Brown-Forman: sales growth ‘will come back’

Brown-Forman CEO Paul Varga talks SB through what has been a transformative period for the Kentucky-based drinks giant – and his confidence in the firm’s future.

Brown-Forman CEO Paul Varga

*This article was first published in the July 2016 edition of The Spirits Business

“Basically, I’m for anything that gets you through the night – be it prayer, tranquillisers or a bottle of Jack Daniel’s,” Frank Sinatra once famously remarked. The iconic American whiskey brand certainly held fast for parent company Brown-Forman in 2015/16, where a long ‘night’ of geopolitical crises, falling oil prices and bruised consumer confidence hit parent company Brown-Forman’s full-year sales to the tune of -2%.

“We delivered solid underlying growth in sales and operating income, led by the Jack Daniel’s family of brands,” CEO Paul Varga stated in the financial report, released in early June. Indeed, despite emerging market currency volatility pegging back sales, the trademark gained 4.38% in volume terms last year, according to Brand Champions figures. While growth was also noted in other categories – Brown-Forman’s wider American whiskey portfolio plus its Herradura and El Jimador Tequilas also performed well – Finlandia vodka witnessed a 5% sales decline, prompting speculation about its future.

So it’s in large part thanks to that star player, Jack Daniel’s, that Varga remains sanguine when we speak on the phone in the weeks following the release of the financial statement. The long-time Brown-Forman executive, who joined the company in 1986 as a summer intern and subsequently climbed through the ranks, delivers a narrative of cohesion and confidence, and you’d expect nothing less given the transformative year he has just navigated.

A portfolio reshuffle saw Brown-Forman offload Southern Comfort and Tuaca as it also bolstered ranks with the acquisition of Slane Castle Irish Whiskey and Scotch producer the BenRiach Distillery Company – more on that later. So the headline dip in sales doesn’t quite paint the full 2015/16 picture for the firm.

We start with the initially disappointing full-year results. “The emerging markets were much more difficult in the past 12 months and some people have been pointing out that those that are most directly tied to oil and the oil business are the ones that have had the most difficulty,” Varga concedes.

It’s true: emerging markets have historically been a significant contributor to growth for Brown-Forman, and underlying net sales growth, which ran at 8% in the first half of the year, collapsed to 1% in the second half. But, Vargas adds: “I do think with the passage of time – I mean, just because they have such favourable demographics – that they will come back.”

He is also keen to stress the competitive advantage Brown-Forman gains from a diverse geographic footprint compared with its competitors. “We’re not particularly tied to any single emerging market, or really any market at all,” he states, adding the exception of its native US – the largest distilled spirits market in the world.

“But once you get beyond that, I feel we’ve always benefited from our geographic diversification thanks largely to Jack Daniel’s Black Label, because it enjoys success so broadly.” As such, he adds, the company can pick up slack in Mexico and Australia if Poland and Russia are having “a difficult go of it”.

This year Jack Daniel’s celebrates its 150th anniversary

But regardless of any emerging market pressures, the company is in a festive mood at present, and rightly so. The Jack Daniel’s Distillery celebrates its 150th anniversary in 2016 – quite the landmark. Special events, product releases and promotions – including a great barrel scavenger hunt – will be held around the world, in domestic and travel retail, and “we’re going to have a lot of fun with it”, says Varga.

“Jack Daniel’s is such a unique brand in being both very high priced and also very high volume, so when you have a mobilising event like this, you do hope to see some benefit,” he says on the potential uptick the anniversary may bring. For him, the loyal and engaged consumer franchise could well be an incremental sales cherry on top of the cake of what will be a memorable birthday.

The conversation turns from historic celebrations to history in the making: mid-way through 2015, Brown-Forman announced it was to acquire the Slane Castle Irish Whiskey brand and held a ground-breaking ceremony to construct a new distillery in September.

The company’s first foray in the category – which has seen exports soar by 220% to €300m since 2003, according to the Irish Whiskey Association – should start to come into fruition next year, with the distillery opening to the public (“barring any interruptions”) and a third party-sourced product going live in 2017.

“We will of course enter the business through the bulk market to start; this is something we did similarly with Woodford Reserve [Brown-Forman’s Kentucky-based American whiskey brand] 20 years ago,” Varga confirms. “[We will] finish the produce the way that might be similar to what you would be producing yourself.” And will blended, pot still and grain variants be produced at the new distillery? “Yeah, I think so. You know, we learned this from Woodford. It gives you the flexibility to blend of course […] so I think that would absolutely apply to the Irish project.”

