Brown Forman Has Survived Past Economic Downturns and Should Once Again

While Brown Forman's focus on the premium end of the beverage alcohol market can produce great earnings growth as it did prior to the current recession, it heightens exposure to consumer defection to lower priced substitutes when unemployment climbs and wages stagnate. As in the past, BFBC is taking advantage of economic downturn to make fundamental changes to their business that should enable them to continue to compete effectively. But cutting marketing probably shouldn't be one of them.

One of the hallmarks of Brown Forman for the last 60 years is their decision to compete almost exclusively at the premium and super premium end of the beverage alcohol market in the US and around the world. Electing to occupy such a competitive positioning carries with it exposure to increased risk when the economy heads south. Tiffany knows this. So does Hermes. But like both of those super premium leaders, Brown Forman's corporate culture appears to be well versed in recession survival.

 

Their stable of brands, built largely through acquisitions, produced an impressive record of earnings growth over the last 20 years. This is due in part to a belief held by company management that their primary product is their stock. With the Brown family having control over the company and much of its collective wealth tied up in it, earnings are king and a rising share price is the only true report card.

 

But competing in the premium segment has a downside. They have few brands in the lower price segments. Granted, this would be a little like Tiffany also selling Timex watches, but having brands at a variety of price points does offer some insulation during times of economic downturn. While one could argue that Early Times is a whiskey entry at a lower price point than Jack Daniel's, it may not be the direct beneficiary of a consumer trading down from Jack. Spirits producers have always believed that consumers were more actively "involved" with their categories than they really are. Heck, a great many vodka drinkers believe that Smirnoff is a Russian import. But I digress.

 

When the economy pressures the earnings, the BFBC corporate culture embraces change. In many ways it is not unlike the way Warren Buffett and Berkshire Hathaway turn chaos to their advantage. As Mr. Buffett stated it, "Be fearful when others are greedy and greedy when others are fearful." Many of Brown Forman's most significant acquisitions have taken place when economic conditions were unsettled and the price of some very valuable brands were depressed. They acquired Jack Daniel's during the economic downturn of the mid 1950's; Canadian Mist in 1971 when Barton Brands needed cash; Southern Comfort in 1979; and Fetzer in the early 1990's.

 

Concerning the staff and marketing cuts, they may simply represent a right sizing and a repositioning of strength. This week BFBC announced that John Kristin Sirchio has been hired as CMO. It appears as though the hire will shore up their strength in Europe where he has spent much of his career including a number of years in charge of P&G's European marketing. This is similar to BFBC's earlier move to bring on Mark McCallum who is now COO in part because of his Asian and Australian connections. Both are markets growing in importance for BFBC.

 

One area of caution resulting from this latest earnings conference call is the reduction of marketing spending and the movement of remaining budgets to off premise promotion. History has shown that recessionary times are when strong companies press their advantage. BFBC may be missing opportunities by being too frugal. Many of Brown Forman's competitors such as Diageo, Pernod Ricard and the Jim Beam unit of Fortune Brands, face far graver situations and now is the time that BFBC might be able to press their advantage.