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Blithe Spirits

Bucking declining North American demand for spirits, Guinness ranks as the world’s most profitable alcoholic drinks company. Having retaken control of its distribution networks, the company is pushing pricey, upscale brands in the hope of repositioning scotch as status. Interested in a $500 bottle?

As many schoolboys know, the mighty German battleship Bismarck was undone not by a sudden Midway-like cataclysm, hut by a lucky torpedo that fouled the warship’s rudder steering mechanism. Five years ago, Guinness Plc, the U.K.-based brewer and alcoholic drinks company, found itself-like the legendary warship-sailing in circles with guns

unscathed but not of much practical effect. Per capita spirits consumption had been declining for almost 10 years from very high levels in the US., one of the prime international markets. During the 1970s, the real, stateside price of major scotch brands almost halved. (This on top of unabating anti-alcohol social pressure, which continues today.) Too, other traditional markets such as the U.K., Canada, and Australia were maturing with growth difficult to achieve.

Another handicap in common with that unfortunate pride of the Kriegsmarine was a commander in dire need of a reality check. In a 12.7 billion ($4.6 billion) hostile takeover bid in 1986 for Distillers-a UK. spirits company also sought by Argyll, a food retailing group        then Guinness chairman Ernest Saunders engaged in an illegal 1400 million share support scheme. (Britain’s Serious Fraud Office was tipped off by U.S. authorities when Wall Street arbitrageur Ivan Boesky “sang” in the fall of 1986.)

Until eclipsed by the Blue Arrow scam, the Guinness name had been associated with the biggest UK. financial scandal to rock London. It cost taxpayers at least 115 million to investigate and try. Possible civil action forced the company into a 1 70 million settlement. Criminal charges against directors prompted the Bank of England and the City to bring in four `pure and true” outside directors, one of whom was Anthony Greener. (Meanwhile, Saunders’ five-year prison sentence, judged severe at the time, was commuted in light of his claim to be suffering senile dementia. But since his release, the former CEO has proved a lively and oddly coherent chat show guest, causing one Guinness executive who knew him to remark acidly that Saunders’ was the only case of senile dementia to reverse itself)

During this time, company morale was just below sea level. Ultimately replacing the disgraced Saunders was Anthony Tennant, who had boosted the fortunes of Grand Metropolitan’s spirits division. His course was simple but effective. For starters, Tennant decided to focus on Guinness’ two core businesses: spirits and brewing. He took control of distribution and persuaded consumers to trade-up, or to purchase higher-quality, higher-value products. But perhaps most important, he moved to redeploy brands (e.g., move I. W Harper bourbon out of U.S. and intoJapan where it commands a high premium); reposition brands (e.g., moving Johnnie Walker further up the prestige scale), and tailor the company’s marketing approaches (e.g., status-minded Taiwanese can be expected to drop $500 on a single bottle of scotch in upmarket nightclubs).

But upon reflection, Tennant wasn’t happy with the executive in the spirits division (Brian Baldock led the brewing operation) and persuaded Anthony (Tony) Greener to leave Dunhill Holdings to run Guinness’ United Distillers. (The unit’s turnover and profits now dominate the company.) Last December, Greener succeeded Tennant as chief executive; he will assume the chairmanship after Tennant retires at year’s end.

Greener, 52, is known as a tough, single-minded manager who doesn’t suffer fools gladly. Before Dunhill, he held executive marketing positions with Unilever. In 1989, he also became a director of LVMH Moet Hennessy Louis Vuitton, the French maker of luxury goods, champagne, and cognac. Guinness and LVMH own a 24 percent stake in one another.

Greener takes control at a momentous transition in Guinness’ affairs. For the first time in years, the waters are quiet: Although one defendant has yet to be tried, the scandal is effectively over. Also, in May, the Earl of Iveagh, the last Guinness connected to Guinness, leaves the board. (Arthur Guinness founded the brewery in Dublin in 1759; shares were first floated in London in 1886.) When Greener disclosed the departure at a meeting with analysts, one tradition-minded observer questioned how the company could not have a Guinness link. “Do you expect us to have a Johnnie Walker or a Gordon’s on our board too?” Greener quipped.

In a tough, consolidating market, the $7 billion company has become the most profitable alcoholic drinks company in the world, having overtaken Anheuser-Busch in 1990. London analysts are predicting 1991 pretax profits of .£945 million, compared with last year’s £847 million. Among beverage firms, it is second only to Coca-Cola. In market capitalization, it ranks ninth in the U.K. and 15th in the EC. Since 1987, Guinness’ CAGR in pretax profits has been 28 percent and EPS growth 26 percent.

