B-F Optimistic for the Future After a "Challenging" Year

FILED JUNE 9, 2011

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The United States "remained a challenge for us" in fiscal 2011 (12 months ended April), said Brown-Forman cfo Don Berg, with net sales declining slightly for the year. But "we have seen some recent improvement in the pricing environment" and expect to gain some share in the US in fiscal 2012 as a result of new innovations and improved brand trends.

US depletions for Jack were less than stellar, declining -3% for the fourth quarter and flat for the year. However, el Jimador remains strong, with depletions growing in the high-single digits in Q4 and 17% for the year.

RECAP OF FISCAL 2011: "Innovation" is the buzzword of 2010 and 2011, and B-F is no exception. The company introduced a number of new innovations this past year, and as with other spirits companies, they have been a source of growth.

Line extensions included Chambord Vodka, SoCo Lime, Early Times 354 Bourbon, and the biggest, Jack Daniel's Tennessee Honey. "We plan to build on these innovations in fiscal 2012, particularly with Tennessee Honey," said Don. The brand just began shipping at the end of fiscal 2011 and "results so far have been very encouraging.a lot of excitement from the trade and consumers alike." Support for Honey includes traditional advertising, such as TV, and new media, such as Facebook and Twitter. Recall that Honey is the first spirits brand to advertise on Twitter. Needless to say, B-F is "investing heavily behind" the rollout. In the fourth quarter (3 months ended April 30), reported advertising expenses for the company overall increased 11% and underlying advertising expenses grew 7%. The advertising expenses outpaced net sales growth "largely as a result of the company providing strong support" behind Honey.

Meanwhile, B-F revamped packaging for SoCo, Herradura, Chambord and Tuaca last year, and plans are underway for new packaging for Jack Daniel's and Finlandia in fiscal 2012. (More on Jack's new packaging below).

ON PRICING: "It's always a delicate balancing act," said B-F chief Paul Varga, between "taking pricing up at the expense of consumption." He pointed to the US beer industry, which "has been more aggressive in pricing." But as a result, they are "losing some of their occasions." Furthermore, "the spirits category already enjoys a premium position relative to beer segments."

He said it is not "realistic" for B-F to take the type of price increases that the spirits industry took in 2005, 2006, and 2007. However, they have been "taking some pricing up or taking some pricing down due to [brand] repositioning, but that is different than what you would have seen in the mid-2000s."

Many of B-F's direct competitors "have put pressure on prices downward, so that makes it more difficult in some cases to take the prices up," said Paul. "We will continue to watch more closely," and "as conditions warrant," they will try to take pricing. Growth at the on-premise is typically a good indication, and right now "it's a little better" compared to the past two years.

ON BEAM GLOBAL. When asked if they have observed any changes in the marketplace as Fortune prepares Beam to become a standalone company, Paul said: "We've always considered Fortune to be a really viable competitor of Brown-Forman's around the world.we're used to that." However, "over the last 12 months Fortune is probably putting as much pressure as any competitor on downward pricing - you can see it in their price mix pretty strongly."

ON RISING COSTS: "We do see gradual improvements [on pricing] as we sit here today," said Don. But there is also the issue of rising costs, mainly grain and fuel prices. They were "fairly well protected in fiscal 2011 due to hedging.we continue to be hedged around 55%-57% for our commodities but won't be as protected next year as we were last year.gross profit growth next year will not be as good as our sales growth next year."

ON UPCOMING HOLIDAYS: Is B-F optimistic about the oh-so-profitable holiday season? "It is highly dependent on how the consumer reacts to fuel prices.history tells us fuel prices hits the American consumer in many different ways," said Paul.

ON JACK'S NEW LABEL: Why the new label? Paul said they consider the change "very evolutionary in nature.. It has helped the brand present itself in countries around the world as a more global package. A lot of the early work on Jack Daniel's was of course designed for its home market in the US," and now it is "a little bit more relevant in international markets."

Furthermore, the Jack Daniel's label "gets copied so much.so we're going to regularly make sure Jack Daniel's looks unique and different."

ON TENNESSE HONEY. Although Paul would not comment on upcoming plans for Tennessee Honey, he said they would continue to monitor it "as an individual expression in the marketplace against a backdrop of the growing flavored brown spirits category." They will also watch to see how it affects the Jack Daniel's family.

