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Straight up or mixed, whiskey or wine ? Brown-Forman?s got a drink for you. The Louisville, Kentucky based company is the best known for its world famous whiskeys, Jack Daniel?s and Southern Comfort. It?s wine and spirits segment manufactures, bottles, imports, exports and markets a wide variety of other alcoholic beverages and wines (Bel Arbors and Bolla). But Brown-Forman is also part of a consumer durables segment which sells fine china (Dansk and Lenox), sterling silver jewellery and personal leather accessories (Hartmann). Flat profits in the distilling industry spurred Brown-Forman to develop an international presence by diversifying into non-alcoholic areas, adding more than 50 new markets during the mid 1990?s. For the six months ended 31/10/98, sales rose 4% to $1.02 billion. Net income rose 9% to $104 million. Results reflect higher sales volume sales for Lenox collections and improved manufacturing efficiencies.


In 1870, George Garvin Brown saw a need form a quality whiskey that met medicinal standards. With $5,500 of saved and borrowed money he began J.T.S Brown and Bro. Their flagship brand Old Forrester Kentucky Bourbon whiskey was sold in sealed glass bottles to assure its quality. Brown?s friend George Forman joined the company and hence led to the name being changed to Brown-Forman.

The incorporation of Brown-Forman occurred in 1901 just after Forman died. In 1904, Owsley Brown, George Garvin Brown?s son took a very important decision, to come into the business, thus beginning a tradition of family apprenticeship that continues to this day.

In 1933, prohibition, which hindered the initial progress of the company, died and Brown-Forman was able to establish whiskey as an alcohol beverage. Also in that year, Owsley Brown and several other prominent figures of the time, set up DISCUS (Distilled Spirits Council of the US). This trade organization has been instrumental in the education of abuse of alcohol. It is still very prominent today. This year also saw Brown-Forman?s first public stock issue, which provided a capital base that allowed the company to re-enter the American market with strength after the lean years of prohibition and depression.

1956 was another important year in the history of Brown-Forman as they made one of their most famous acquisitions. They purchased Jack Daniel?s distillery in Lynchburg, Tennessee. This has since become one of the most popular whiskeys in the world, and led to the company producing a net sales figure of more than $100m for the first time in 1960.

Since 1960, Brown-Forman has been littered with new acquisitions. These include companies such as Korbel California champagnes in 1965 to Moray Speyside Malt Whiskey in 1997. Other major acquisitions during this time include, ?The Grand Old Drink Of The South?, Southern Comfort in 1979 and Lenox Inc. in 1983.

In recent news Brown-Forman?s Korbel champagne was named the ?Official Champagne of the millennium in an agreement reached with the Times Square Business Improvement District. As a result Korbel will be a sponsor of the Time Square Millennium Celebrations. This will hopefully push up sales in this area along with the expected millennium rush.

Estimated Profit and Loss

Profit and Loss account for Brown-Forman for last Quarter ending 30/04/99

Figures in $000?s

30/04/99 30/04/98 30/04/97

Turnover 498,000 461,000 433,000

Cost Of Goods Sold 241,100 229,000 215,000

Gross Profit 246,900 232,000 218,000

Expenses 170,200 160,500 150,500

Earnings Before Interest and Tax 76,700 71,500 67,500

Interest Expense 1,800 2,500 3,500

Income Before taxes 74,400 69,800 64,000

Taxes on Income 26,000 25,000 24,000

Net Income 48,400 44,000 40,000

Earnings Per Share 0.68 0.63 0.58

Profit And Loss Account Analysis:

In this section we will attempt to justify the above profit and loss account figures on a short summary basis. Full details and our reasoning behind our beliefs will be thoroughly covered in the next section.

