Brown-Forman CEO on tariffs: ‘We are most affected company’
In the face of American whiskey tariffs, president and CEO Lawson Whiting tells The Spirits Business that the group is becoming more open to taking risks as it enters a new chapter in its story of global growth.
*This feature was originally published in the July 2019 edition of The Spirits Business magazine.
Such is the peculiarity of international relations that a row over metal imports into the US has rinsed the coffers of Kentucky and Tennessee distillers. After president Donald Trump slapped tariffs on imported aluminium and steel last year, the likes of the European Union and China fought back with their own punitive measures, and American whiskey was caught in the firing line.
A year later and exports of Bourbon and other US whiskeys have dramatically slowed. Jack Daniel’s producer, Brown-Forman, has been hit particularly hard, with the slew of retaliatory taxes shaving US$125 million off its annual earnings. “In a way, the American whiskey tariffs are a tariff on Brown-Forman because we have a 60% share of American whiskey in Europe. We are by far the most affected company – no-one else is even close,” says Lawson Whiting, who became company president and chief executive officer at the start of this year.
Risk of losing customers
The group reported a 2% net sales increase for the latest fiscal year, which may not sound too shabby but is less than the 8% net sales growth it experienced in 2017/18. The firm was forced to increase the price of its US whiskey brands by 10% in the EU markets where it owns distribution, and may need to “pass some pricing on” to its regional partners. The price hike means the company runs a risk of losing consumers to other tariff-free whisky categories, says Whiting.
“The challenge is we are the only category that is under this tariff situation. If it was all spirits, then it’s easier to get pricing up because your relative price to your competition doesn’t get out of whack. It’s hard when you’re the only category getting picked on.”
Whiting has taken Brown-Forman’s helm at a turbulent time for the industry, but he remains convinced that “it’s a great ride to be on”. The executive joined Brown-Forman from college in 1997. He was most recently chief operating officer before taking over from Paul Varga as CEO. Over the course of his career at Brown-Forman, Whiting has played a key role in reshaping the firm’s portfolio to focus on high-end whisky and other super-premium spirits.
“When I joined we had a market cap of about US$3 billion to US$4bn, and now we are US$26bn, so the business has grown substantially,” he says. “Spirits were also weak then, and whisky was really weak, and in the middle of a 30- to 40-year decline, but even during that time Jack Daniel’s was able to buck the trend. Now, the whisky category has become so attractive compared with others and we are doubling down on whisky.”
As a result, Brown-Forman exited the wine business in 2011, and sold some of its lower-end spirits brands. “I have learned in my 20 years in the business that at Brown-Forman we don’t do well in lower-margin businesses; we’re much better at growing in the super-premium-and-above side,” Whiting says.
“It’s more attractive, [has] better returns and it’s where the growth is, so we’re going to focus on that.”
The group sold its Southern Comfort and Tuaca liqueurs to Sazerac in 2016, and entered a number of fast-growing categories where super-premium rules. In 2015, it moved into Irish whiskey with the acquisition of Slane and its historic estate in County Meath. Whiting explains: “We’re building [Slane] slowly, [with the] right accounts, and a high-end, on-premise-led brand-building strategy. We say we’re going to lose millions of dollars a year on Slane until we get this thing seeded the way we want, then we believe we can build it into something that can be scaled up – but it’s a slow build.”
Brown-Forman again expanded its international distilling footprint after purchasing the BenRiach Distillery Company and its three distilleries from industry veteran Billy Walker in 2016. The move marked the group’s re-entry into Scotch, which it was last involved with 15 years ago, thanks to a minority shareholding in Glenmorangie. “We had been looking to find ways back in for a decade and could never find the right brands with the right mix of what we wanted to do,” says Whiting, “until we met up with Billy Walker and saw what he was doing with GlenDronach in particular.”
While BenRiach is arguably the better-known name among the three distilleries, which also includes Glenglassaugh, Brown-Forman was most drawn to GlenDronach, which Whiting believes can be a serious contender in Scotch and even reach a million cases at its relatively high price point. Brown-Forman has invested in “significant” capacity expansion for its new Scotch business, which is seeing “dramatic growth”, he says.
The latest addition to the Brown-Forman fold is Fords Gin. The group entered the super-premium gin category for the first time with the acquisition of Fords’ parent, The 86 Company, last month. Launched in 2012 by Simon Ford, Jason Kosmos and Dushan Zaric, the business specialises in spirits that are “made for mixing”. As well as Fords Gin, 86’s portfolio includes Aylesbury Duck Vodka, Caña Brava Rum and Tequila Cabeza. Fords is the result of a collaboration between Simon Ford and Charles Maxwell, of Thames Distillers.
With regards to other portfolio gaps, Whiting says Cognac is “an interesting category” but “tough to get into”, while super-premium rum “just hasn’t happened”. Regardless of whether the group enters new categories, whisky will continue to be its focus, and while Jack Daniel’s is Brown-Forman’s bread and butter, Whiting is particularly excited by the potential of its Bourbon stablemate.
“Woodford Reserve is a stellar brand,” he enthuses. “Look, the Jack Daniel’s franchise has got to be my first priority every day. It’s so big and so powerful, [and] continuing to grow; that has always got to be my priority. But my passion really would be seeing the growth of Woodford Reserve.”
