BF Says Consumers are Increasingly Trading Down


Dear Client:

All ears were on Brown Forman this morning as the industry listened for early holiday sales indicators in the company’s second quarter results ended October 31. Luckily B-F did not disappoint and offered some insight into the holidays and beyond. Most notably, B-F execs said there are concerns of increased trading down in the US, consumers shifting to the off-premise and increased discounting from competitors.

“During the past several months, we’ve seen dramatic shifts in consumer behavior, particularly as it relates to the move from on-premise to the off-premise. This, coupled with the increase sensitivity consumers appear to be having to pricing and the related trading down we have been seeing, we believe we moved quickly to adapt to these trends,” said cfo Don Berg.

HOLIDAY PRICING. There are some concerns over extreme holiday discounts, although nobody is surprised at the fierce competition. “There’s no doubt that we’ve been seeing more and more pressure particularly from pricing side. We just looked at some Nielsen data that came in as of November 14. It’s interesting, if you look at the top 5 suppliers, 2 of the largest [Diageo and Pernod] have really taken down their price mix anywhere around 2%...whereas the other 3, us, Fortune and Bacardi, have continued to try to find ways to create additional value through the pricing mechanism ...Everyone is kind of out there with their coupons and we’re out there with our FSI’s...we’ll all get through it,” said Don.

[Editor’s note: FSI stands for Free Standing Insert. This is an ad or a group of ads with a coupon that are usually placed inside of a newspaper, magazine or direct mailings as a separate item so you don't have to cut it out or tear it off.]

WHY HAS TRADING DOWN INCREASED AMONG CONSUMERS? It was a bit surprising when B-F execs said they’re seeing further trading down among consumers, especially as many in the industry thought things were starting to improve. When asked to elaborate, Don said it was partly due to the competitive holiday season, but also acknowledged that the middle-tier brands are seeing the most softness.

“On the trading down front, it’s particularly being seen in the US...within the US, and when you follow the NABCA and Nielsen data, it continues to show stronger growth at the lower price points in our business. You’re starting to see a little bit improvement on the higher end as well. It’s kind of in the middle where there seems to be a little bit of pressure.”

Meanwhile, some of B-F’s more expensive brands, including Gentleman Jack, Single Barrel and Woodford Reserve, all grew in the mid-single to low double-digits in the quarter. A number of other premium and super-premium brands in the US, Sonoma-Cutrer, Bonterra, Herradura, and Chambord, are all still declining somewhat but showing improving depletions trends compared to the first quarter.

Chief Paul Varga said “we’re seeing more stabilization of the trading down phenomenon but it hasn’t yet turned the corner and started to go back towards better trends for the most premium priced brands versus the value and popular priced.”

PREDICTIONS FOR THE FUTURE. B-F execs believe trading up will likely return to pre-recession levels but it will take awhile. “Hopefully overtime we’ll get back to that point. I think it will probably be pretty gradual. Part of it was boosting our confidence. When we look at some of the data that we’ve seen recently, 2 of the categories that seem to be doing particularly well in the higher end is whiskey and tequila, so it serves us particularly well if those trends continue,” said Don.

They also think the on-premise business will eventually stabilize: “We do believe that the on-premise business will eventually stabilize and growth will return, although that certainly is not in sight yet,” said Don.

And they also expect that “consumers’ interest in flavorful drinks and multiple drink choices will continue, and this trend towards mixability will continue to be an advantage for spirits.”

NEW INITIATIVES AT THE OFF-PREMISE. B-F’s main adaptation in the recession has been shifting its focus to the off-premise. This includes new line extensions, such as ready-to-drink and ready-to-pour offerings, value packs and new packaging. They’ve also shifted promotional and advertising activity to the off-premise “to encourage consumer purchasing behavior.”

B-F believes it’s important to invest “more in value added packs as a way to provide the consumer more rather than just reducing price. As we’ve mentioned before, we continue to be price competitive in a very targeted, strategic way on a market by market basis” in order to increase dollar sales over volume, said Don.

