Close Menu

SB Voices: Constellation’s brown spirits thirst

Kristiane Sherry ponders this week’s big-time merger that never was, and considers what’s next for Constellation Brands and Brown-Forman.

Has Constellation left it too late to get in on big-time American whiskey?

The drinks industry was taken by surprise this week when US-based beer giant Constellation Brands reportedly tried to woo the Brown-Forman family with a takeover bid.

With sales of more than US$4 billion in 2016 and a market cap in excess of $20bn, the Jack Daniel’s maker would be quite the prize for any drinks company. Constellation Brands, with its US$7bn in sales and US$34.7bn valuation shapes up as a fitting suitor, albeit with some debt concerns.

But despite a challenging 2016 for Brown-Forman, when full-year sales slid 2% on weaker economic conditions and currencies, the bid says far more about Constellation Brands than it does the state of the Brown-Forman business.

Headline growth might be down, but the engine room of growth – American whiskey – is front and centre of the Brown-Forman establishment. Jack Daniel’s saw underlying sales climb 6%, and all super- and ultra-premium whiskeys saw growth – Woodford Reserve alone was up by 28%. 2016 might have been tough, but Brown-Forman is doing fine on its own, thank you very much – as the family reiterating just yesterday [25 May], stressing that the business was not for sale.

Constellation Brands by contrast had a roaring 2016/17 fiscal year. In the 12 months to February 2017, reported net sales climbed 12%, with operating incomes up 36% to US$2.4bn. But it’s the beer business that is the “powerhouse for growth”, and the company has already said it expects 2017 wine and spirits sales to decrease from 4-6%, with operating incomes “flat”.

Its only million case-plus selling brands had a mixed 2017, too. While Svedka vodka bucked market trends to see volumes climb 4.7%, Paul Masson brandy only managed 1% gains, with Black Velvet Canadian whisky shedding almost 2.5% of its case sales (see The Brand Champions report, out in the June issue, for more).

If Constellation Brands wants to become a major spirits player acquisitions seem the only logical route. During its last financial year, Constellation snapped up a minority stake in organic spirits producer Catoctin Creek Distilling Company, assumed complete ownership of Utah-based High West Distillery, and acquired a minority stake in Kentucky’s Bardstown Bourbon Company. It also bought bought a minority stake in the recently reopened Nelson’s Green Brier Distillery in early 2016 through its investment unit, Constellation Ventures.

But these will take time to come into fruition – and with the distilling boom in the US there are many small-to-medium sized distillers anxious for a bite of the same super-premium ‘craft’ pie. It seems up-scaling via a major transaction is the most viable option if the ambition of becoming a major spirits player is to be realised.

The question then is if now how, but who? Even if Constellation can cough up the funds, who might be willing to sell? The Brown-Forman family has resisted capture for almost 150 years, and it seems unlikely they will relinquish control of the brown spirits behemoth at a time when the category is flying.

Sazerac, also strong in brown-spirits, is fiercely protective of its independence. Similarly, Heaven Hill seems unlikely to give up its strengthening position in the market. It would seem prior consolidation in the market has left few options, unless a mutually beneficial merger can be agreed.

Has Constellation Brands simply left it too late to enter the big-time American whiskey fray?

It looks like you're in Asia, would you like to be redirected to the Drinks Business Asia edition?

Yes, take me to the Asia edition No