Major Brands and Diageo/Glazer Settle Out of Court

FILED SEPTEMBER 23, 2014

After just over a week in court, WSD has learned that Major Brands, Diageo and Glazer's Missouri have settled their dispute out of court with a "substantial payment made to Major Brands," per a statement from the company.

For Diageo's part, the company says: "Diageo is pleased to amicably resolve this regrettable dispute. Diageo continues to distribute our beer and Smirnoff Ice lines with Major Brands, recognizing it as a well-run, family-owned business… We look forward to growing that business in Missouri with Major Brands."

Major Brands says it is "happy to put this matter in the rear-view mirror and remains committed to providing our retailers and suppliers with outstanding service and performance."

As a result, all pending litigation relating to the terminations of Major Brands by Luxco, Diageo and Bacardi has been settled, according to Glazer's.

MAJOR BRANDS PRESIDENT TAKES THE STAND, SAYS PRICE INCREASES AND THE RECESSION HURT DIAGEO'S PERFORMANCE

Recall, last week, we published an in-depth report on the opening statements in the Major Brands v. Diageo and Glazer's Missouri trial [see WSD 09-18-2014]. Despite resolving the case out of court, a lot of interesting details came to light last week. Major Brands (MB) president Barry O'Neill, who joined the company at the end of 2007, was the first witness to take the stand over a grueling, three-day cross examination. During his direct testimony, Barry and MB council Richard Walsh sought to prove that MB and Diageo had a solid relationship, that MB was doing a good job in light of the recession and price increases and that Diageo did not indicate they were unhappy with the relationship prior to termination.

Of course, the council for Diageo and Glazer's argued against those points during cross examination. Here are the highlights:

MAJOR BRANDS' ALLEGED FOCUS ON BEER: In Diageo's opening statement, lawyer Lazar Raynal stated that during the Todd Epsten era of business "performance was poor year, after year, after year." But Barry gave a much different impression.

Barry left a "very, very good job in Chicago" at Future Brands after he was recruited by late MB chief Todd Epsten in 2007. "I would say Todd had a great vision...he wanted to grow," calling him a "great leader" and "widely respected" throughout the MB organization.

But Lazar called Todd's vision into question, claiming performance was weak for Diageo but that Todd was instead focused on building out their new Anheuser-Busch (A-B) beer business, and using MB's wine/spirits business (led by Diageo) to fund it. MB purchased and owned Western Beverage in Oregon from 2009 to 2012. After selling Western Beverage back to A-B, MB's parent company then purchased Eagle Brands in Miami from A-B in 2012. The operation is now called Major Eagle.

Lazar showed an internal email written by Todd to Tony Short, president of Major Eagle, after Tony joined the company in 2010. Todd wrote: "We want to be a consolidator in the beer business," noting it was something they "weren't able to do in wine and spirits" across state lines. Todd's aim was to gain new A-B territories in Chicago, West Virginia, Oklahoma, and Kansas. "We are going to be a private equity firm masquerading as a beverage alcohol company."

Barry maintained that Major Eagle is a separate company from Major Brands and did not interfere with their focus on Diageo or other wine and spirits suppliers.

OTHER CONSOLIDATION EFFORTS: Recall, MB is suing Glazer's for tortiously interfering in their distribution contract with Diageo. But Glazer's and Diageo's lawyers showed that MB has taken other wholesalers' brands, and also led efforts to consolidate and grow its wine and spirits in Missouri and elsewhere.

Lazar noted that Pernod Ricard USA and Constellation Brands terminated Glazer's in favor of MB, but MB didn't have to pay Glazer's for the brands they gained. Barry's response: "Glazer's had indicated that they had no franchise rights" to those brands. As you know, MB believes in franchise.

Another point: After Constellation awarded MB its brands throughout the state in 2013, which was previously split between MB, Glazer's and Garco Wine Company, MB acquired Garco in January 2014.

