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Brown-Forman ‘more successful than competitors’ in pushing through price hikes

12 December 2022 By Ron Emler

“Optimistic” and “confident” are not today’s most common descriptions of a company’s outlook. But that was the mood projected by Brown-Forman’s chief executive, following the group’s first half results.

Despite falling short of analysts’ expectations in the latest three months, the maker of Jack Daniel’s believes it can see a clear road ahead despite inflation, the continuing legacy of the global pandemic and the fragility of international security.

In its past four quarters Brown-Forman has surprised on the upside including the June to July summer period, but in the three months to the end of November its earnings were almost 15% below expectations.

However, chief executive Lawson Whiting was adamant in pointing out that the root causes of the disappointment were diminishing in their effect.

The shortages of glass and the high cost of transportation were easing. But a real problem had been the strength of the dollar during a time of world crisis. That too has begun to fade but nevertheless it will impact the full year results.

“We had a strong first half of fiscal 2023, with double-digit reported and organic net sales growth, driven by strong consumer demand and the rebuilding of distributor inventories as supply constraints eased,” finance chief Leanne Cunningham said.

Brown-Forman has been enjoying strong sales trends, driven mainly by the resurgence of Jack Daniel’s Tennessee Whiskey, and growth across its global operating regions as well as travel retail.

Whiting said that Brown-Forman had seen travel retail organic net sales grow by 67% on the return of international airline travel and the cruise industry.

“Our business in this channel is quickly recovering and is close to returning to pre-Covid levels,” he said.

However, despite buoyant volumes and price increases, these had not been sufficient to totally offset additional costs, hence the disappointing second quarter results.

“Our price mix and tariffs offset the input costs. The killer on the gross margin has been the foreign exchange,” Whiting said.

Brown-Forman is a member of Wall Street’s prestigious Dividend Aristocrats index. It has paid regular quarterly cash dividends for the past 79 years and has increased it for 39 years on the trot.

Only last month it announced yet another record pay-out and the disappointing quarterly results are unlikely to interrupt that long-term trend.

The background is encouraging.

Whiting underlined that Brown-Forman has been more successful than most of its competitors in pushing through price increases, especially in the US.

We are “one of the pricing leaders in the US with nearly 3% pricing growth outpacing total distilled spirits growth of just over 2%,” he said.

“This continued emphasis on identifying pricing opportunities, not just in the US but also internationally, is a key part of our focus on revenue growth management.

“The top line organic numbers are very, very strong, and they have remained very strong. The consumer is still pretty healthy – we are not seeing any kind of trade down. In fact, we’ve actually seing stronger performance even at the higher end of our portfolio.”

That includes growth in the Tequilas Herradura and el Jimado, despite the problems with glass supply that have hampered shipments.

And the recent takeovers of the premium Gin Mare and Diplomático Rum brands will add further depth to the portfolio and boost the bottom line in the long term.

But Whiting believes the game changer for Brown-Forman will be the tie-up with Coca-Cola to supply a ready to drink version of Jack Daniels and Coke for the global market.

“The opportunity for the Jack Daniel’s and Coca-Cola RTD is significant, and we believe this will meaningfully expand the growth of both of our businesses,” Whiting told analysts.

“The Jack and Cola brand is something that we very much believe in as a long-term play with a really nice growth look to it. Based on IWSR 2021 figures, the RTD category is a US$39 billion business globally and is projected to grow in the high single digits with the cocktail and long drink segment projected to grow even faster, delivering double-digit growth over the next five years, he said.

Crucially, he expects the new variant to add significantly to volumes, which is part of the reason for the present doubling of production capacity at Louisville.

“We’ve not seen the growth of our RTD cocktails result in a decrease in our full strength products. In fact, we’ve experienced growth of both of our full strength in RTD products side by side, proving to be a net benefit.

“Jack Daniel’s existing RTD products hold approximately a 2.5% share of the global RTDs business and approximately 9% share of the cocktails and long drink segment. We believe there are numerous opportunities for geographic expansion and to gain share.

After what he called a “successful” launch in Mexico last month he revealed that pre-mixed Jack and Coke would be available in a number of key markets around the world in the first half of the New Year, “including the large RTD markets of the US and UK as well as additional selected European, Asian and Latin American markets.”

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