Sazerac ‘questions wisdom’ of flavoured whiskey
Mark Brown, president and CEO of Sazerac, discusses his company’s new international outlook following a transformative year in 2016 – and details why flavours are “not the correct direction” for Southern Comfort.
*This article was first published in the November 2016 edition of The Spirits Business
In a year brimming with merger and acquisition news, one spirits company has dominated headlines more than any other – Sazerac. With a business consisting of 350 spirits brands, one could be forgiven for presuming that the 147-year-old firm had sated its desire for portfolio growth. But recent activity indicates just the opposite. In less than 12 months, the Louisiana-based company confirmed its acquisition of seven spirits brands and businesses, at the same time as continuing its experimental Bourbon programme and announcing a US$200 million expansion of its Buffalo Trace Distillery.
For Mark Brown, Sazerac’s president and CEO, who has captained the company for the past 10 years, the deals were the result of savvy opportunism, rather than some grand growth strategy. “First and foremost we see ourselves as a brand-building company,” he says. “Second priority is new business development. Then the third thing on our priorities list is acquisitions. But over the last 12 months a lot of opportunities have come along [and] we have been fortunate enough to be in a position to take advantage of them.”
Luck of the Irish
Sazerac kicked off its recent acquisition streak late last year with the purchase of Michael Collins Irish whiskey, previously owned by the Sidney Frank Importing Company. The firm expanded its footprint in the category even further after acquiring Paddy Irish whiskey from Pernod Ricard’s Irish Distillers unit in May for an undisclosed sum. Brown believes that while the rapid growth of Irish whiskey is “really a Jameson success story”, other brands will “emerge alongside Jameson and be very nice global spirit brands”.
Sazerac furthered its relationship with the French drinks group in October with a deal to take over Frïs Vodka, which Brown describes as “more of a US play”. Just one month earlier, Sazerac bought a controlling stake in Australian importer, marketer and distributor South Trade International, and also acquired the family-run British spirits bottler The Last Drop Distillers, which will continue to operate independently.
“We have a number of businesses that I would describe as really nice small family businesses that we like to operate very much at arm’s length by letting them continue to run the business,” Brown says. “So for example, our craft distillery in Virginia, A. Smith Bowman, operates very independently to Sazerac, and we foresee the same type of work with Last Drop.”
While many consumers will associate the bottler with high-end offerings from Scotland, Brown stresses that he does not view Last Drop as restricted to Scotch whisky. “We think there are a number of spirit categories, including American whiskey and Canadian whisky, where Last Drop can work very well indeed,” he says.
However, the most significant acquisition for Sazerac in the past 12 months – perhaps even in the past 20 years, since its purchase of Buffalo Trace – was of spirits brands Southern Comfort and Tuaca from fellow US distiller Brown-Forman. The combined US$542.4m deal was announced in January 2016 and finalised two months later. Brown admits that while Tuaca is more limited in global appeal than its stablemate, the brand was an attractive proposition for Sazerac, which previously tried to buy the Italian liqueur in 1998. Meanwhile, whiskey-based liqueur Southern Comfort will become a key focus in Sazerac’s portfolio.
“Southern Comfort is an iconic American brand, and we like iconic American brands,” Brown says. “So for us it was an absolute natural fit.” Brown’s admiration of Southern Comfort dates back to 1992, when he took a five-year break from Sazerac, which he joined in 1981, to work in various positions at Brown-Forman. “I’d worked on Southern Comfort when I was at Brown-Forman, so I had some experience with it, and I liked the brand and always thought it had lots of opportunity,” he says.
Southern Comfort may be an established brand, well known by consumers around the world, but it has been suffering financially for some years. In 2014/15, its last full financial year in Brown-Forman’s portfolio, the Southern Comfort family of brands fell 5%, continuing a downward sales trend. This was despite a full re-design of the range, copious new flavours and much marketing activity. What makes Brown think he can turn its fortunes around?
“Brown-Forman did a very nice job [on Southern Comfort] over a long period of time,” he concedes. “But I do think that, to some extent, it lived in the shadows of Jack Daniel’s. Jack Daniel’s has become a remarkably successful global brand and I still think [it] has a long runway in front of it. When you have a brand like that, other brands tend to live in the shadow of it, and I think with Southern Comfort out of the shadows, there are lots of opportunities for us to generate growth. We are very excited about that.”
When asked about Sazerac’s strategy for Southern Comfort, Brown keeps his cards close to his chest – but hints at a stark change of strategy. “[We] think flavours are not the correct direction,” he says candidly. “Now there are a couple of markets where the flavours seem to have taken root, but I think we see Southern Comfort as a serious mainstream whiskey brand, and we are not big advocates of flavoured whiskey.
