Brown-Forman: Distribution & Jack Daniel's Pricing Power

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Do you think this centralized decision-making, which may not be data-supported, relies heavily on individual judgment? Can you put this in the context of the last 10 to 15 years, where there's been a surge in smaller or craft distilleries? This surge was aided by the capacity provided by companies like MGP, allowing smaller brands to bypass the need for aging inventory and the associated capital requirements. How would you contextualize the industry's changes over the last 10 to 15 years and Brown-Forman's ability to respond? How well do you think they've adapted?

The significant difference is in the retail environment. Ten years ago, American whiskey shelves in the US would have had eight facings for Black Label Jack Daniel's whiskey, with a large block dedicated to it. Now, there are probably only two facings for Jack Daniel's Black Label. This change is due to market fragmentation, as US retailers want to stock more brands. Consequently, shelf presence has significantly declined. Brown-Forman has also diversified, so the space that once had eight facings now has four for Brown-Forman, including Black Label, Honey, Jack Daniel's Fire, and Jack Daniel's Apple. Retail fragmentation is likely more important than the volume impact, as it's now harder to secure in-store presence.

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I'm trying to untangle this a bit. You've probably seen more options for customers, evidenced by more shelf space being allocated, as you pointed out. But from a consumer perspective, there aren't enough inroads being made in terms of sales across the industry. Does this validate the barrier to entry and the stickiness of bigger brands because consumers aren't willing to switch and try smaller brands? Or is it that larger brands have responded with flavor extensions and variations that neutralize the impact of these so-called craft distilleries?

All spirits distribution in the US is through distributors. In the last 10 years, distributors have massively consolidated from maybe 30 or 50 to about five or six. These distributors have hundreds of brands on their sales sheets, so the odds of them promoting whiskey number 46 are low. Although it's easier to create a whiskey without a distillery, the barriers to entry are more about consumer awareness and distributor focus. We've launched smaller brands in the US and talked to distributor representatives who don't even know these brands exist because they have a brand book of 700 to 800 brands. Gaining attention in the US is very difficult unless you're a big brand, especially on the distributor side.

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What you think about distributors going from 50 versus five manufacturers or four or five producers controlling the bulk of the market, now going to five versus five? Economics 101 suggests that producers might have to give up more margins because they have less bargaining leverage against a fragmented distributor base. Is that something you've seen in terms of the economic split within the value chain?

It's not just about buying things cheaper. Distributors say, "I have 800 brands. If you want me to focus on your brand, you need to pay extra to move up the list." This is why smaller craft brands haven't made the impact you might expect. It requires millions of dollars. Even for bigger brands like Jack Daniel's, which has almost 100% distribution in the US for Black Label, other products like Honey and Fire have less distribution. Herradura is at 30%. There's a massive opportunity for increased distribution in the US, but everyone is competing for the same distributor focus, leading to a bidding war for attention.

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