1) Turnover: We have predicted a figure of 8% growth in Brown Forman?s turnover for the coming

Quarter. This is optimistic, but we believe that there are many positive factors favoring the corporation in this area, including the effect of the currently strong dollar will have on earnings. The continued growth of the Jack Daniel?s & Southern Comfort brands, along with the remarkable growth in turnover of Brown Forman?s wines are what will continue to drive turnover. Steady growth will continue in the Lenox collection and the Dansk tableware range. A possible negative effect is the current slowdown in domestic expenditure in the US, but we do not expect that this will have a material effect on the turnover growth for this quarter. One thing that could offset turnover growth for the next quarter is the continued decline of the Canadian Mist, Jack Daniels frozen cocktail, and Old Times brands. This poor performance may slow down or shadow an otherwise consistent turnover growth rate.

2) Cost of Goods Sold: We expect that growth in this figure will remain as it has for the previous two years at approximately 5.2%. To justify this we must look at the cost structure of the company, including the depreciation and amortization of the fixed and tangible assets. The Assets are depreciated over a 40 year period, using the straight-line method, leading us to believe that the depreciation charges will not vary much over the next quarter. Advertising costs, which are prevalent in the Hartmann Luggage and Lenox China, 14% increases in 1998 over the 1997 figure, are charged to expense as incurred ( charged to expense immediately after service has been availed of ) or else they are amortized over a period of 1 year or less. This means that there will be little variance with regard to advertising over the next quarter. The effects on the cost of goods sold by depreciation and advertising are relatively consistent, however, with an uncertain year ahead of the dollar, the effects of foreign currency transactions are uncertain. With regard to the next quarter, the effect of foreign currency transactions will have no bearing on the cost of goods sold.

3) Earnings before interest and tax: Expected annual increase in operating earnings over the next full business cycle (3-5 years) is expected to be 9.8%. Again, we feel that this is somewhat optimistic, as it was only 5.9% in the period 1997-1998, and even less ( 4.3% ) in the year before that.

4) Interest Expense: The interest expense is going to keep on falling through the next quarter and the next period. Since 1989, the interest expense has fallen from $34m to a proposed $11m in 1999. With regard to the next quarter, we have projected a weighted fall in the interest expense to just under $2m. The reason for these falls are simply the result of changes in the corporation?s debt financing structures. Since 1994, with a total of $299m in long-term debt, the overall debt figure has been reduced to $50m in 1998. With debt reductions of this magnitude, it is no surprise why the interest expense continues to fall.

5) Taxes: Because of the established and mature nature of Brown-Forman?s business we do not expect any substantial changes in the taxation figure, with that we expect it to remain at 36.5%.

6) Net income: In May 1998 BFB adopted Accounting Standard (SFAS) No 130, ?reporting comprehensive income?. The adoption of this did not have a material impact on the net income in the previous 3 quarters so we do not expect it to effect the last quarter of the fiscal year. Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources. In order to analyse Net income, it is very important to consider operating income. In 1998 operating income grew 14% due to strong performances by the Lenox collections and the Jack Daniels brand package, as a result the Net Income rose 23% on the previous year. The effective tax rate in the Lenox collections segment fell from 47.5% to 45%, which probably won?t be the case again this year, there fore the growth rates may be not as impressive in the next year, especially in the next quarter.

Economic Background

Brown-Forman produces mainly in consumer non-cyclical areas. While this would indicate an aversion to economic changes it does not mean that Brown-Forman is exempt from such.

?Our Business is subject to changes in general economic conditions, changes in consumer preferences, the degree of acceptance of new products and uncertainties of litigation?

(Extract from: BF Corp SEC form 10 quarterly report December 1998)

As we can see from the above chart Brown-Forman?s beta is quite low at .47. This would indicate that the company is subject to a good deal less risk than the market that they trade in, and indeed than their main competitor Diageo. This information is important to consider when we are evaluating economic changes because it would appear to indicate that Brown-Forman are less exposed to these changes

Emerging Market Difficulties a danger to the US economy

The financial turbulence and economic setbacks which emerging markets have experienced since mid 1997 continue to cast a shadow over the world economy. These economies experiencing major financial and economic difficulties account for 1/3 of world output. Although Brown-Forman are not a big exporter

to emerging market areas the potential for a large effect on the US market still remain. In the US worrying signs, which could have a bearing on the markets and Brown-Forman?s growth, include:

? A fall in domestic demand in emerging markets leading to a negative impact on export trade. US export growth is expected to fall much more than Europe.