Where to go from here? Greener has already streamlined Guinness’ North American businesses and recent acquisitions, consolidating operations in Stamford, CT. By his own admission, all obvious restructuring is complete. But one unfulfilled challenge is to reposition scotch in relation to, say, cognac as a luxury good. Thirty years ago a bottle of either cost about the same in a New York store. Today, a decent cognac retails around $40, while scotch is about $15, and bringing it back to parity won’t be easy. On another front-taking a page from his Dunhill days-Greener introduced six classic single malts, dressing each in fancy packaging       and fancy prices. He would love to do for spirits what LVMH has been able to do for champagne and cognac. Similar alliances may follow.

CE editor J.P. Donlon caught up with Greener at his former UD offices in London‘s Hammersmith with personal effects in boxes en route to Portman Square.

DISTRIBUTION CONTROLS

Since 1989, Guinness’ control of its distribution networks has gone from 25 percent to about 80 percent. Also in that time, the number of brands has diminished. Are these two phenomena related? Will you place a greater emphasis on controlling distribution because of a squeeze on profitability?

Our business is about building our brands. Distribution is clearly an essential part of the brand-building process-something one can’t afford to delegate to a third party.

In third-party distribution, you’ll often find a considerable portion of the profit margin accrues to the distributor. So by bringing distribution back in-house, we gained control of a greater portion of the margin. That was necessary to generate more funds for advertising and promotion.

Profitwise, a distribution network is crucial in terms of presenting your product to consumers in individual marketplaces. It’s essential to analyze your network to enumerate what is owned, including joint ventures, and any agency arrangements. Internationally ambitious companies often get a big ego boost from owning their own distributors worldwide. But I think it is inappropriate to assume you should own your distributors in every market. That may not be the best use of your investment dollars.

You’re also continuing to pursue a so-called branch profit system, whereby you’ll go into alliances, joint ventures, or co-producing agreements in moving your product to the point of sale. What does that involve?

There are several configurations that we use. Some are for spirits, and some are for brewed products.

On the spirit side, our biggest alliance is our joint-venture arrangement with LVMH. The driving force behind that arrangement is our desire to put our complementary, noncompeting brands together with those of LVMH in distribution companies across the globe. That will provide these companies with “critical mass,” that is, a powerful portfolio of brands to offer consumers.

The way this structure works is that we share overhead expenses. We own 24 percent equity in that group-we are their largest shareholder-and they have a similar position in Guinness. So far, the arrangement has been immensely successful, particularly in the Asia Pacific and Far East regions.

SEEKING SYNERGIES

What are the merits of ownership versus joint ventures?

Joint ventures allow both companies to improve on their strengths without getting into discussions about who should acquire what. Consequently, the arrangement also avoids turf wars and the possibility of hostile takeover costs.

For example, an important feature of our relationship with LVMH is that the shareholder followed after the joint ventures were set up-rather than the other way around. The cross shareholding was undertaken to cement valuable, commercial joint ventures.

LVMH owns a clean 24 percent of Guinness cash shares. But Guinness’ stake in LVMH is owned through a holding company. At least theoretically, does that not make you more vulnerable than they to a takeover attempt?

Anything is possible. If management fails to increase value in a company, the shareholders might decide to go in a different direction. But our record on that count is reasonably strong.

DOWN SPIRITS

You’ve just announced a major reorganization in North America at a time the market’s spirits consumption is markedly slumping. What’s your objective?

The North American spirits market has been in decline for quite some time. That decline was exacerbated last year by the adoption in the U.S. of the Federal Excise Tax. In addition, our overhead structure had become somewhat heavy, given the fact that over time we had acquired a number of stateside businesses.

Before the reorganization, we had three sales forces, four administrative systems, and two production systems. There was considerable duplication in our portfolio. The most important thing we’ve done is to consolidate and eliminate three of the four overhead systems. And we’ll now have only two sales forces: One will handle the premium imported brands [Schieffelin & Somerset] and another domestic brands [United Distillers North America].

You also recently made a $20 million investment in Louisville. Why now?

There are a number of reasons. First, the acquisition filled a number of gaps in our portfolio. It was also the catalyst that enabled us to restructure our entire North American operations.

Meanwhile, on the production side, we believe that demand will increase overseas for whiskey and bourbon. Also, our current facilities badly need modernizing. So, the Louisville move is an investment in quality and a bet on the demand for increased exports from the U.S.

