economic conditions improve, we expect that Jack Daniel’s global volume growth will return to the long term historical rate of mid single digits.”
Meanwhile, Gentleman Jack and Jack Single Barrel experienced strong growth in the quarter.
B-F also reported a shift between price categories, namely acceleration in volume growth for value brands in the U.S. and weaker trends for many of the brands in the premium and super premium categories.
Berg said consumers in the US are not trading up at the rates they were in the past, but B-F’s super-premium developing brands continue to buck this trend and deliver strong performance. These brands include Sonoma-Cutrer, Bonterra, Chambord, Tuaca, and Woodford Reserve, which all grew strong double digit net sales.
“Growth in premium and super premium brands,” said Varga, “are testaments to opportunities that exist for well positioned brands in this industry.” He said the company’s premium and super-premium brands will become "more important to Brown-Forman's profit picture" in the future.
Furthermore, margins felt some pressure in the first quarter because recent price increases did not outpaced cost inflations from grain and fuel. B-F said it has implemented some cost saving initiatives as a result. The company expects costs to increase, and will continue to look at inflationary pressures to determine to what extent it can pass those costs to pricing.
FORTUNE TERMINATES ABSOLUT, GAINS CRUZAN RUM
In not entirely surprising news yesterday, Fortune announced it has severed its joint-venture agreement with Vin & Sprit to distribution Absolut in the U.S. in exchange for some cash and Cruzan rum. Pernod Ricard now carries sole marketing and distribution rights to Absolut.
The j-v, otherwise known as Future Brands, was originally slated to end in February of 2012, but will now come to a close on October 1. In return, Pernod is paying $230 million cash to Fortune, which in return is acquiring Cruzan rum from Pernod at $100 million. It appears a win-win situation for both sides. The cost savings for Pernod that will stem from the early termination more than offsets the payout to Fortune.
“We believe these announcements are very positive for Pernod,” said Melissa Earlam of UBS.
At the same time, Fortune was able to acquire the fast-growing rum brand at a discounted price and obtain some cash for future acquisitions. V&S paid close to $200 million for Cruzan in 2005.
Fortune already owns Ron Rico, a low-end rum with limited distribution, but Cruzan is the fifth largest rum brand in the U.S. and grew double digits in 2007. As a result, it will fill a niche in Fortune’s portfolio and become its flagship rum offering.
Commenting on the agreement, Patrick Ricard stated:
“The immediate takeover of Absolut distribution in the US by Pernod Ricard USA is excellent news for the Group. We will now market and distribute the leading imported spirit and Premium vodka in the U.S., which greatly enhances our position. Through both our size and the quality of our portfolio, we are now the clear number two in the North American spirits market. These factors will allow us to strengthen our growth in this key market. I also wish all the best and a continued success in the future for the Cruzan rum brand and the Cruzan teams within Fortune Brands.”
WSD BRIEFS:
INTERVIEW WITH FOSTER’S EXECS. The Business Spectator featured an interesting interview with Foster’s chairman David Crawford, temporary ceo Ian Johnston and cfo Angus Crawford in which the execs explain why they want to shift Foster’s focus back to value market share. The first question, directed as Angus, asks: “Well gentlemen isn't it reasonable for shareholders to feel now that you've ruined a perfectly good beer business by going into wine?”
To check it out, click here.
PERNOD’S CHIVAS BROTHERS UNIT said it is selling the Glendronach distillery to The Benriach Distillery Company. The sell off will allow Chivas to concentrate on its 13 other distilleries, said the company. In addition, it has started “significant expansion plans” for The Glenlivet Distillery.
COBBLESTONE VINEYARDS, a family-owned winery in Napa’s Atlas Peak appellation, says it has “gone global” by acquiring a New Zealand vineyard specializing in pinot noir. Details of the transaction were not disclosed. It bought the small New Zealand hillside property from Jeff Barber, a Kiwi winegrape grower and winemaker, who will stay on as vineyard manager. The vineyard is situated on the Te Muna Terrace, an elevated and recently developed section of Marinborough.
Have a wonderful Labor Day Weekend!
Until Tuesday, Megan
“Plans are only good intentions unless they immediately degenerate into hard work.”
Peter Drucker
--------- Sell Day Calendar ----------
Today’s Sell Day: 21
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
CFO Don Berg said the company understood the volatility of an agricultural product when it acquired Casa Herradura. However, B-F experienced an abnormal loss rate of 25% in the quarter which is not entirely unique to the company. The recent agave glut has driven prices down. As a result, many farmers are leaving fields untended and instead producing corn which is in high demand.
The company owns a few agave fields, but most of its supply comes from land owned by others, in which B-F owns the plants and is responsible for the farming.
Berg pointed out that the majority of B-F’s agave plants are healthy, and that the company is “actively taking steps to prevent further plant losses.” He said the situation will not constrain the company’s “ability to build our tequila brands to their full potential.”
The company is re-launching el Jimador as a 100% agave product, and plans to expand distribution of the Herradura and el Jimador brands. Paul Varga, ceo, also said tequila is doing well in many U.S. states, not just the traditional California and Texas markets.