Furthermore, Major Brands is in the process of closing its acquisition of Missouri Beverage Company (MoBev), which Glazer's council Nick Lamb says is expected to happen after the trial [see WSD 07-25-2014]. It was revealed that the Wirtz family is investing about 50% into MB's holding company.

"You don't think Mr. Rocky Wirtz will want to run [MB]?" Nick asked Barry. While Barry said that's not part of the agreement, Nick asserted that MB and Wirtz will try to win Diageo's business back in three years when its contract with Glazer's Missouri is up.

GROKKING MAJOR BRAND'S PERFORMANCE: A major point up for debate in the trial is whether or not MB was performing well for Diageo. During Barry's testimony, MB's council showed segments of Diageo's annual reported growth for fiscal 2011-2012 in order to demonstrate that MB was growing in line with Diageo's North American performance.

The stats:

Captain Morgan: 3% growth at Major Brands; 5% growth for Diageo
Jose Cuervo: 3% growth for MB; -6% decline for Diageo
Crown Royal: 8% for MB; -4% for Diageo
Smirnoff: 8% for MB; 3% for Diageo
Bailey's: 3% for MB; 3% for Diageo.

Looking at long-term growth from fiscal years starting with 2005 and ending 2012, MB met or exceeded Diageo's growth every year except for 2011, they said. Lazar's response was that MB failed to beat its own growth numbers year over year specifically for Crown Royal and Jose Cuervo during Barry's tenure starting in fiscal 2008.

Recall, Diageo's lawyer mentioned MB's alleged poor performance in the years leading up to termination in his opening remarks last week, specifically calling out fiscal 2011. Through this witness testimony, however, MB's lawyer sought to show that poor volume growth during that period was a result of price increases taken by Diageo. Early 2011, around January-March, MB was instructed to take a price increase on Smirnoff Vodka. Barry called it a "big price difference," noting that MB was unhappy with the price increase because "we wanted to keep the price as competitive as we could."

MB also claimed that Diageo was aware that recent price increase had hurt sales but "that's what they were expecting." Continues Barry: "Diageo underestimated the impact of their price increase."

However, Lazar said that "while there was some expected softness," the numbers MB posted for Diageo in 2011 "are extreme." He claimed that MB cost Diageo almost $2 million in the second half of fiscal 2011, which includes almost $1 million in June alone.

They also missed case goals and points goals starting fiscal 2008 through fiscal 2013. As we've mentioned, fiscal 2011 was a particularly tough year for MB, where it missed its case goal by 50,000 and points goal by 52,600. And while MB hit its points goal in fiscal 2012, Lazar alleges that was only because Diageo had lowered its goal.

Then there was fiscal 2013. Note, MB held Diageo's brands until June 2013, up until the end of the company's fiscal year. During that time they missed the case goal by 185,000, and at H1 they were short 23,000 cases.

In all, Diageo cites underperformance, while MB points to price increases and negative effects from the recession. "From 2008 to 2012, the business you did for Diageo in Missouri was shrinking," said Lazar. Barry's response? The numbers show "a small decline…. We shared their successes, we shared their disappointment."

FRUSTRATION WITH CROWN ROYAL. While Diageo had submitted around $1 million in advertising in the Missouri market for Crown Royal, MB posted negative growth in fiscal 2011, according to Lazar. Case sales went from 400,000 to 200,000. Looking at longer-term trends, Crown Royal fell -3% in fiscal 2009, -4.7% in fiscal 2010 and -4% in fiscal 2011. "We had some brand health issues," said Barry, noting that it depends on where a "mature brand" falls in its "product life cycle."

Brad Chelf, MB's main contact and market manager at Diageo, was called out for being especially frustrated. In August 2011, he alerted Barry that Crown Royal numbers were "unacceptable" and that MB needs to "change the way they are doing things." The frustration, apparently, was due to late deliveries of Crown Royal to retailer partners. Barry's response via email was that their "intentions are sound" and that he doesn't "want to debate numbers."