Although innovations from competitors like flavored whiskeys, spiced rums and flavored vodkas have taken share from SoCo, it is an "exciting new arena for growth in the US segment and we expect to be a major part of it."

ON SELLING FETZER: Why did B-F choose to sell Fetzer and the other Hopland-based wine brands when they are actually profitable? Paul said it allows them to concentrate more on growing their main brands, like Jack Daniel's, and offering new innovations. "We've talked about some of our difficulties in the United States and our desire to improve our performance," he said. They view the sell-off as an investment with plans to make up for that lost growth. "It wasn't that they weren't profitable for B-F but return challenged."


Cognac sales in Asia were a big growth driver for Remy Cointreau for the year ended March 31, while recovery in Europe and the US also helped. "This will continue in coming months. I have a very good feeling about the first quarter," said chief Jean-Marie Laborde. When asked about potential acquisitions, Jean-Marie said he was not interested in acquiring a tequila brand because they are too dependent on the US, while vodka is not high-end enough, according to Reuters.

In the Americas, Cognac sales grew 30.4%, the liqueur and spirits division gained 34.7%, Champagne grew 14% and their partner brands rose 65.5% (largely due to Scotch).

On a global basis, Remy Martin grew sales by 12.1%, with a 20.3% rise in organic growth. Remy's liqueurs and spirits division experienced a "moderate decline" in turnover. Although Cointreau and Mount Gay Rum both reported growth, they were unable to offset the decline in sales of Metaxa, which continued to suffer from difficult market conditions in Greece. The company's partner brands grew sales by 6.2%, mainly due to Scotch whisky in the US and travel retail. The brands include The Macallan, The Famous Grouse and Highland Park.

Last week the company announced it is selling its Champagne division to EPI for about $593 million. Remy will continue as the sole distributor of the Piper-Heidsieck, Charles Heidsieck and Piper Sonoma brands, which are now classified as Partner brands.


DIAGEO CLOSING BOTTLING PLANT. Diageo is closing a 54-year-old bottling plant in Menlo Park, CA (in the San Francisco Bay Area) that will result in 150 lay-offs, effective at the end of July 29. Recall that Diageo is also reportedly cutting 55 jobs at its Halethrope, Maryland facility. In a statement to WSD, Diageo said this is "part of a recent strategic review of its Supply Operations in North America," and has "not taken this decision lightly.. Diageo is fully engaged with employee representatives to discuss the appropriate support to those individuals."

MARK CORNELL, the former ceo of Moet Hennessy USA who was replaced by Jim Clerkin in December, was appointed ceo of yacht company Edmiston & Company. He will be based out of the company's headquarters in Monaco. "After more than ten happy and successful years working on some of the most prestigious brands within the LVMH portfolio, I am eager to embark on a more entrepreneurial role with a new set of challenges," he said.

THE TEXAS DEPARTMENT OF AGRICULTURE is launching a new program called "Go Texan or Go Thirsty," designed to promote local restaurants and retailers that carry Texas wines. The campaign's website will list restaurants that serve Texas wines and will help connect local wineries with restaurants that want to offer Texas wine on their menus. A report by MKF Research showed that the Texas wine industry's economic impact jumped to $1.7 billion in 2009, up from $1.35 billion two years earlier.

JAMESON WINS EFFIE AWARD. Jameson took home the 2011 Effie ward in the Beverage Alcohol category for its "Taste Above All Else" advertising campaign. "Jameson has experienced phenomenal success over the last decade and our 'Taste Above All Else' campaign has been a key contributing factor to that success," said Wayne Hartunian, vp of marketing for whiskies, Pernod Ricard USA.

JIM BEAM WINS AICP AWARD. Beam's "Bold Choice" commercial featuring Willem Dafoe received three awards at the American Independent Commercial Producers (AICP) awards. The agency behind the ad is StrawberryFrog New York. Dafoe says in the ad: "All choices lead you somewhere," he states. "Bold choices take you where you're supposed to be."

Until tomorrow, Megan

"You have succeeded in life when all you really want is only what you really need."
Vernon Howard

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