? Falling interest rates. These have been cut by ? of a % in the past 6 months.

? Reduced credit availability for overseas lending due to increased risk

? Most importantly for Brown-Forman increased uncertainty associated with the crisis has potential to adversely affect confidence in the US domestic market.

Potential Economic Growth

Economic growth in the US in 1998 was 3 %. Many economic indicators predict a downturn. This would be in contrast to above trend growth in the past 3 years. Mr Alan Greenspan of the Federal Reserve speaking on January the 20th warned that the potentially disastrous combination of high inflation and reduction in growth could not continue indefinitely and he reckoned that a small slowdown might be required to sustain economic expansion. According to the ERSI US consumer expenditure growth has slowed but it still remains the main source of expansion for the economy. They predict a slowdown to 2% in 1999 due to slower retail sales and industrial production. Further interest rate cuts were expected to counteract this. Combining this with the US current account deficit meant that the consensus was that the US $ was likely to weaken against the Euro. However in the past two weeks there have been significant changes to our opinion with regard to this area. Presently the $ is trading very strongly against the Euro. This comes as a surprise to many economists. Growth is now not expected to stagnate but merely to slow down.

The advent of the Euro

As Brown-Forman continues to expand globally their results are more exposed to foreign exchange rate fluctuations and foreign happenings. The advent of the Euro will force managers to rethink their assumptions about doing business in Europe.

?We believe that expectations of foreign beverage business would be optimistic if the US $ strengthens against foreign currencies particularly Germany, the UK and Japan?

(Extract from B-F annual report 1997)

This, surprisingly, is the situation at the moment, but a strong dollar cannot be expected to last indefinitely once the Euro finds it feet. Shifts in exchange rates have, in the past, undermined even the best pan- European strategies. However, with regard to this coming quarter the outlook is positive. Achieving rational and economic Euro price points may require reconfiguration of their products. For example packages may need to be redesigned to hold one or two fewer bottles, or some other changes.

From our examination of the Brown-Forman reports the company seem to have no clearly defined strategy or contingency plan to deal with the advent of the Euro either this year of in future years.

?We do not expect Euro conversion to have a material adverse effect on financial conditions or results? (Extract from Brown-Forman Annual Report 1998)

This seeming indifference may be a potential hazard to future growth in European markets. However during the time span in question we feel that this will have little material impact on the growth of Brown-Forman?s earnings for this quarter and that the current strong position of the US $ will benefit their earnings.

Product Performance

There are two main areas in which Brown-Forman Corporation is involved;

Distillers and Vintners:

? Jack Daniel?s collection of spirits

? Southern Comfort

? Canadian Mist whiskey

? Early Times Old Style Kentucky whisky

? Fetzer Californian Wines

? Korbel Californian Champagne

? Bolla Italian Wines

Consumer Durables:

? Lenox Fine China and Crystal Collections

? Dansk Contemporary Tableware

? Hartman Luggage accessories

In order to be able to predict any figures for the forthcoming quarter, the product performance in 1998 must be examined. We will examine the two separate sectors with regard to Sales and Operating Income.

1. Distillers and Vintners:

On the whole Brown-Forman?s beverage industry grew by approximately 6%. The main contributors were the Jack Daniel?s brand of whiskeys. Worldwide depletion?s of the product (in 9 litre cases) were up 5% on 1997 to 5.4 million cases. This shows that the brand still has the capabilities to expand, even in the developed markets. The brand has also expanded into new markets such as Poland, South Africa and China in order to increase the brand equity.