The problem, stated Brad, is "I have not hit a plan in the four years I've been here." Under his tutelage, Crown Royal, which he calls the "most profitable brand" in Missouri, shrank and he lost potential bonuses. We need to "achieve goals we have agreed to…. This is not working for me…. We were told repeatedly that Crown would not be an issue."

POSITIVE FEEDBACK FROM DIAGEO. 2012 marked an improvement for MB, and also seemed to have a positive effect on their relationship with Diageo. In general, Barry said they got "lots of compliments" from Diageo, including feedback that MB was doing better with Captain Morgan Black "than anyone else in the country." MB's council showed emails where Diageo specifically praised MB's performance with Bailey's Mudslide in May 2011, and also Crown Royal Maple in October 2012.

Recall, Diageo's market manager in Missouri, Brad Chelf, nominated them for a Golden Bar award for their performance with Smirnoff and Crown Royal in 2012. MB lawyer Richard Walsh also noted that Barry and MB employees had gone on many award trips hosted by Diageo, with the last one taking place in 2012. They were also taken on a trip in 2011 - the year that Diageo calls a "disaster."

Glazer's council Nick Lamb's response was that Glazer's Missouri won two Golden Bar awards in 2012 for performance, Spirits Excellence for Tanqueray and Franchise Distributor of the Year for Spirits. In comparison, MB did not win the performance-related awards it was nominated for. Glazer's Missouri executives also attended award trips.

One argument by MB is that Glazer's happened to carry brands that "were heavily supported by Diageo over recent years." They include: Ciroc, Johnnie Walker, Ketel One and Tanqueray. Although Nick noted that Tanqueray isn't a "trendy or cool" brand and therefore not any easier to sell. However, Glazer's still won a national award for that brand, partly through promotional efforts they ran in the summer of 2012.

Stay tuned for Part II of Barry's testimony tomorrow.

TITO'S ISSUES PUBLIC STATEMENT ON LAWSUIT

Last week, we reported that a class action lawsuit has been filed against Tito's Handmade Vodka for alleged violation of California's unfair competition lawsuit, false and misleading advertising, violation of consumer legal remedies act and negligent misrepresentation [see WSD 09-19-2014]. In response, founder Tito Beveridge has released a public statement with a few of his "initial reactions" regarding the case:

He claims Tito's still distills in "batches" (notice the lack of the word "small" here) in pot stills that are "customized and hand-built on-site to our proprietary specifications." He goes on the say that the artistry in their production method is in cutting the heads and tails.

He also notes that all of the Tito's labels have gone through the approval process at the TTB. Moreover, the TTB approved Tito's use of the "handmade" term on the label after sending out a field agent to review their process.

Finally, he points out that these types of cases have become popular "among a certain segment" of the California legal community- the type that can't even get the name of Tito's company right. It's Fifth Generation, Inc., not Fifth Dimension as stated in the complaint. "I bet a number of other folks in our industry will see similar cases in the not-too-distant future," he predicts.

NY RETAILER TAKES ON THE SLA OVER RIGHT TO SHIP WINE OUT OF STATE

Albany-based retailer Empire Wine has filed a lawsuit against the New York State Liquor Authority (SLA) after being notified it is in violation of the state's alcohol regulation laws for shipping wine to states that prohibit direct-to-consumer sales, reports the Times Union.

Empire feels there is no New York law preventing the shipment of wine to consumers in other states, nor does it feel that the SLA has the authority to stop it since the Commerce Clause gives the federal government the power to regulate interstate trade. However, an SLA spokesman says there is plenty of precedent showing that because the retailer is located in New York, it falls under the purview of the New York SLA. We'll watch how this one plays out.


Until tomorrow
Emily

"Flattery is like cologne water, to be smelt of, not swallowed."
-Josh Billings


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