ARE RTD’S A BAD MOVE? However, some analysts worry that B-F could be poorly positioned once the economy rebounds. Specifically, is B-F making the wrong move by investing more heavily in RTDs? Paul doesn’t think so:

“There’s a perception that because these brands are in the single serve format they’re therefore trendy. Our experience is if we take the primary markets where we have ready-to-drink entrants, we’ve been in existence successfully in those markets for on average an excess of a decade...The US business where we’ve got a decent presence is a 20-year-old business...
I know because we’ve seen a lot of volatility in the trends that you see, particularly from those that break out in the very high levels and then they drop, it gets that perception...If you market them more as extensions of their parent brand versus free standing trendy drinks, I think they have better endurance.”

Don also pointed out that RTDs taking drinking occasions away from beer:

“It’s a convenient form of drinking the beverage in the way the consumer likes to drink it. IT gets us into new drinking occasions and particularly more beer drinking occasions that we don’t necessarily get into otherwise.”

BETTER PREPARED FOR AN ECONOMIC RECOVERY. Paul thinks the steps B-F has taken will better prepare them for an economic rebound. “I actually think that what we’ve been doing will prepare us even better for any recovery because we’ve kept our brands relative during a time in the absence of things like ready-to-drink and special’s a shift in course I think we’ve made to be where the consumer is...from a total marketing program in trying to meet the needs of our consumers today, we doing the right thing for today but also we’re positioning the business for any kind of recovery. Depending on how that recovery unfolds, we will make what we hope are the right adjustments to continue to stay with the consumer,” said Paul.


The Jack Daniel’s family of brands and el Jimador were two of B-F’s strongest brands in the 12 months to October.

Jack Daniel’s U.S. depletions declined -1% for the three and six month periods. CFO Don Berg said that about half of the fifty states showed improvement in Jack Daniel’s depletion trends which included their 4 largest markets: California, Texas, New York and Florida. The last three all showed growth in the low- to mid-single digits, while CA showed a slight decline. He said this is particularly encouraging because FL and CA were early markets to suffer in the economic downturn and suffered disproportionately. In addition, B-F implemented its distribution agreement with Bacardi in all 4 of these markets. He said Nielsen and NABCA data also support these trends. Here in the past 3 months, Jack Daniel’s showed value growth as increased pricing more than offset slight depletion declines and negative side mix.

El Jimador, meanwhile, has benefited from its attractive price point in the recession and a reformulation to 100% agave. CFO Don Berg noted that premium and super-premium whiskey and tequila brands have done notably well in the current economic environment, which is particularly good for Brown-Forman.

Beyond Jack Daniel’s and el Jimador in the US, results were mixed. A number of B-F’s brands did well in the second quarter, said Don. They include Finlandia, Early Times, Old Forester, Pepe Lopez, Little Black Dress, Gentleman Jack, Jack Daniel’s Single Barrel and Woodford Reserve.

SOUTHERN COMFORT, which relies more heavily on the on-premise continued to struggle. However, its ready-to-pour extensions performed well.

FINLANDIA, meanwhile, posted growth in the US after coming down on price. “We are in the process of repositioning Finlandia in the United States right now, and so we have taken the price down on a permanent basis. But we’ve taken to a spot that we think probably represents where the consumer sees the greatest price value relationship. As a result of that, that’s where we’re seeing some of that nice growth from the United States right now,” said Don.


Big corporations equal bad policy, at least that’s what the Marin Institute is suggesting in a new report titled: “The Myth of the Family Winery: Global Corporations Behind California Wine.” In it they come down hard on the Wine Institute, who they claim falsely portray their members as “mom and pop,” family-owned wineries in California, when the majority of wineries are actually owned by large corporations that also own beer and spirits brands, among other things. Marin believes this makes the Wine Institute “a tool of global beer and spirits corporations, who oppose public health policies such as charging for alcohol harm," stated Bruce Lee Livingston, executive director of Marin Institute.

According to Marin, 6 of the 7 producers that own 82% of U.S. wine are global corporations, and 6 of the top 10 wine producers also own spirits and beer brands. It also contends that executives from Diageo, Constellation Brands, Foster’s, and Brown-Forman sit on the Board of the Wine Institute and therefore control the trade group, “despite its tag line of the ‘Voice of California Wine.’”

“Unlike beer or spirits, the wine industry has the unique opportunity to exploit the perception of small, local, family-owned wineries for all of its members, including giant multinational alcohol conglomerates,” said the report. “Trinchero Family Estates and Jackson Family Wines even use the word “family” in their corporate names.”