Whiting adds that Woodford Reserve is set to become a “big global brand” and will pass the million-case mark “in the next fiscal year”. After launching in 1997, it took the brand 10 years to reach 100,000 cases, and last year alone grew by 170,000 cases. “The brand was seeded in the right way, in a premium way,” says Whiting. “Then when Bourbon started to get hot, it became the leader in that super-premium Bourbon category, and we’ve had double-digit growth for more than 20 years now.”
Despite Bourbon becoming an increasingly crowded market, Woodford Reserve has managed to stay ahead of the curve with its focus on innovation. Whiting calls Double Oaked the “most successful single innovation” from Woodford Reserve, while the new US$1,500 Woodford Reserve Baccarat Edition, aged in Cognac casks and bottled in hand-cut crystal, “builds the brand’s credibility and notoriety”.
More broadly, Whiting believes the much-touted craft challenge in American whiskey never quite got off the ground. Despite the surge in micro whiskey distilleries in the US, large-scale producers such as Brown-Forman have retained their market share. “There were so many people four to five years ago saying craft is going to dominate the big brands, and that just hasn’t come true,” says the CEO, who adds that a mix of inexperience, lack of funds and small-scale distribution means many smaller players are going out of business in the US.
“You’ve got to build a brand with more than what I call ‘place’. A brand has to have personality and something more than a zip code. A lot of these brands were built on ‘think local, buy local’, but they were charging higher prices, and their whiskey was either mass-produced or it wasn’t very good. We also ran into a lot of craft whiskey makers that tried to accelerate the process by throwing staves in a barrel. There was a lot of bad whiskey out there, and a lot of these brands have gone bankrupt.”
As such, Whiting says the craft movement doesn’t keep him up at night but that “the number of big brands entering the American whiskey category” does. “We still have high market share but it always does leave a lot of competition, and it’s not getting any easier.”
As well as American whiskey challengers and cross-category competition, much has been said of the potential for cannabis to eat into the market share of spirits. A number of drinks groups have invested in the burgeoning sector, but Whiting isn’t convinced such a move would present a “clear track of opportunity” for Brown-Forman. “People keep trying to make the comparison between the two [cannabis and spirits] – there’s almost none; there are no synergies between the two at all,” says Whiting. “So if we were to make an investment in that business it would be because it’s a good business in and of itself, and we would operate it completely separately. But as of now I don’t want our minds wavering from the super-premium spirits opportunity that we see out there. [We have] very little interest [in cannabis], particularly as the laws are uncertain.”
Whiting is, however, interested in continuing to explore innovation in the sector Brown-Forman knows best, and highlights the impressive growth of flavoured whiskeys. Jack Daniel’s Tennessee Honey hit shelves in 2011 and three years later became the first flavoured whiskey to reach 1m cases. Its launch was followed by cinnamon-flavoured Fire in 2014, while an apple version is set to roll out in the coming months.
According to Whiting, flavoured whiskey is now “bigger than flavoured vodka” in the US, but Jack Daniel’s has avoided cannibalisation. “We are very measured and careful, but [innovation] has become a bigger part of the business over the past 10 years.”
He says Brown-Forman avoids knee-jerk reactions to trends, and its majority family ownership means its focus remains on long-term growth. The family’s shareholding in the business is not public information, but it is understood to be more than 50%, while they dominate the voting stock. Whiting says the family members are “very active” in the business, and there’s a “remarkably strong” relationship between the family shareholder committee and the executive team. “But you have to keep performing,” he adds. “If we go on a multi-year run of underperformance, then it may be a different story.”
A report in 2017 alleged that New York’s Constellation Brands had approached Brown-Forman with an acquisition offer. Brown-Forman quickly stressed that it was “not for sale” – a statement Whiting is keen to reiterate. “It’s not even an option; we don’t spend five minutes talking about it,” he says. The family’s hold over Brown-Forman continues to grow, with the recent introduction of sixth-generation members to the business. A merger such as that between Beam and Suntory therefore seems a distant possibility, but Whiting says continued industry consolidation means Brown-Forman does not take its position for granted. He claims since the formation of Beam Suntory, Jim Beam is “growing much faster” than it used to, prompting Brown-Forman to “up [its] game. We’re the big competitor and everyone is coming after us, so we’re using it as a rallying cry right now to grow faster; to do better. I have been using terms like ‘agility’, ‘transparency’ and ‘empowerment’. These three words are very powerful in our company right now, letting folks ‘take the gloves’ off and fight a little harder, and we’re starting to see the results of that.”
A key area of focus for Brown-Forman will be international expansion, says Whiting. “We’re still US- and western European-centric, but the international opportunity, particularly in the emerging markets, is huge. We are so under-indexed in the places where a lot of our competitors are, like China, India, Brazil, Africa and all over Asia.” As such, over the next 20 years, Whiting is confident the industry will see the “continued globalisation” of Brown-Forman’s brands.
But to do this, he says, brave decisions need to be taken. “No-one has ever been fired for trying and failing at something at Brown-Forman. You’ve got to be agile; you’ve got to try new things. They have been fired for not trying and not trying new things. People want to feel empowered to drive the business and make decisions on their own, and when you do that you’re going to get the best out of them. This is a direction I’m trying to pull everyone towards – to be a bit quicker.”