EFFECTS OF CONSUMER TRENDS. Spirits companies across the board, including B-F, have reported that consumers are shifting from the off-premise to the on-premise. As a result, Jack Daniel’s depletions were flat in the quarter and Southern Comfort was down mid single digits. Price increases partially offset Soco’s declining numbers.
"It is unlikely that SoCo trends improve near-term as we expect on-premise to remain weak," said Kaumil Gajawala of UBS.
After reporting disappointing results for Jack Daniel’s and Southern Comfort, B-F said it was confident the trends would pick up with increased off-premise promotional activities and discount programs. Recent Nielsen trends in the four weeks to July 26 reported 8% growth for Jack Daniel’s.
“We believe the first quarter had a fair amount of noise in it which depressed reported quarterly depletions in several key markets around the world. Every quarter has some of this noise in it, but this one seemed unusually high to me,” said Varga.
“As economic conditions improve, we expect that Jack Daniel’s global volume growth will return to the long term historical rate of mid single digits.”
Meanwhile, Gentleman Jack and Jack Single Barrel experienced strong growth in the quarter.
B-F also reported a shift between price categories, namely acceleration in volume growth for value brands in the U.S. and weaker trends for many of the brands in the premium and super premium categories.
Berg said consumers in the US are not trading up at the rates they were in the past, but B-F’s super-premium developing brands continue to buck this trend and deliver strong performance. These brands include Sonoma-Cutrer, Bonterra, Chambord, Tuaca, and Woodford Reserve, which all grew strong double digit net sales.
“Growth in premium and super premium brands,” said Varga, “are testaments to opportunities that exist for well positioned brands in this industry.” He said the company’s premium and super-premium brands will become "more important to Brown-Forman's profit picture" in the future.
Furthermore, margins felt some pressure in the first quarter because recent price increases did not outpaced cost inflations from grain and fuel. B-F said it has implemented some cost saving initiatives as a result. The company expects costs to increase, and will continue to look at inflationary pressures to determine to what extent it can pass those costs to pricing.
FORTUNE TERMINATES ABSOLUT, GAINS CRUZAN RUM
In not entirely surprising news yesterday, Fortune announced it has severed its joint-venture agreement with Vin & Sprit to distribution Absolut in the U.S. in exchange for some cash and Cruzan rum. Pernod Ricard now carries sole marketing and distribution rights to Absolut.
The j-v, otherwise known as Future Brands, was originally slated to end in February of 2012, but will now come to a close on October 1. In return, Pernod is paying $230 million cash to Fortune, which in return is acquiring Cruzan rum from Pernod at $100 million. It appears a win-win situation for both sides. The cost savings for Pernod that will stem from the early termination more than offsets the payout to Fortune.
“We believe these announcements are very positive for Pernod,” said Melissa Earlam of UBS.
At the same time, Fortune was able to acquire the fast-growing rum brand at a discounted price and obtain some cash for future acquisitions. V&S paid close to $200 million for Cruzan in 2005.
Fortune already owns Ron Rico, a low-end rum with limited distribution, but Cruzan is the fifth largest rum brand in the U.S. and grew double digits in 2007. As a result, it will fill a niche in Fortune’s portfolio and become its flagship rum offering.
Commenting on the agreement, Patrick Ricard stated:
“The immediate takeover of Absolut distribution in the US by Pernod Ricard USA is excellent news for the Group. We will now market and distribute the leading imported spirit and Premium vodka in the U.S., which greatly enhances our position. Through both our size and the quality of our portfolio, we are now the clear number two in the North American spirits market. These factors will allow us to strengthen our growth in this key market. I also wish all the best and a continued success in the future for the Cruzan rum brand and the Cruzan teams within Fortune Brands.”
WSD BRIEFS:
INTERVIEW WITH FOSTER’S EXECS. The Business Spectator featured an interesting interview with Foster’s chairman David Crawford, temporary ceo Ian Johnston and cfo Angus Crawford in which the execs explain why they want to shift Foster’s focus back to value market share. The first question, directed as Angus, asks: “Well gentlemen isn't it reasonable for shareholders to feel now that you've ruined a perfectly good beer business by going into wine?”
To check it out, click here.
PERNOD’S CHIVAS BROTHERS UNIT said it is selling the Glendronach distillery to The Benriach Distillery Company. The sell off will allow Chivas to concentrate on its 13 other distilleries, said the company. In addition, it has started “significant expansion plans” for The Glenlivet Distillery.
COBBLESTONE VINEYARDS, a family-owned winery in Napa’s Atlas Peak appellation, says it has “gone global” by acquiring a New Zealand vineyard specializing in pinot noir. Details of the transaction were not disclosed. It bought the small New Zealand hillside property from Jeff Barber, a Kiwi winegrape grower and winemaker, who will stay on as vineyard manager. The vineyard is situated on the Te Muna Terrace, an elevated and recently developed section of Marinborough.
Have a wonderful Labor Day Weekend!
Until Tuesday, Megan
“Plans are only good intentions unless they immediately degenerate into hard work.”
Peter Drucker
--------- Sell Day Calendar ----------
Today’s Sell Day: 21
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
posted at 11:37 AM
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