Beam Has Better Than Expected Q1

FILED MAY 3, 2012

Dear Client:

Beam Inc. had a stronger first quarter (3 months ending March 31) than expected, benefitting from "strong demand" and "excellent initial sell-in for new product launches that are front-loaded in 2012," said chief Matt Shattock. Sales grew low double-digits in the US led by Beam's power brands (Maker's Mark and Jim Beam) and rising stars (Pucker Vodka and Skinnygirl). Also, new innovations "helped boost our sales in our seasonably smaller quarter," he continued.

Beam's success in the US is "underpinned by the heartland bourbon category, which continues to be the fastest growing large category in the US," said Matt, as well as the "biggest share gainer in the US over the past year." Innovations like Devil's Cut, Red Stag, Knob Creek Single Reserve and Maker's 46 are a "strategic growth imperative" for the company as they deliver strong growth and also benefit the parent brands. Execs pointed out a number of times during the call that Jim Beam white label is in growth in the US, and that innovations compliment the entire brand family on a topline and mix basis. "The Beam family overall is growing very, very well and the new product launch will continue to drive that acceleration," said Matt.

While they don't necessarily expect bourbon to maintain its current level of double digit growth, "we are very focused on the bourbon segment" and expect it to continue to outperform the industry, said Matt. Evidence of their belief in the category lies in the fact that Beam doubled its advertising spend globally for bourbon over the past 2 years, focusing on the US, Australia and Germany.

THE BRANDS. Innovation is a big growth driver for the spirits industry and Beam in particular. For example, Red Stag continues to grow double digits in the US three years after its initial launch, said cfo Bob Probst. Maker's Mark, which benefitted also from innovation and its first-ever television ad campaign last year, climbed +18% in the US in Q1. Meanwhile, execs believe Basil Hayden could be their "next breakout success" in small batch bourbon, following in the footsteps of Knob Creek.

Turning the page to Cognac, Courvoisier experienced "strong demand" in the US, helped by its Rose and "C" extensions.

Skinnygirl continues to be on fire, and is backed by a new flavor offering in its ready-to-drink line (Peach Margarita), and entrants in the wine and vodka categories. Pucker's flavored vodka had a strong quarter backed by new flavors and easy comparisons in Q1 last year.

Meanwhile, both Canadian Club and Sauza tequila experienced "soft sales" in the US.

Moving forward, Beam estimates they will growth about +3% in the US in fiscal 2012.

TEQUILA REMAINS TOUGH. Speaking of Sauza, the brand is having a tough go of it in the "competitive US tequila category," said Bob. Tequila is currently in oversupply, and Sauza and Hornitos faced tough volume growth comparisons as they lapped promotions this time last year.

"We're cycling some big year ago pricing promotions which has had a bit of an impact on consumption.but we will continue to invest in our brands," said Matt. For example, Hornitos is currently running television ads and Sauza is being backed by a digital ad campaign.

As for the over-supply problem: "I would not anticipate that equilibrium to be arrived at in 2012," he continued. But in 2013, "that is when I think we will see things come into in balance and I think that will play well for the overall category."

PRICING ENVIRONMENT THE SAME. The pricing environment in US spirits "hasn't changed materially since our last call," said Matt. Overall value growth continues to be driven by volumes and a favorable mix shift from premiumization. "We're not seeing ay evidence of broader pricing taking place in the category or broader spirits category as a whole."

However, Beam felt it was the right time to raise prices on Jim Beam and Maker's Mark in the low-single digits. "We think the brands could stand it."

ON PINNACLE. And of course the big news is that Beam has agreed to purchase Pinnacle Vodka and Calico Jack from White Rock Distillers for $605 million. [To read our past analysis click here].

So how did the deal come about? "We did a lot of extensive research and analysis on this," said Matt. Besides the fact that vodka is the largest spirits category by far, he noted that about 90% of growth is being driven by flavors and Pinnacle has been a leader in innovation. "It's got scale in both the flavored and unflavored" vodka categories in the US, and there is further headwind for growth through increased distribution. "The more we looked at this brand, the more we got to know and like about this brand."