What are your projections for the North American market? Will your operations there be self-contained or perhaps a springboard for expansion in the Pacific Rim?

We see our North American operations as self-sufficient. Our approach here will be to build existing brands and to take opportunities to trade up the market wherever possible.

Trade up?

What that means is we have recognized a trend for consumers to trade up-to purchase higher-quality, higher-value products-in the U.S. and elsewhere. Put another way, the market is constantly polarizing towards a few strong brands. Accordingly, we now offer for sale a number of super-prestigious brands.

Last year, for example, we launched the Johnnie Walker Gold Label, a 15-year-old branded scotch whiskey. It retails at double the price of Johnnie Walker Black Label. In December, at duty-free outlets, Johnnie Walker Premier was also introduced at a retail price of $80 a bottle. In addition, Johnnie Walker Oldest, a limited blend of up to 60-year-old whiskeys, is available in the Asia-Pacific market.

So, getting back to North America, even though the market is declining, last year our premium scotches gained market share.

MARKETING TARGETS

Is another reason for that your decision to regionally tailor marketing approaches? More and more, you’ve got to be targeted in your marketing. You’ve got to view your market on a local-rather than composite-basis. We market not so much to Americans as to American blacks, American Hispanics, or American Asians. Each of those groups you’ve got to attack in a different way. One reason for that: There are more than a few retail outlets that cater almost exclusively to particular ethnic groups.

In sum, there’s a certain amount of fragmentation in the U.S. market. That’s pushed us to adopt grassroots marketing.

Guinness seems particularly inclined to market premium brands in the Asia-Pacific region. Why?

Some consumers in that market tend to have a greater affinity toward top-shelf products. For some, premium-label scotches are prized as status symbols. So we’ve engaged in recent years in what we call range extensions. In other words, we started with Black Label, and now we also have such brands as Johnnie Walker Gold, Johnnie Walker Swing, and Johnnie Walker Premier. All of these offer consumers the opportunity to trade up.

Is there any price ceiling to the trade-up concept? For example, some Taiwanese business executives think nothing of plunking down $100 for a bottle of premium-label whiskey.

Make that $500. In response to your question, I’m not sure if there’s a ceiling in terms of spirit sales, but they do seem subject to a pyramid effect, with a smaller market at each subsequent, higher price level.

Is there enough at the top of the pyramid to make it worth your while?

So far, we’ve found this to be a highly profitable niche. The point I’m making is that it’s human nature to aspire to something better. If you own a Ford, for example, you want a Jaguar.

PRICING APPROACH

Guinness has adopted a so-called confident pricing strategy. I assume that means the company aims to charge top dollar for its products. Given the current tight market, can you sustain such an approach?

If we have confidence in our products, we should be strong on our pricing. We should charge as high a price as consumers will pay, while still feeling that they receive value for the money. It’s important to understand that we’re not talking about raising prices for the same product. We’re talking higher prices for higher-quality brands. Both buyer and seller get value from the exchange.

What tells you that a given brand has reached its confident-price level?

The consumer tells me. For example, the market for champagne is not as strong now as it was a couple of years ago. There’s less to celebrate.

What are your plans on the brewing side, particularly for stout, a hallmark Guinness product?

Worldwide, stout is the fastest growing segment of the beer industry. Taken on a worldwide basis, consumption has been growing at nearly six percent.

Is that a countertrend, given consumers’ propensities these days for lighter spirits, lighter lagers, and even lighter wines?

Yes. but a stronger trend is toward products that have intrinsic value. Stout is growing, even in Britain, because it is perceived as a fashionable, young person’s drink.

Nonetheless, might Guinness eventually introduce, say, a light beer or a soft drink? Put another way: Can you foresee any circumstances under which you would market a product that would place you in head-to-head competition-either here or in the EC-with such American companies as Anheuser-Busch or Coca-Cola? That might enable you to develop a third leg of the business, in addition to brewing and spirits.

That’s always a possibility. But at least for now, we intend to stick to our knitting. I think you’ve got to look at the market and look at the competition. And just as I don’t think it likely that we will enter a competition with Anheuser-Busch in America, similarly, I doubt we would want to get into a competition with Coke or Pepsi.

Do you see Guinness as an increasingly international company?

Yes. We are a company that provides its units with a high degree of local autonomy, but within a framework that’s appropriate for individual brands. That’s the best way to satisfy our customers out there in bars and restaurants worldwide.

Although we didn’t coin this expression, we try to think globally and act locally. That’s what it means to take a global view of your brands.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.