Brown-Forman has also sought out portfolio development the other side of the Irish Sea, with its £281 million (US$405m) acquisition of The BenRiach Distille y Company and its three single malt Scotch whisky brands – The GlenDronach, BenRiach and Glenglassaugh – which was completed in June 2016.

“Oh, it’s very exciting,” Varga opens. “You know, we are so skewed to American whiskey and we had been in [the Scotch category] with Glenmorangie before as a minority investor.” But Scotch has yet to completely recover from a 7% fall in export values recorded in 2014. What is his vision for the brands as the company returns to the sector?

“These categories [Scotch and Irish whisk(e)y] fit very, very well with a family-controlled company which thinks in multi- generational time frames,” he explains. “I’ll give you a parallel – this past year, both Woodford Reserve and Gentleman Jack [a Jack Daniel’s Black Label higher-end Jack Daniel’s line extension] went through what I would consider a very important milestone for a super-premium brand, which is 500,000 cases.”

With the brands started in Ireland and purchased in Scotland, “we’ll do the same thing. And our view I think [is] we could build these over the next 20 to 30 years into significant brands”.

Copper still at Woodford Reserve’s distillery

Those who followed Brown-Forman’s sale of liqueur brands Southern Comfort and Tuaca to Sazerac for US$544 million earlier this year will have noted some very precise wording. The sale was, the company said, to “focus resources on its highest strategic priorities”. With such a whisk(e)y-centric portfolio, where does this approach leave the likes of Finlandia vodka, Chambord liqueur and even the Tequila portfolio?

Varga is quick to confirm Herradura and El Jimador’s place in the whisk(e)y-oriented stable. “Both brands had their finest year,” he says, referring to the “double-digit” sales growth reported in the 2015/16 full-year results.

“I think Tequila benefits – and this is my own personal opinion – [from] vodka,over the past quarter of a century, really emerging but not having a memorable flavour. I think as a white spirit – and we’re watching what’s going on out there with gin right now – these white spirits that have a little more flavour, I think the consumer has shown a stronger interest in them as an alternative to vodka in some instances, and I think Tequila holds up very well there.”

In the case of proprietary vodka Finlandia, “it’s had a very difficult time of late because of its concentration in Eastern European countries; and the vodka category, particularly the premium vodka category, has been under a lot of pressure there”.For Varga, the impact of low oil prices has hit the geography especially hard.

“But I would contrast it to, say, Southern Comfort and Tuaca, which were less important to [what I] call the distribution platform for Brown-Forman in a particular region. In this example, Jack Daniel’s has enjoyed great success throughout Eastern Europe in large part because Finlandia preceded it there.”

Varga acknowledges that Chambord “hasn’t been as large a contributor” but is quick to add that in its major UK and US markets “we’ve been very excited about what we’ve seen, particularly in the UK these last three years”. But is that enough for it to hold its place?

“If you look at our history, we regularly look at the brands that are represented in our portfolio to make sure that they hold up well to our expectations,” he counters. “In the case of Southern Comfort and Tuaca, our expectations changed after having years of success with those products but [feeling] that we could place a higher priority on other items. I would expect Chambord, Finlandia – everything – to be held to the same standard of performance and evaluation.”

Looking forward

Regardless of whether or not we can expect to see further immediate changes to the Brown-Forman product portfolio, Varga is forward-looking. “The last 20 years or so – maybe 25 now – was a period where we made regular but thoughtful shifts to our portfolio. But most importantly we built out as a company, I would say, the beginnings of a global company. We now have representation in so many diverse cultures around the world.”

Varga credits the presence of Jack Daniel’s in those diverse market as a key growth builder.
“What makes it most exciting now is to be able to bring [consumers] products like the GlenDronach, or Slane, or Coopers [Craft] Bourbon, or in some cases Woodford Reserve, which still has not been introduced to many of these countries, and to have these great brand builders around the world.” It’s these people, he says, who will “do the next 20 or 25 years of development on behalf of new trademarks alongside Jack Daniel’s”.

And with the whisk(e)y-centric portfolio now established, it will be intriguing to see what those new trademarks might be.