“If you look at Crown Royal, it’s clearly going after the flavoured whisk(e)y segment as a clearly identified segment. We’re not convinced about the wisdom of that. It’s very similar to the challenge of Jack Daniel’s. We view that as an iconic mainstream whiskey brand and frankly have some questions about the wisdom of going off into flavours. So I think on Southern Comfort, if you see anything from us, it will be very much about looking after the mainstream whiskey as opposed to producing another 20 flavours.”
Sazerac may have its work cut out to secure consumer mindshare for Southern Comfort, but, as analysts (and Brown himself) note, the brand gives the company a greater international focus than ever before. As a historically Bourbon-centred business, the vast majority of Sazerac’s sales are in the US. However, it has now greatly increased its presence in markets such as the UK, South Africa and Australia following the purchase of Southern Comfort.
“With the acquisition of Southern Comfort we actively became a global spirits company,” Brown says. “Thankfully it’s not like a Star Trek film – we’re not boldly going where no one has gone before – but it’s always been our ambition to become a global company, and the Southern Comfort acquisition was a very helpful way of accelerating that.”
Sazerac has also hastened its international growth with a secret acquisition – that of its UK distributor, Hi-Spirits. Rumours began to circulate in the industry that Sazerac had sought to buy Hi-Spirits at around the same time of its Southern Comfort takeover, but the firm remained tight-lipped. Now Brown tells me the deal was “consummated quite a while ago”, but a decision was taken to not publicly disclose the news.
“Consistent with the way we operate our business, [Hi-Spirits is] running very much as an independent business, which is how we think it’s going to operate best,” he says. “So the deal was consummated seamlessly and they have been part of the Sazerac family for a while, and we’re thrilled with the way that business is running.” Brown adds that Sazerac, as a private company, is free to choose which new business ventures it publicly discloses. “In fact, I’d say we’ve made at least two other acquisitions that are still not in the public domain,” he admits. “We’re clearly acquisitive and I think on each one we just consider at the time if it’s appropriate to disclose it, or not disclose it.”
Plugging the gaps
So, with a number of portfolio gaps plugged, is this the end of Sazerac’s spate of acquisition activity? “I don’t think we see any particular reason for the general M&A activity in the industry to slow down,” answers Brown. “[In] a highly fragmented industry you obviously would bet that there’s going to be more consolidation.
“So I think the M&A environment in the industry will be substantial, and that would suggest that we don’t particularly see a reason for anything to slow down as it relates to us. There are a few gaps that we plan on plugging up over the next two, three, or four years, but we are very pleased with the way the portfolio has filled out.”
Brown also stresses that Sazerac is “not a seller of brands”, adding that since he joined the company in 1981, it has sold only one of its spirits, and this was part of a brand swap. “We’ve been fortunate over the years that for all the brands we’ve acquired, we’ve been able to figure out a role for them,” he says. “So we really haven’t had any particular issues with underperforming brands that we felt would be better off in someone else’s hands.”
Sazerac may be happy with its lot, but as international ambitions grow, Brown believes it is only a matter of time before production moves abroad. “I think it is extremely likely that over the next 20 to 25 years we will end up buying distilleries in a variety of countries and in a variety of categories,” he says. “So, for a specific example, China is very hard to ignore. Obviously there’s a very robust distilling industry inside [the country].”
Despite its growth and diversification, Sazerac will “always be an American whiskey company”, Brown says. “That’s our bread and butter, so to speak.” He is bullish about the future prospects of American whiskey, as evidenced by the fact that Buffalo Trace Distillery announced the US$200m expansion in May this year. “We’re laying down infrastructure and we’ll be building a warehouse every five months for the next 10 years, if the trends continue,” he says. “And the beauty of that is, if things slow up, we can just stop building.”
Brown, however, is realistic in his acceptance that consumer thirst for American whiskey may not remain as rapacious as it is now. “In our industry, like all whisk(e)y industries, you just can’t get the forecasting right – it’s either feast or famine,” he admits. “This is inherent with any aged product, so you end up with these period gluts. Bourbon saw it in 1991/’92/’93 and obviously we now continue to be in a period of shortage. But by the same token, there’s a lot of inventory being laid away and it is speculative whether the consumer will mop all of that up.”
But, for the time being, Buffalo Trace’s whiskeys remain on strict allocation, and the distillery’s latest supply updates suggest this will be the case for the foreseeable future. Sazerac has been accused of scaremongering in its annual report to the industry, and even of masterminding its own shortage. This, according to Brown, is poppycock. “The limited aspect is nothing that we set out to create, it’s just the situation we’ve found ourselves in,” he says. “I don’t wake up in the morning thinking how to engineer a shortage of something.
“We’re making Pappy Van Winkle today for 2039 and I could be pushing up daisies by then. So my crystal ball is no better than anybody else’s and I don’t know if by the time we get to 2039 we would have made too much or not enough. The only thing I know is that we wouldn’t have made the right amount.”