Marin’s main beef is that these companies – namely Diageo, Constellation, E&J Gallo, Foster’s America and Altria Group – fund the Wine Institute, which in turn lobbies heavily against increased taxes on wine and other avenues that Marin believes “dismantles” the three-tier system. According to this report, the wine industry spent more than a million dollars lobbying lawmakers in California in 2008, with the major funders being Diageo and Brown-Forman.

Our guess is that most in the wine business do not support tax increases. But this is where the industry divides. Marin also attacks the Wine Institute’s support of direct wine sales from retailers and wineries to retailers and consumers. Small and mid-sized wineries generally support this and wholesalers generally do not. We’re not so sure that these large wine and spirits companies are the ones supporting direct sales (mainly because they already have representation from wholesalers).

“In theory, the three-tier system of alcohol control applies to wine, beer, and distilled spirits equally. Yet a great deal of the wine industry’s efforts to influence alcohol control is comprised of efforts to gain special exemptions from alcohol regulation. One arena where the distribution tier can potentially be circumvented is in the direct shipment of wine from a supplier to an individual,” says the report.

Lastly, Marin dislikes wholesaler consolidation. The report says industry insiders “blame” distributors for their “ongoing consolidation...yet the push to consolidate the distribution tier comes directly from the producers.” It will be interesting to see if the Wine Institute or these other companies respond.


It appears that the recession and resulting declines from French imports in the US have served as a wake-up call to producers. An interesting article in the National Post says some French wine producers are offering more approachable wines in the $30 and under range in order to compete with wines from Australia, California, Argentina, Chile, New Zealand and others. They’re also offering wines that appeal more to the palates of new world consumers and feature labels that are easier to read. This means including the grape varietal on a label much like new world producers instead of featuring the estate or the domain name. The article notes that Italy and Spain are already several steps ahead of France: “In Italy and Spain, always major wine-producing countries, wineries took note of the New World palate, and styles were sometimes modified to help export drives.”


THE US CHAMPAGNE BUREAU has launched a new campaign dubbed “Unmask the Truth” in favor of truth-in-labeling. The main ad features a sparkling wine bottle that reads "American Champagne," and is partly covered by a mask. A tagline underneath the bottles reads: "Champagne only comes from Champagne, France." The group claims that 50% of sparkling wine in the US is mislabeled as champagne. Most of the ads will be online and in print, but the bureau will also run radio for two weeks in December.

DRUNK DRIVING FATALITY RATES have declined in 40 states and the District of Columbia, according to The Transportation Department. A total of 11,773 people were killed in drunk driving crashes in 2008, down from 13,041 motorists in 2007. Furthermore, Vermont, Wisconsin, Maine, Nebraska, Minnesota, Connecticut, South Dakota, Arizona and the District of Columbia saw fatality rates involving alcohol-linked crashes decline by 20% or more.

DIAGEO NORTH AMERICA has named Peter McDonough to the role of president, chief marketing and innovation officer, effective January 1, 2010. He is currently president of North America innovation. In conjunction with this appointment, Diageo will be combining the marketing and innovation teams. Peter will report to Larry Schwartz, president, Diageo USA.

CANNON WINES HAS GRANTED BRONCO WINE CO exclusive direct-import and distribution rights for the following French wine brands: the Heritages, Clos de l'Oratoire and Ventoux brands by Ogier; the Original Malbec brand by Rigal; the Sables d'Azur brand by Gassier; the Château Fonplégade Grand Cru, Château de Candale Château de Bel-Air, Château Lagarosse Château Douley, Château Lagarosse les Comtes, Château Roc de Candale, Château Roylland, and Fleur de Fonplégade Bordeaux wines by Adams French Vineyards.

Until tomorrow, Megan

“Procrastination is the art of keeping up with yesterday.”
Don Marquis

--------- Sell Day Calendar ----------
Today's Sell Day: 6
Sell days this month: 22
Sell days this month last year: 22
This month ends on a: Thur.
This month last year ended on a: Thur.
YTD sell days Over/Under: 0

Subscribe or check back issues at:
Send news and comments in confidence to:

© 2009 Wine & Spirits Daily, all rights reserved. May quote with attribution.

Follow me on Twitter

Go back to listing Go to next article Go to previous article


Top Secret News Hotline:

Got wine and spirits news for WSD?

Submit Anonymously
twitter facebook