Of the 6% total, there was an increase of 2% in the Southern Comfort brand. This is a result of international expansion in its traditional markets such as Ireland, and heavy investment in developing markets such as India. The brand is increasing in sales but not as quickly as the Jack Daniel?s brand. However, the continued investment in new advertising initiatives will serve to establish the Southern Comfort brand as a strong contributor to the overall sector sales figure.

The other main contributors are Canadian Mist whiskey and Early Times whiskey, whose contributions have fallen by 4% and 3% respectively in the last year. This reduction follows a trend of reduced growth in the past four years. This may be due to the new product placement strategy imposed on these brands in order to introduce them into new markets outside the United States.

The wines introduced by Brown-Forman over the last number of years have contributed greatly to the overall performance of this sector. Depletion?s of 9 litre cases have grown by 4% for the Fetzer Californian wines, 6% for the Bolla Italian wines, and by 4% for the Korbel Champagne range in the last 2 years. Double-digit growth for two consecutive years has put a gloss on an otherwise faltering beverage industry.

2. Consumer Durables:

Operating income from Consumer Durables grew 17% in 1998. This is the second consecutive year that this sector has grown by over 15%, and this is largely due to the improvement of the Lenox collections high margin catalogue and direct mail business. It has dominated the U.S market to the extent that it now heads the fine china market, having double the market share of its nearest competitor.

The Dansk tableware collections are a steadily expanding part of the consumer durables sector, growing by an average of 2% per annum. This is largely due to the aggressive marketing efforts of the sector and the re-entering of the products into the previously successful wholesale channel.

But What about 1999?

There is an expected growth figure of 9.8% predicted for the corporation in the next year. We feel that this is somewhat optimistic. The beverage industry, although showing great figures for the last few years, is not growing as fast as it was. The continued growth of the Jack Daniel?s brand, the emergence of Southern Comfort as a popular, internationally recognized sprit, and the remarkable growth of the wines are what is driving the industry along. We feel that the continued decline of the frozen cocktail sector (-3% in 1998) and the consistent losses made by the Canadian Mist brand (-10% depletion?s in the last 3 years) are going to offset the gains made by the other brands somewhat.

The growth of the Consumer Durables sector over the last few years, as we have seen, has been good, and we see nothing that should affect its further expansion. The development of the Lenox collection?s high margin catalogue, which includes china used in the White House, will continue to help keep this product?s market share and hopefully continue to increase it?s popularity. Similarly, the Dansk range of tableware is experiencing, and will continue to experience, steady growth over the next quarter. It used to have a wholesale operation a couple of years ago, and has recently re-entered this market. This successful

Re-entrance into this market has bolstered sales by a consistent 2% and will continue to do so into the next quarter of 1999. Finally, the continued double-digit growth of the Hartmann luggage accessories product range, which has a major part to play in the overall success of the consumer durables sector, will

continue due to recent aggressive marketing efforts and favorable consumer reactions to product line innovations.

Factors affecting Industry Growth Trends

In attempting to determine future growth for sales, profit etc., there are many factors one could examine. However as brevity is of importance we have decided to use the following;

1.) Social Attitudes

2.) Legislation

3.) Distribution

4.) Competition:

1) Social Attitudes

Currently the business environment for distillers and vintners is strongly influenced by societal attitudes towards drinking and government policies reflect those attitudes. Government Policy objectives are aimed at reducing alcoholism and curbing the amount of under age alcohol consumption. A company such as Brown-Forman seeks to compete strongly in the marketplace and to protect the right of adult consumers to purchase these products.

Within the U.S. and other international markets Brown-Forman works with other distillers and vintners to gain a more favourable political and social environment for the sale of its products. Brown-Forman is a member of the Distilled Vintner?s Council and the Wine Institute. Both of these organisations attempt to obtain fair treatment for the company and its consumers. Moreover Brown-Forman seeks to secure beneficial regulatory treatment in foreign markets, including open access to foreign markets for U.S. made spirits and wines.

