June 28, 2012

Whiskey talk with Beam CEO Matt Shattock

Matt Shattock, CEO Beam (photo: Beam)
Matt Shattock: "We see a bright prosperous future as a stand-alone company" (photo: Beam)
This year has been a historic one for Beam, Inc. In October 2011, the world's fourth-largest spirits maker separated from Fortune Brands to become a publicly-traded company on the NYSE. The Deerfield/Illinois-based company has built on strong momentum in 2011 and posted double-digit top-line and bottom-line growth in Q1 this year.

Like its major rivals, Beam finds Germany an increasingly attractive market. 
This is surely why Matthew (Matt) J. Shattock, President & CEO, was happy to talk on a visit to Beam Germany head office in Frankfurt.

Beam, with global sales of $2.8bn last year, clearly considers Germany an investment priority. Given the Federal Republic's general saturation, stagnating population, and hard-discount-dominated retail market, this would seem a counterintuitive play.

However, Shattock, a 49-year-old Englishman, reasons cogently why Germany is such an important part of Beam's global mix. He was ably flanked by Manfred Jus, MD of Beam Deutschland, who added some excellent detail on local operations.

Interested readers should also refer to an earlier and most entertaining visit to Frankfurt by Beam whiskey ambassador Fred Noe, a descendant of the founding family.

"Borrow and build" 

How dry has Beam, Inc. been during the world economic recession?

We have been encouraged by the resilience of the spirits industry since the recession began in 2008. Over the last 18 months we’ve even seen a return of some underlying trends including premiumisation and on-premise consumption.

But no industry can be completely immune from general macroeconomic trends?
True. Therefore, our job during this difficult period is to find ways to stimulate consumers by investing in our brands and innovation. We must also make sure that we sustain our relationship with the consumer in order to keep driving traffic through our customers’ stores and bars.

Given the preponderance of your global sales in North America, what mix are you striving for between mature and emerging markets medium-term?
We have a broad and balanced growth algorithm. We’d like 50 per cent of our growth to come from our “power brands”, such as “Jim Beam” and “Maker’s Mark”, and from our “rising star brands” like “Kilbeggan”.

We’d like a further 25 per cent of our growth to come from emerging markets, such as India, Brazil, Russia and China, and another 25 per cent to come from innovation.

Emerging markets are likely to present whisk(e)y producers with two billion new, aspirational and thirsty customers over the next 20 years. How are you exploiting this potential?
We enter emerging markets via local consumer tastes and preferences and then strive to broaden our business there. In India, for example, which is our most important and fastest growing emerging market, consumers drink a locally-produced whisky called “Indian-made foreign liquor,” which represents a huge market of more than 100 million cases.

Currently, only around 3 million cases in India are Scotch — a segment where we are the leader with our “Teacher’s” brand. As incomes rise, consumers tend to trade up to Scotch because it is perceived as something authentic and of higher quality. Scotch then provides us with a cornerstone to sell our bourbon brands such as “Jim Beam”.

Beam, Inc. is considerably less lucrative than Diageo and Pernod Ricard in terms of operating profit. How do you intend to catch up?
Our profitability actually compares very favourably with that of our peers. The most common margin looked at in our industry is the ebitda margin, and our ebitda margins are in excess of 30 per cent, which is very competitive.

We also intend to grow our sales faster than the market and our operating income and profitability faster than our sales.

How are you going to implement this goal?
Over the past five or six years, we have made a number of strategic investments which will leverage sustained levels of profitable growth. These include building a very strong portfolio of brands through acquisitions such as Allied Domecq in 2005, and investments of over $60m to gain greater control of our routes to market in 2008.

This has taken the amount of sales under our direct control from around 8 per cent to over 75 per cent. In 2010 and 2011, we also initiated a double-digit uptick in our brand investment.

At minus 5 per cent, your “local jewels” represented the only area of comparable net sales decline on Beam Inc.’s 2011 balance sheet. Will you therefore continue to divest local brands?
Our local jewels play a very important role in our portfolio. While our top-line growth focuses on power brands and rising star brands, local jewels play a very important role in driving scale and profitability within our business.

In Germany, we only disposed of our local brands “Kümmerling” and “Fürst Bismarck” because we did not see them creating the right value. In fine, we are currently very happy with our portfolio.

In view of the increasingly strong consumer demand for Scotch, as well as Diageo’s and Pernod Ricard’s sizeable investments in their Scotch-making facilities, do you wish Beam, Inc. had more Scotch and less bourbon in its portfolio?
We believe very strongly in the growth of the bourbon category. Bourbon is one of the fastest growing categories of spirits both in America and internationally. We achieved high single-digit global growth with bourbon last year and see a lot of growth going forward, so we think it's a very good category to be in.

The great news for our business is that, with “Teacher’s” and “Laphroaig”, we also have a strong Scotch portfolio, which complements our bourbon portfolio nicely.

How strongly have increasing raw materials prices affected your cost base?
One of the benefits of our portfolio is that spirits like whiskey are aged for several years after distillation. Thus we know our input costs long before the product is sold on the market. This gives us an opportunity to anticipate and to cut costs.

In fact, our growth strategy stands on three legs: Creating Famous Brands, Building Winning Markets, and Fuelling Our Growth. The third element includes an ongoing cost & efficiency programme which aims to reduce annual input and SG&A costs by 1 to 2 per cent. However, with current cost headwinds of around $20m-$25m, we also increase prices selectively in the marketplace, where necessary.

How do you manage innovation?
Our company has a mantra called “borrow and build”. Our innovations must borrow from the size, scale and familiarity of the parent brand. However, they must also build something back by giving a new dimension of interest and by keeping the brand both fresh and vital to the consumer.

How much pricing power do you really have on increasingly price-dominated markets?
As a market leader we are conscious of our responsibility to create sustainable, incremental and profitable growth for our customers. We build our brands via innovation and premium strategies which give consumers reasons why they should pay a higher price. That makes us relatively independent of local price climates.

What was the rationale behind the Fortune Brands split in 2011?
Fortune Brands was a very good custodian of shareholder capital, but a number of strategic investments in each of its businesses meant that shareholder value could be maximised by separating its businesses and allowing them to stand on their own two feet. The increase in the share prices of both Fortune Brands Home & Security and Beam Inc. since October 2011 clearly show that this was the right decision.

But haven’t you gained focus only to become an acquisition target?
Speculation in this industry is a way of life. Our job is to drive sustainable profitable growth and shareholder value. We have demonstrated since October 2011 that we can create a lot of value for our shareholders, and therefore we see a bright prosperous future as a stand-alone company.

In Germany, Beam Inc. wants to jump from being the sixth- to the third-largest import spirits distributor by 2015. Why this interest in such a mature market?
Whisk(e)y consumption is booming, whether in bourbon, Scotch or Irish whiskey, and international brands are continuing to grow more strongly than local ones. This makes Germany one of the most important markets in the world for Beam Inc. and why we have made the country an investment priority. It is also the reason why I am talking to you here in Frankfurt today.


Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Beam will voll powern' by international editor Mike Dawson on page 16 of Lebensmittel Zeitung, no. 25, 22.06.2012

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