Bruce: "Brown Spirits Holding Up Better"

FILED OCTOBER 1, 2009

Dear Client:

Third quarter organic net sales were down -11% on a comparable basis for Fortune Brands, reflecting flat sales for the company’s spirits business. Comparable net sales for spirits declined--4%.

"Spirits sales were flat in the quarter, benefiting from higher sales of Jim Beam bourbon and Canadian Club whisky, the Cruzan acquisition, and strong growth in emerging markets, offset by soft results in other international markets," said Fortune Brands chief Bruce Carbonari.

THE STATE OF BEAM’S SPIRITS BIZ:

Craig Omtvedt, cfo, said the spirits market is holding up relatively well although they’re seeing lower consumption by consumers’ on-premise as they drink more at home. There’s also “some level of consumers trading down,” he said. The spirits industry in the US is up about 1% in volume and value.

As we mentioned above, Beam’s spirits sales for the quarter were off -4% on a comparable basis. US year to date depletion case volumes remained off at a low-single digit rate, while depletion revenues for global brands were up 3%.

While global volumes of BOURBON were off in the low-single digits, case volumes have turned positive in the US, gaining 1%. The Jim Beam franchise gained dollar share in the US in the third quarter and strong pricing benefited depletion revenues, which grew 8%. Red Stag certainly contributed to those results, while Maker’s Mark experienced double-digit depletion revenue growth in the US.

Sauza TEQUILA’S volumes and depletion revenues remained off in the high-single digit year to date. In the quarter, however, it experienced solid depletion gains in the US offset by lower volumes in Mexico. Modest growth from the super-premium Hornitos brand led to modest growth in the US year to date. Beam also saw improving share trends for Sauza Gold and Sauza Blanco.

Case volumes of Cruzan RUM were up double digits. Courvoisier COGNAC volumes were off globally, while depletion revenues were of single-digits in the US and UK due to an overall challenging segment. Lastly, CANADIAN Club depletion revenues grew 4% in the US, benefiting from a strong third quarter.

INVESTMENT AND PROMOTIONS IN THE FOURTH QUARTER:

In the fourth quarter Beam plans on “shifting brand investments to better align with the holiday selling season. That includes ramping up brand investment behind Jim Beam with new TV advertising that begins this week on major cable networks,” said Bruce. Also expect to see new ads for Effen Vodka and promotional activity around the new supply of Knob Creek Bourbon that will appear online in the weeks ahead. Craig said the company under-spent in the first half of the year, which gives them the opportunity to ramp up marketing in the second half into fiscal 2010.

Beam Global will “respond” to heavy promotions they’re seeing in certain categories, said Bruce, during the holidays. “There are certain category where we’re seeing heavy pricing, actually heavy promotions than pricing, in certain channels and we are responding to that as well.”

Craig also commented that “we feel well positioned for the holiday selling season with our enhanced route to market and distributor inventory with emphasis on distributor inventories that are in balance.”

BRUCE ON WHY BROWN SPIRITS ARE OUTPERFORMING VODKA:

“The US market hasn’t really changed that much. Overall we’re seeing about 1% growth in that market...The mix side a bit with a shift down from super-premium and premium to value and standard but it’s not significant. More of the shift is from on-premise to off-premise. Certainly some categories are doing better than others. Mixables are more challenged because they’re mixable. You can make a vodka tonic or screwdriver and you hardly taste the vodka so I think people are being a little bit more sensitive with the mix downturn there. The brown spirits are holding up better, bourbon especially, because again you really don’t mix it. No depreciative change in the trends.”

BRUCE OPPORTUNITIES FOR EFFEN VODKA:

Bruce noted during the question and answer portion that Effen Vodka is a small brand and focused in Southern California and Chicago. Beam recently finished the transition of that brand in mid-September, so it’s too early for them to see much movement.

When asked if they’re considering acquiring new brands or adding production extensions to Effen, Bruce said: “Again we have a great portfolio of brands and we’re first going to focus on delivering performance on all our brands. If we have select opportunities here and there, like Effen was, then we’ll look hard at it and if makes sense we’ll execute behind it. Effen is a really targeted brand. It’s a brand we think we can leverage well inside our now national network and take it from Chicago and the Southern California region and expand it selectively across the country.”

SALES AND MARKETING REORGANIZATION:

Reducing cost structures, enhancing supply chains and improved efficiencies across their organization has been front and center for some time. Over the past several quarters Beam has discussed initiatives to build a higher performance organization for its spirits business, including next generation route to market. Bruce said these moves has “elevated our consumer insight...and given us much great control over sales and execution.”

Recall earlier this week when Beam announced major organizational changes, which includes changing its sales organization from regional to distributor based “to fully leverage the benefits of our new performance based contracts and distributor partnership programs.”

Beam chief Matt Shattock believes this will create a simpler, smarter and faster organization, while freeing up resources that will support stepped up brand investment. “This now completes the major restructuring initiatives around sales and marketing in the US,” said Bruce.

STEPS IN INNOVATION:

“Delivering value to the consumer is critical in the current environment,” said Bruce. He noted that value doesn’t just mean price, but offering products that consumers trust. “We will continue to innovate and build our brands during the economic downturn.” Red Stag, Cruzan and Sauza in a Box are some examples of Beam’s brand innovation.

In spirits, “Red Stag by Jim Beam has become one of the most successful new spirits brands in years,” said Bruce. Since launching the brand in May, they now expect to ship 100,000 cases in 2009. “Sauza in a Box has significantly exceeded our expectations,” appealing to the at-home consumer trend.

Recall that Beam launched new packaging for Cruzan Rum earlier this year, and “recently launched the most sweeping positioning campaign yet for the brand,” said Bruce. “The “Legendary Rum of St Croix” campaign is elevating the profile of Cruzan with nationwide point of sale activations.” Recall that Beam also signed a long term agreement with government of the US Virgin Islands to continue producing Cruzan in St. Croix. “That agreement will be considered by the Virgin Island senate next week,” he said.

YELLOW TAIL AIRS NEW COMMERCIALS TODAY

Yellow Tail’s new commercials, “Open for Anything,” start airing today and will run through the holiday season. “Despite our early growth and our high brand loyalty, Yellow Tail is still a discovery brand,” said Isabelle McDonnell, Director of Marketing for Yellow Tail wines. “Through the new ad campaign we have the opportunity to take that to the next level and deepen consumer affinity and awareness of Yellow Tail.” The first two executions are “Tragedy” and “Swirl.” Planned spending for the campaign, which will appear in national television, online, and in-store, is $7 million. The launch of the campaign marks a busy year for the wine brand. Recall in July, the brand added to its white varietals by introducing sauvignon blanc to its 12-varietal portfolio.

WSD BRIEFS:

DIAGEO IS CLOSING ITS BOTTLING PLANT in Dorval, Quebec and moving its production to Delta Beverages in Woodbridge, Ontario in late February. The Dorval facility has bottled Smirnoff-brand drinks since 2003, according to the Canadian Press. The move will impact 65 workers.

CASTLE BRANDS has entered into a marketing and distribution agreement covering the Nordic Region with Arcus AS, Norway's largest spirits producer and wholesaler.


Until tomorrow, Megan

“Most conversations are simply monologues delivered in the presence of witnesses.”
Margaret Millar

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