2.) Legislation

The alcoholic beverage industry is highly sensitive to increases in tax rates. In the U.S., Brown-Forman?s largest market, there is no imminent legislation to increase excise taxes, although a future increase cannot be ruled out!

Similarly, while there has been discussion (and legislation introduced) to ban advertising of spirits in the U.S. nothing has come of it. However, most TV networks currently decline to accept advertisements for spirits. Outside the U.S., the alcoholic beverage market is also affected by tax rates and advertising restrictions, but the impact of those policies in any one market is not significant to the company?s overall business and advertising.


At present Brown-Forman do not own any major distribution companies. Therefore it relies on its competitors to distribute its products in different markets. For instance, United Distillers and Vintners distribute ?Jack Daniel?s? and ?Southern Comfort? in the U.K., while Bacardb Wedistributes Brown-Forman?s spirits products in most of continental Europe. However, the current European economy is in a state of flux, with the recent creation of the European Union and the consequent elimination of trading barriers along with the adoption of the Single European Currency, which will be put in motion in the near future. These changes will greatly affect Brown-Forman?s business in Europe and will revolutionise distribution of spirits and wine in Europe, which is presently constructed on a country by country basis, by encouraging cross-border sales. B-F is not an owner of a European distribution company; therefore if

reform is not undertaken in the near future, their retail sales prices will come under pressure due to increased cross-border competition.

4.) Competition

The recent merger of Grand Metropolitan and Guinness (07/11/97) created United Distillers and Vintners, (a sub-component of Diageo) by far the largest global spirits company. This merger created uncertainty within the industry and added to the already fierce competition among the different major spirit producers (Brown-Forman, Seagram and Allied Domecq). However Brown-Forman?s CEO, Owsley Brown, felt that this uncertainty was not present at Brown-Forman, as he clearly stated,

?We believe our company will not only preserve its enviable position within the industry but will grow to become an even greater factor in the world?s marketplace. We are better positioned than ever to accomplish our objectives??..our financial and operating capacity is growing and our people are among the most motivated in the industry?.

As the above chart shows, Brown-Forman?s 5 year EPS growth rate is in a much better position than that of its nearest competitor Diageo. While this may be because of restructuring in Diageo following the merger, it none the less augurs well for a stable growth company of the strength of Brown-Forman.

In conclusion, the outlook for Brown-Forman remains positive and should continue along previous year?s growth levels. The factors mentioned above such as Social Attitudes and Legislation should remain unchanged, thus having no significant adverse affect on short-term future growth rates. While the creation of UDV has undoubtedly heightened the fierce competition already in place, we feel that an established and mature company like Brown-Forman who is continuously re-investing in its workforce and products should maintain its foothold within the industry.

Finally, it must be stated that the company?s distribution channels across Europe need reform, in the long run, when the full ramifications of European Integration will be felt.


So, what has been covered throughout this project ?

? The overall object of the assignment was to analyse the financial and economic performance of the Brown-Forman Corporation over the last 3 or 4 years, and come up with a set of figures that best describe how we thought the company was going to perform in the upcoming period. In the case of the Brown-Forman Corporation, the next quarterly report.

What are our results, and what to they show us ?

? Firstly, we saw how mature the company was, and how it?s segments are non-cyclical.

? Secondly, we saw that through different attitudes towards the different segments, diverse results were obtained. No more so than with regard to the continual pressure put on the Jack Daniels brand package to perform, even in the established markets.

? Thirdly, it is very noticeable that the projected growth rates, made by the company, are very much exaggerated. With all the evidence given throughout the paper, it is hard to determine where exactly the growth is going to come from. Included in the project is a very interesting piece on the Guinness and Grand Metropolitan merger. The reason we mentioning it now is the fact that a recent article in the Economist newspaper of 5th of March describes rumors of a possible merger between Allied Domecq and Seagram, two of the other biggest players in the alcoholic beverage market. If this were to take place, where or what would Brown-Forman go then ?

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