ON BOURBON INVENTORY. Current double-digit growth experienced by bourbon is great for the industry, but there are also concerns of running out of aged inventory. Bob, however, says things are good. "Supply/demand discussions are ones we have a lot with operators.. We feel good that we are in balance in bourbon as a general statement."

"We are always looking at the leverage we have," he said, pointing out that "price is a lever" in this type of explosive, double-digit growth.


Organic net sales in North America rose +5% in the nine months ending March 31. Although they did not give specifics, chief Paul Walsh said volume in Q3 (Jan-Feb-Mar) "grew as we lapped a weak volume performance in the prior year when Diageo reduced discounts in US spirits." It's been Diageo's goal to reduce promotions and improve price/mix, which they've been quite successful at. However, volumes have suffered a bit overall, especially as lower-priced brands like Popov and Gordon's and premium-priced Jose Cuervo have declined.

"The performance of our premium and super premium brands continues to drive growth in North America," Paul continued. Brands like Ciroc (+94.7%), Johnnie Walker Black (+15.5%) and Blue (+24.8%), and Ketel One (+4.7%) come to mind, based on Nielsen data in the 12-weeks ending March 3. But Smirnoff (+5.1%), Captain Morgan (+1.7%), Crown Royal (+5.2%) and Bushmills (+9.8%) are also posting solid dollar sales results.


Jagermeister is launching is first television ad campaign today (May 3) in the US. "Stronger Bond" is aimed at males aged 21-29 and features boxing trainer Freddie Roach, wide receiver Keyshawn Johnson, musician Kerry King, surfer Nathan Fletcher, pit crew champion Mike Lingerfelt, bullfighter Rob Smets and artist Mister Cartoon.

"The introduction of this campaign is a milestone for our business as we continue to build Jagermeister in the United States, the largest market in the world," said John Frank, vice chairman of Sidney Frank Importing Company, Inc.

The ad campaign will appear across multiple cable networks such as FX, Spike, Comedy Central, ESPN, Discovery and Fox Sports. Mistress is their agency of record.

You can watch the ad here:


CARIBBEAN RUM MAKERS PROTESTING TAX REBATE. A 15-member group representing rum-producing Caribbean countries is mounting a lobbying campaign to protest the rum cover-over, reports New York Amsterdam News. The group, Caricom, argues that the US tax subsidy is putting regional exports at a disadvantage against the likes of Diageo, which is receiving large rebates from the US Virgin Islands. You'll recall this has been an ongoing issue ever since Diageo announced it was moving the production of Captain Morgan from Puerto Rico to St. Croix, beginning first with protests from Puerto Rico officials that Diageo alleged was backed by Bacardi. So the group plans to send a delegation to meet with U.S. Trade Representative Ron Kirk on Capitol Hill this month to support their cause. Another one of their arguments is that the level of incentives given to Diageo by USVI "might be in breach of World Trade Organization rules," says the article. We'll see how this one plays out.

SKINNYGIRL LAWSUIT UPDATE. First reported back in September last year, both Skinnygirl Cocktails founder Bethenny Frankel and owner Beam Inc are fighting multiple lawsuits for "falsely marketing" the Skinnygirl margarita as "all-natural." In Florida yesterday a federal judge threw out part of a putative class action case, but will accept an amended complaint with more specific allegations, according to Law360. The judge told plaintiff Regina Greene she needs to provide detailed factual allegations including time period in which she purchased the product. Her amended complaint is due May 16.

CECCHETTI PROMOTES KATHY BROCK VP SALES WESTERN US. Kathy cut her teeth in the industry at Shannon Ridge Vineyard, Guenoc Winery and St. Supery Winery before becoming western regional sales manager at Cecchetti. As vp of sales, western US, Kathy will oversee all western sales operations for the Redtree, Line 39, Backhouse and Exitus wine brands.

Until tomorrow, Megan

"Happiness is essentially a state of going somewhere, wholeheartedly, one-directionally, without regret or reservation."
William H. Sheldon

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