Paul Walsh Talks Beam, Cuervo and US Spirits

FILED MARCH 26, 2012

Dear Client:

Diageo chief Paul Walsh spoke with WSJ this weekend, touching on much speculated about topics like a potential Beam Inc. takeover and the future of their distribution deal with Cuervo. Paul also confirmed industry chatter that newly appointed coo Ivan Menezes would be his natural successor when he eventually retires. He notes that Ivan is the "lead internal candidate," and although there are a number of other "talented players" in the industry, Paul believes Ivan "is the lead player." But Paul plans to stick around until at least 2014.

ON BEAM. Paul refused to go into much detail on whether or not they would be interested in acquiring any of Beam Inc.'s brands, but he did say this: ".The totality of that entity would not be of interest." So if anything were to happen (emphasis on the if), it's probably more likely that Diageo would go after a brand or several brands, or split Beam with other companies/private equity firms as a number of analysts have suggested.

ON CUERVO. Paul was very careful on the subject of Cuervo and their ongoing negotiations with the Beckmann family. He reiterated much of what has already been said in the press, which is mainly that they need to make more money from Cuervo. Currently he thinks Cuervo is "not fully paying its rent in our distribution system," and said he would not "take anything less than control, or a route to control." As far as the brand goes, Paul thinks Cuervo "is not realizing its full potential."

Recall analysts were claiming in a Financial Times article last week that Diageo would likely consider acquiring another tequila brand if it fails to reach a satisfactory deal with Cuervo. At this point it is anybody's guess how the negotiations will fair. But as Ivan recently said: ".Our intention is to secure a long term participation in the tequila category globally and in the United States."

ON SPIRITS TRENDS. Regarding the U.S. spirits market, Paul said it "is showing very good signs of improvement." One interesting trend he laid out is that women are increasingly adding scotch to "their repertoire." Diageo plans to "fuel" that trend by "allowing and cultivating those relationships" with women.

ON SPIRITS VS BEER. Although the big brewers are rolling out new innovations to better compete with spirits, Paul says spirits has "an inherent advantage," which is style and a more upscale image. "Beer is a bit functional. Spirits is a bit more stylistic."

VINTAGE POINT TURNS FOCUS ON MILLENNIALS

Vintage Point is launching a number of imported wine brands and one new California brand nationally this spring targeted at millennials. They include Makara, a New Zealand Sauvignon Blanc that retails for $12 and hits shelves in April. Mountain Door, which is an Argentine Malbec, also hits shelves in April and retails for $10. If You See Kay is a Cabernet Sauvignon blend made by Jayson Woodbridge of Hundred Acre and Layer Cake with grapes sourced from Italy. It retails for $20 and will be available this summer. A Layer Cake Garnacha from Calatayud, Spain, is also set to release in June. Lo Nuevo is another import from Spain that will be released in April. The Garnacha, Merlot, Verdejo and Monastrell-Syrah varietals will sell for $10, while the Albarino and a Tempranillo are priced at $15.

On the domestic side, Vintage Point partner and Luna Vineyards winemaker Tom Peterson is tapping into the growing trend in red blends with Lunatic. The red is a blend of Sangiovese, Cabernet, Zinfandel and Souzao. The white is a blend of Albarino, Malvasia Bianca and Chardonnay. Both are sourced from "very small, unique" vineyards in California, said the company.

"This year, a renewed focus on imports reflects our passion for discovery and our understanding that the millennial consumer is one of the most important targets for our growth brands," said David Biggar, president of Vintage Point. Recall that in 2011 the company added BR Cohn and Gary Farrell to its wine collection, which includes Jayson Woodbridge's Cherry Pie, Hundred Acre and Layer Cake.

WSD BRIEFS:

ITALIAN WINES FOCUSED ON THE U.S. As Italy's domestic wine consumption falls flat, producers are looking elsewhere to drive sales. That's where the U.S. comes in. Lucio Mastroberardino, chairman of an Italian wine trade group, told Reuters: "North America will remain the biggest market for Italian wine for a long time," while emerging markets like China, Russia and India are showing a lot of growth. Sales of Italian wine rose +16% in 2011, says the article without naming its data source. Italian wine importer Banfi Vintners, for example, said its sales rose +17% in the U.S. last year. So domestic players can expect increased competition from Italy. But the off-premise is not Italy's strong suit, as dollar sales declined -0.4% in the 13-weeks ending March 3 and volumes fell -2.5%, based on Nielsen off-premise scan data.

VIRGINIA GOV BOB MCDONNELL has appointed Richmond prosecutor Bryan Rhode to the ABC board. He will succeed Wayne Ozmore, who resigned from the board in May. If approved by the legislature, Bryan will join chairman J. Neal Insley and Sandra Canada.

NEW LAW ALLOWS OHIO DISTILLERS TO SELL DIRECT. March 22 was the first day artisan distillers in Ohio were allowed to sell directly to consumers from their tasting room and offer product tastings, reports The Daily Record. The new law also allows micro-breweries to sell beer by the glass for carryout.

MACPHAIL FAMILY WINES ENTERS NEW STATES. MacPhail Family Wines are now available through wholesalers in New York (Empire Merchants), Florida (Premier Beverage), Minnesota (Phillips Wine & Spirits) and Massachusetts (Martignetti Companies). Soon to be added are North Carolina, Georgia, Maryland, Washington D.C. and Connecticut. MacPhail focuses on vineyard designated Pinot Noir, principally from Mendocino's Anderson Valley and the Sonoma Coast. In 2011 it joined The Hess Collection, where winemaker James MacPhail also leads Sequana Vineyards.

BEAM APPOINTS HEAD OF NEW HERITAGE CENTER. Kimberley Bennett has been named director of the new Beam Heritage Center, which will be completed in the fall of 2012. The Center is in the home of Jim Beam, Clermont, KY, and will be a stop along the Kentucky Bourbon Trail. It will offer visitors the seven-generation history of the Beam family and how to make bourbon. In her career Kimberley has led the National Baseball Hall of Fame and Museum in Cooperstown and served as the Director of Hospitality Programs for The World Equestrian Games.

PIPING ALL TRUTH SQUADERS. We want to know what's keeping you up at night, and where you think the industry is heading in 2012. So we set up a short, anonymous survey to gauge your thoughts. We'll share the results in the coming days. We have no idea who you are, so feel free to let loose. Copy and paste this link into your browser to participate: https://www.surveymonkey.com/s/9ZT2PZ7


Until tomorrow, Megan

"I can't complain, but sometimes I still do."
Joe Walsh

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