Bushmills the Most Important Purchase in Cuervo's History

FILED NOVEMBER 3, 2014

News leaked over the weekend that Diageo and Casa Cuervo, owned by Mexico's Beckmann family, would be swapping brands [see WSD 11-01-2014 ]. Today, that news has been confirmed, albeit with a slightly different arrangement than initially reported. Diageo dropped out of the Irish whiskey category in trading Bushmills to the Beckmanns and the Beckmanns gave Diageo full control of the Don Julio tequila brand, but it was Diageo who received a$408 million cash payment, not the Beckmanns as was first reported. In addition, the two parties agree to an early termination of Casa Cuervo's production and distribution agreement for Smirnoff in Mexico.

WHERE THINGS STAND: Let's look at where each brand stands. Don Julio is a super premium 590,000-case tequila that currently generates about $168 million in global sales. Diageo reported it grew 27% organically during fiscal 2014. In the US market, where upscale tequilas in general have been performing well in recent years, Don Julio nabbed the most volume share on-premise in 2013 with a healthy balance of increased velocity and distribution gains, according to GuestMetrics data [see WSD 10-09-2013 ].

Bushmills is an 800,000-case brand that generates about $91 million in global sales. In Diageo's fiscal 2014 ended in June, Bushmills only grew 8%, despite the growing popularity of the Irish whiskey category.

In the US, Bushmills has grown from a 163,000 cases in 2009 to 222,000 cases in 2013, per IWSR. For comparison's sake, Pernod Ricard's Jameson Irish whiskey, the leading brand in the category, weighed in at nearly 1.9 million cases in the US in 2013, per IWSR.

Recall, Diageo acquired Bushmills from Pernod Ricard in 2005 for about $365 million. Since the purchase, Diageo has invested more than $128 million to build capacity, infrastructure and maturing inventory at the distillery, per a BBC report.

But it turns out Diageo was not the right match for this brand. "We have tried hard over the years to get [Bushmills] into growth and we've struggled. So in the US market, it's not performing well," said Diageo chief Ivan Menezes in July.

THE STRATEGY: This transaction allows Diageo to offload a relatively weaker brand in order to get more value out of a stronger brand and potentially accelerate the growth rate even further. Don Julio fits into Diageo plan to focus on its upscale offerings, a price segment in which Bushmills could not play.

As for the Beckmanns, their Proximo Spirits company, which presumably will takeover Bushmills, has done a good job building its high-end tequila portfolio with 1800 and Gran Centenario and more recently has begun building a whiskey portfolio. Recall, they purchased Stranahan's Colorado Whiskey in 2010 and earlier this year launched Tincup American Whiskey. Bushmills will become the foundation of this portfolio.

In fact, Jose Cuervo chief Juan Domingo Beckmann says the Bushmills acquisition is the "most important purchase made by Cuervo in its entire history."

"Like Bushmills Irish Whiskey, Jose Cuervo is built on a very strong tradition of quality and craftsmanship that dates back over 250 years, so we understand the importance of nurturing and protecting the heritage and quality of a brand and are strongly committed to doing exactly that with Bushmills," he tells BBc.

When this transaction closes Diageo and the Beckmanns will largely be untethered except that Jose Cuervo International produces Don Julio. We'll be interested to see if that partnership continues or whether Diageo will transfer the production of DeLeon, Peligroso and Don Julio to one distillery.

WSD BRIEF:

VIRGINIA DISTILLERS IMPLORE GOV. NOT TO RAISE TAXES. We recently reported that Virginia governor Terry McAuliffe has directed the state's department of alcoholic beverage control to increase the price of spirits in order to make up for a $2.4 billion budget gap. In response, some of the state's distilleries have banned together to request that the governor abolish this plan, reports a local affiliate. In a letter, the distilleries, which include micro distilleries like Catoctin Creek and Belle Isle Craft Spirits as well as Sazerac's A. Smith Bowman, called the plan shortsighted and a "blow" to its growing spirits industry. They noted that spirits have been marked up ten times while neither beer nor wine has seen one since 1980. They agency has not yet decided how or when it will raise prices.

Until tomorrow,
Emily

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