Core Values

Allied Domecq recently reported interim results that surprised and pleased the financial community.  Investment in its core brands is building momentum, reports Joanne Hart

ALLIED DOMECQ has traditionally been something of a black sheep in the European drinks herd. Compared to the global Titan, Diageo, the company has been seen as having second-tier brands, second-tier distribution and secondtier management.

If there was a banana skin to slip on, Allied would find it. If there was a convoluted way of doing business, Allied would unearth it.  The company’s accident-prone nature has been reflected in both its volatile profits and its share price.

But in recent weeks, it appears as if change is afoot.  The company reported half year figures that were a good deal better than financial markets had anticipated.  Not only were underlying profits higher than expected, but the group said it would meet full year forecasts, despite the current difficult economic environment that exists.

Chief executive Philip Bowman and finance director Graham Hetherington spent several weeks subsequently touring the world and selling the Allied story to big investors and stock market analysts.

The tales they told have convinced many pundits that the company is beginning to turn a corner.  "What Philip has done is pretty positive.  The management is much better than before," commented Graeme Eadie, drinks analyst at Deutsche Bank.

Philip Bowman became chief executive of Allied Domecq in August 1999, having previously been its finance director.  At the same time, Graham Hetherington was promoted to finance director. 

Aided by senior managers, the duo have set about trying to revitalise Allied’s rather tired and lacklustre portfolio and reenergise the company’s brands, which have suffered from years of neglect.

Allied’s extensive portfolio includes such well-known names as Beefeater gin, Ballantine’s Scotch, Sauza tequila and Kahlua, the coffee liqueur.  But the business failed to invest sufficiently in its products and the popularity of many of its brands lagged behind those of rivals as a consequence.

In the company’s latest half-year figures, however, Allied was keen to emphasise its determination to keep major brands at the forefront of consumers’ minds.

Marketing expenditure rose 18% at constant exchange rates to £228 million and there is an intention to maintain this momentum.  "Over the past three years, there has been a complete turnaround in this business," said Stephen Whitehead, the corporate affairs director at Allied Domecq.

 "The interim figures showed our core brands are growing significantly with Tia Maria delivering healthy volume growth of 32% and Sauza growing by 39%," he added.  Allied’s wine business has also proved more resilient than many had feared.

The company has been on a wine buying spree in the past three years, acquiring the Buena Vista winery in California, Montana in New Zealand and a string of producers in Spain. 

There were concerns that the newly formed Wine Division would suffer from the downward pressure on off-trade prices that has afflicted many of its peer group. In the event, however, volume growth, excluding the impact of acquisitions, was 5% and trading profit rose 12%.

The group benefited from its concentration on Allied’s wine business has proved more resilient than many had feared the premium end of the market and its repeated resolve not to participate in some of the more ferocious, margin-busting pricecutting ventures of rival wine-makers.

"We have a saying here that volume is vanity," said Whitehead.  Not all in the Allied Domecq garden is rosy, however.  In its halfyear figures, the company reported two blips; one referring to currency movements and the other to pensions.

Adverse foreign exchange rates reduced profits by £16 million and are likely to have an adverse impact of £20m for the full year. Weak equity markets also meant Allied had to top up its pension fund by £20m and is likely to need a further £25m in the second half of the financial year.

Taking these factors into account, profits before tax rose just 2% to £256m and turnover climbed 5% to £1.8 billion.  If currency movements were stripped out, however, profits rose 9% and turnover climbed 13%.

This was clearly helped by the success of brands such as Tia Maria and Sauza but growth was constrained by volume declines in Ballantine’s and Beefeater.  "It takes a long time to change people’s perception of a brand.  We have had a long battle with credibility but we are now making continued investment in our core brands," said Whitehead.

Some people in the City remain sceptical, telling investors that they should hold onto the shares if they have them but they should not feel the need to rush out and buy more.

 "We are retaining our neutral rating on the stock given the group’s disadvantaged distribution position and the likelihood of tough trading continuing in the wine business," said Ian Shackleton of investment bank Credit Suisse First Boston.

Most financial analysts are less harsh.  They acknowledge that Allied has certain weaknesses but they are prepared for the first time in a while to give the company the benefit of the doubt.

"Currencies and pensions are an issue but they should be out of the way this year and next year we should start to see growth reflected in the bottom line," said David Hallam of stockbrokers Williams de Broe.

Hallam recognises that Allied is spending more money on marketing and doing it more efficiently.  He is concerned, however, that the company is not doing enough on the product innovation side and also that it lacks the distribution focus of its larger rival Diageo.

Admittedly the launch of cream liqueur Tia Lusso last summer was one of the most successful new drinks launches of all time but attempts to jump on the ready-to-drink market have been less triumphant.

"They came in too late and they have now had to de-emphasise this side of things," said one broker from a leading bank. 

In distribution, Allied has signed dedicated sales agreements in California and Illinois but elsewhere in the US, the group has to rely on shared sales teams; a system that puts it at a potential disadvantage to Diageo, which has dedicated sales forces throughout North America.

The majority of drinks experts do believe, however, that Allied is making a real effort and that the fruits of its labours will help to lift it from the lacklustre position it held not so long ago. "The outlook for the company is far superior to what it was," said Deutsche’s Graeme Eadie.

Allied itself is aware of what it has to do.  "We are focusing on the portfolio, our presence on the ground and our capabilities. We want to drive brand growth through marketing excellence," said Whitehead.

Those who follow Allied’s fortunes suggest its days as an independent entity may be numbered, despite or perhaps because of its efforts to improve.

It is widely accepted that the drinks industry is ripe for further consolidation and that there is a urgent need for global businesses such as Allied, Bacardi, Brown Forman and Pernod Ricard to team up – one way or another – to match the dominance of the market leader, Diageo.

Many believe the combination of Allied and Bacardi would create a dream team and there are hopes that the opposition of some members of the Bacardi family to change may soften.

Alternatively, the London stock market continues to speculate about interest in Allied from a venture capital buyer, who would take the company private, sell parts of it off and then try to do a deal with other industry players.

Thoughts such as these, alongside Allied’s renewed vigour, have buoyed the group’s share price in recent weeks.  The company is travelling a long road but it is clearly moving in the right direction.