SB interviews… Chris Heath, Stock Spirits

It has a quintet of million case-selling brands and a powerfully ambitious private equity owner, but Stock Spirits has retained a surprisingly low profile to date. Richard Woodard met CEO Chris Heath to find out why.

Chris Heath, CEO of Stock Spirits

For a company with a turnover of about €300m and leadership positions in spirits markets such as Poland and the Czech Republic, you don’t hear an awful lot about Stock Spirits. Sure, vodka-based liqueur Lubelska was one of sb’s Brand Champions in June, and four of the company’s vodkas topped 1m cases in 2011, but products such as 1906, Zoladkowa Gorzka and Zubr are hardly household names in the west.

“In part it’s been deliberate because I don’t believe in talking until you’ve got something to say,” explains Stock CEO Chris Heath, the straight-talking ex-Allied Domecq exec who’s been running Stock since 2009 – part of a highly experienced management team recruited by the company’s owner, the private equity business Oaktree Capital.

Heath and I talk in a London office, high above the lawyer-filled hinterland of Chancery Lane, with big windows and a sweeping panorama taking in the City and much of south London. The perfect place, then, to take the long view, because Stock Spirits remains very much work in progress.

Heath talks about phase one being “pretty much done”, five years after he joined the business as part of a new senior management team. All drinks industry veterans – the team has over 150 years’ spirits experience and double that in FMCG terms – they could scent the potential of growing this merged combination of traditional businesses in a region of vast, uncluttered potential: central Europe.

For five years changes were made, structures altered, senior staff recruited and replaced. Some €35m was invested to modernise the company and, especially, its production facilities.

The result, five years in, is a business with leadership positions in Poland and the Czech Republic, the top-selling vodkas in those markets plus Italy, and developing operations in Croatia, Bosnia & Herzegovina and Slovenia. But one that also now has an impressive innovation record, thanks to that initial investment.

“At any one time, we have hundreds of different liquids in our NPD pipeline and under development,” explains Heath. “We research until we get the one that has the ‘wow’ factor – we spend a lot more time and effort on research than anyone else in our region, from what we see in the marketplace.”

Lubelska trebled volume sales between 2009 and 2012 to 2m cases

This is most evident in Lubelska, a vodka-based liqueur that is one of the success stories of the industry right now, more than trebling volumes to 2m cases between 2009 and 2011. That dynamic growth is continuing in 2012, driven by two new flavours: grapefruit and mint.

It’s a reflection of the current fashion in the Polish spirits market – flavoured vodkas up, clear vodka flat – and, says Heath, a broader industry trend. “Younger consumers – legal drinking age consumers, I mean – are getting away from ‘when I become an adult, I’m going to have to drink that disgusting stuff my parents drink, or mix it with Coke’,” he argues. “Now they’re drinking products like Lubelska because they taste nice. We’re using our investment in technology with real ingredients that are as natural as possible. Younger consumers and women are really driving the growth in this category.”

This innovation, however, comes within a portfolio of trusted brands, and Stock’s core strength remains in vodka and vodka-based liqueurs. With western brands increasingly targeting markets like Poland – Chivas Brothers reports, for instance, that Ballantine’s blended Scotch will sell about 400,000 cases there this year – does Stock risk being outflanked?

In response, Heath offers a reality check: nearly 96% of all spirits consumption in Poland is vodka, and the company is more interested in exploiting the nuances between the audience for Zoladkowa Gorzka (more traditional) and Lubelska (younger, more modern). Heath also highlights “pretty aggressive” price promotions from the big guns of whisky, pointing out: “If you see something at 50% off, of course you’re going to give it a try.”

But he adds: “I do think over time these other categories will grow, which is why we don’t ignore them – we’ve got our own whisky, gin, rum and brandy. We are seeding these for the future and keeping a very active eye on things.

“But the biggest and best profit pools are vodka-related. I think they will remain the best-performing categories going forward – clear vodka perhaps less so than flavoured vodka, but clear vodka is still very popular. We have the number one vodkas in Poland, Czech and Italy, and we don’t see that changing in the short term.”

Stock Spirits

Ok, so reverse the question. Stock is still very much a regional player, but it’s also ambitious. What’s the global strategy for the business? “We see [our core business] as being central Europe because there is so much opportunity there and there’s no-one doing what we do,” replies Heath. “We actually export to about 50 markets, but we’re more opportunistic in those markets – they’re not our bread and butter.”

Hence the sale of orange liqueur Gran Gala to Sazerac last year. “It was pretty much a single market brand in the US, which was 97% of all sales – therefore clearly not a core brand for a central European business,” explains Heath.

That said, he continues: “But we’ve not pulled out of the US. We’ve been  approached by lots of other importers wanting to take our Polish or Italian range, initially focusing on the Polish and Italian communities, but then building them out nationally.”

And don’t mistake Stock’s regional focus for a lack of ambition. Heath would like to see the company taking a leadership position in “at least three or four” markets in central Europe in the next five years or so, with a refinancing exercise carried out in late 2011 – plus the Gran Gala sale – helping to free up cash for potential future acquisitions.

The economic meltdown of 2008 hasn’t helped the acquisition schedule, but at the time of our chat, Heath reckoned Stock was “pretty close” to a deal or two. “In 2008, everything was for sale with high price expectations; in 2009 everyone wanted to sell and there were no buyers; in 2012, the world’s got a dose of reality and the number of times we get information about businesses up for sale again shows that,” he says.

This drive for expansion brings up the subject of Stock’s ownership by Oaktree Capital Management, recalling rumours last year of a possible sale to Diageo, or a stock market flotation. Detractors accuse private equity businesses of many things, including secrecy and short-termism. While remaining realistic about Oaktree’s motives for owning the company in the first place, Heath is keen to set the record straight.

“Anyone going into a business owned by private equity goes in with eyes open,” he says. “The Oaktree business model only works if they buy and sell businesses, but they have a vision to create the best company in that sector, in that region.”

And if they sell up? “As long as the incoming shareholder shares our vision, we’re very happy to carry on with what we’re doing. And why wouldn’t they, if they’re buying the business?”

Heath’s point is that, to date, Oaktree has been an enabler – “they’ve never stopped us from doing anything” – and the owners have clearly understood that Stock is the ideal business model for a region made complicated by differences of language, culture and government regulation.

More importantly, he says Oaktree has also understood the importance of giving the business long-term scope (and thus an inherently higher resale value). “There’s no-one else doing what we do. We came together because we saw the opportunity and put together a team to run a much bigger business, because we want to run a much bigger business.

“Oaktree recognised that and recruited appropriately. They deliberately invested to create a company that has sustainability and potential for growth in the future – and the business will be worth more if it’s sustainable. The days of buying a business, throwing a few brands together and then selling it are gone.”