Beam Global Enters New Stage of Growth

FILED NOVEMBER 1, 2009

Dear Client:

In his speech at Morgan Stanley’s Global Consumer & Retail Conference, Fortune Brands’ chief financial officer, Craig Omtvedt, highlighted Fortune’s strategy for its spirits business (Beam Global Spirits and Wine). Right now the company is focused on cutting costs, expanding globally and increasing investment behind its spirits brands. Here are the highlights:

WHY FORTUNE SOLD ITS WINE BUSINESS. “We did that for a multitude of reasons. First, from a market standpoint as we looked at wine we said it’s more of an agri product. We can’t fully assure the consistency from year to year. In the normal course of events as people become more sophisticated they tend to want to branch out and try other products. And lastly, as we look at the businesses, while we were doing well from a revenue and from an operating margin standpoint, the asset base was at such a level that we weren’t getting the proper ROIC...at the end of the day we determined it was most logically worth more to somebody else than it was to us....obviously that was the case.”

CATERING TO THE EVOLVING CONSUMER. “There is a new reality in terms of the way people are going to shop in the foreseeable future. We think we’re going to see consumers with a much stronger value for money orientation and that doesn’t mean price. What it means is that people are going to consciously look at products and say, ‘I’m going to buy what gives me the satisfaction I’m looking for and I will pay whatever it takes to get it,’ but it’s going to be a very conscious decision. So we think it’s absolutely critical at this point to be taking the time to really understand the consumer, understand what’s going in on our categories and make sure we’ve got the right products, that we’re innovating with the right products from a value proposition standpoint.”

SPIRITS GROW 1-2% IN THE US. “The spirits business has held up nicely. Here in the US we’re looking at an overall market with growth in the range of 1-2% and obviously compared to what is going on in other categories we think that’s a net positive, we think that stability is important. We are seeing to a degree a migration from on-premise to drinking at home. We are seeing some level of trading down, more pronounced in the mixable categories, vodka and other similar products, versus the brown spirits of Scotch, bourbon, others. We also see it as a category with significant international growth opportunities. We definitely like our position. We’re position 2 in the US; number 4 in the world overall...

“As we’ve described it to people, we’re playing offense. We think that the spirits category is a great category, great here in the US, great international growth opportunities, and we’re going to continue to pursue it.”

COST SAVINGS PUT TOWARDS BRAND INVESTMENT. “We’re now in a process of moving to ramp up our brand spend. We’re going to have higher spend, brand investment here in the fourth quarter. Through some of the cost reduction initiatives we have and other supply chain actions we’re taking, we’re going to take more cost out of the organization and the current intent is we’re going to put that behind the brand building.”

TEXAS PACKAGE STORES TAKE ON DISCUS

In a tough press release, the Texas Package Store Association (TPSA), which represents the strong Texas liquor store lobby, takes on DISCUS' frequent claim that opening package stores for Sunday sales drives incremental volume and thus raises state excise tax revenues. The theory DISCUS promotes is that opening liquor stores an extra day a week promotes impulse buys on Sunday that wouldn't otherwise happen. They also believe closing package stores on Sunday drives Sunday beer sales (and wine in Texas' case). Meanwhile, Texas package stores are of the belief that opening up stores that extra day just spreads six day's sales over seven, but costs them more to open on Sunday.

The TPSA goes tough on DISCUS in their PR, writing that DISCUS encourages "consumers to drink more spirits" and that they continue to "promote the myth that Sunday liquor store sales are the cure for ailing state budgets." DISCUS had recently cited the case in Colorado, where Sunday sales were legislated into existence last year. DISCUS says that law generated extra alcohol tax revenues of $2 million, up 6%, over the past year. A press release from DISCUS cites Jeanne McEvoy, chief of the Colorado Licensed Beverage Association, saying: “Even in terrible economic conditions, Sunday alcohol sales have turned out to be a huge success for both retailers and the state treasury.”

But says TPSA:

"Colorado's alcohol tax collections did increase. But that's where the connection between reality and DISCUS's hype ends--because there is no credible evidence whatsoever that Sunday sales had anything to do with the increase. By trying to link the two, DISCUS is acting like the rooster that crows at dawn, in an attempt to take credit for the sunrise." Wow. Strong stuff. TPSA goes on:

"In Texas, alcohol tax revenues are somewhat higher than during the previous year. But Texas does not allow Sunday sales, so how could this be? The answer, of course, is that alcohol tax revenues fluctuate for many reasons, including population changes (e.g., Texas's population is increasing by 1,600 per day), price hikes, the mood of consumers and the economy. Only DISCUS singles out Sunday sales as a significant variable."

TPSA says that the Texas legislature determined that "Sunday sales would generate zero ($-0-) revenue for the state treasury....Now DISCUS is pushing Sunday sales legislation in Minnesota, and projecting new tax revenues of $10 million per year. Minnesota legislators would do well to be wary of the rooster's promises. A liquor store-owner in Colorado was quoted as saying that DISCUS's Sunday sales numbers were 'baloney'. As to whether that impolite word is apt, we will let the real numbers speak for themselves."

In response to the TPSA’s press release, DISCUS chief economist David Ozgo challenged their math: “The TPSA should get a new economist. Purposefully or not, TPSA looked at a single month of liquor sales in July 2008 and compared it to a different single month – August 2009 – and subtracted the difference. They conveniently failed to take into account the effect from a full year of sales.”

Do Sunday sales drive incremental volume? What's your opinion?

WSD BRIEF:

010 VINTNERS HALL OF FAME. The Culinary Institute of America (CIA) announced that its 2010 Vintners Hall of Fame inductees include Napa Valley grower Andy Beckstoffer; Al Brounstein, founder of Diamond Creek Vineyard; Randall Grahm, founder of Bonny Doon Vineyard; and veteran winemaker Zelma Long. Leon Adams, a founder of the Wine Institute and author of Wines of America, will be inducted as a “Pioneer,” a category that recognizes wine industry pioneers who passed away prior to 1989.


Until tomorrow, Megan

“The cure for boredom is curiosity. There is no cure for curiosity.”
Dorothy Parker


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