Major CaseGroup 2 Introduction – Kyndle Huey Environmental Analysis – Shelley ScarbroughStrategy Evaluation – Cole RigneyProblem and Exec Summary – Zac ChismRecommended Strategy – DB Irwin and Andrew TerryForecast and Recap – Zac Chism

Introduction and Industry Overview

• Brown-Forman is a producer and marketer of fine alcoholic beverage brands

• In 2008, the U.S. beverage industry contributed nearly $388 billion to U.S. economic activity• Distilled spirits accounted for $115 billion, or 30% of all alcoholic

beverages

• Over $90 billion in wages and 3.9 million jobs for U.S. workers were generated by the U.S. alcohol industry

• The Distilled & Blended Liquors industry is highly competitive and heavily concentrated with just 20 companies accounting for more than 90% of the industry’s overall revenueSource: Distilled Spirits Council of the United States

Location• Headquarters in Louisville, Kentucky

• Approximately 1,000 employees• 3,900 Total employees worldwide

History• 1870

• Founded as JTS Brown and Bro. Distillery by George Garvin Brown, a pharmaceutical salesman, and his half-brother

• Brown had the idea to bottle and sell whisky straight from the distillery

• Old Forester• 1890

• George Forman becomes business partner; name changed to Brown-Forman

• 1902• Brown Family buys all of Forman’s

stake in the business

History• 1923

• First acquisition – Early Times• 1964

• Acquire Jack Daniels Distillery• Early 1990’s

• Acquisitions have continued; Brown-Forman owns Canadian Mist, Southern Comfort, and Bolla Wines

• 1991• Forms wine division with Jekel Vineyards

• 1995 • Created and introduced a new alcoholic drink category with

Tropical Freezes, the first blended frozen cocktail

History• 2000

• Global alliance with Altia Group, with 45% ownership of Finlandia Vodka

• 2004• Acquires remaining stake in Finlandia

• 2006• Chambord liqueur

• 2007• Herradurra Tequila

• 2008• Sells Bolla and Fontana Wines

• 2011• Sells Fetzer Vineyards; only wines left are Korbel and Sonoma-Cutrer• Jack Daniels Tennessee Honey• Jack Daniels RTDs

Current Product Lineup• Whisky

• Old Forester• Canadian Mist• Collingwood• Early Times• Jack Daniels• Woodford Reserve

• Vodka• Chambord• Finlandia

• Tequila• Don Eduardo• El Jimador• Herradura• Pepe Lopez

• Liqueur• Chambord• Southern Comfort• Tuaca

• Champagne• Korbel

• Wine• Sonoma-Cutrer

U.S. Market Share

Fortune Brands(Beam Inc.)

26.60%

Diageo23.30%

Brown-Forman20.50%

Pernod Ricard13.20%

Other 16.40%

Source: Business & Company Resource Center

Sales

2007 2008 2009 2010 2011$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$2,806$3,282 $3,192

$3,226$3,404

Brown-Forman Sales (in millions)

Sales

Stock Performance

Source: Brown-Forman 2011 Annual Report

Stock Performance

Source: Google Finance

Brown-Forman Class B Stock52-week high: $77.5652-week low: $61.41Close on Nov. 4: $74.57

Diageo Stock52-week high: $84.3152-week low: $83.01Close on Nov. 4: $83.98

Company Leadership

• Background• Intern Summer 1986• Jack Daniels Brand Manager, Senior

Vice President, and • Chief Marketing Officer

• Education• 1982 – University Kentucky - Finance• 1985 – Purdue University - MBA

• Salary• $7.1 million dollars, down from $7.7

million in 2010

President, CEO and Chairman of the BoardPaul C. Varga

Company Leadership

• Important Notes:

• Former CEO Owsley Brown II

• History of CEO duality

• Director of Family- Shareholder Relations in 2009• Varga realized need first time in 140 years• No current family in top structure with retirement and death of

Owsley Brown

Company Leadership

• Background• VP Morgan Stanley• Joined in 1989 - Corporate Planning • Assistant to CEO and HR for beverage

company• Education

• Princeton – Economics• Salary

• $2.2 million dollars in compensation (Including stock awards, non-equity incentive plan compensation, and a pension plan)

Vice ChairmanJames S. Welch, Jr.

Company Leadership

• Background• CPA at Ernst Whinney in IL• Brand manager Carnation• Assistant to President• Senior VP and Director of Corporate

Finance• Education

• Undergrad – Augustana College (Rockport, IL)

• MBA – Wharton School of Business (U Penn)

• Salary• $2.2 million in 2011

Executive Vice President and Chief Financial OfficerDonald C. Berg

Company Leadership

• Background• Began at Cadbury VP Marketing• Executive VP for Red Lobster• Started at Brown-Forman as Chief

Brands Officer in 2006 – newest addition

• Education• University of Western Sydney,

Australia – Bachelor Food Science• Salary

• $1.9 million 2001

Executive Vice President and Chief Operation OfficerMark I. McCallum

External Environment:Economic

• Spirits industry faring well in recession – profitable

• People stay home for cheaper ways of entertainment

• Many individuals looking for cheaper brands

• Rise in consumption means rise in alcoholism and public scrutiny

External Environment:Legal

• Landmark case results in creation of liquor label warnings

• Advertising• Accusations – targeting minors• Mad Men

• Alcohol Taxation

External Environment:Technological

• Recently implemented a new position in 2008: • Director of Finance and Technology• Controller Jane Morreau

• New Product Life Cycle Management Software

• Social Media Use

External Environment:Social• Distilled Spirits Council of the United States (DISCUS)

• Developed liquor industry standards for advertising and marketing practices

• Founded by former chair, Owsley Brown• Received Mad-Men complaint

• T.U.R.F.• Tailgaters Urging Responsibility & Fun• Brown-Forman charitable giver

Existing Strategy• Our mission at Brown-Forman is to enrich the experience of

life, in our way, by responsibly building beverage alcohol brands that thrive and endure for generations

• Values and Goals• Our Thinking About Drinking

• Responsible leaders; partner with responsible retailers; trusted policy advocate; harness brand power; be a credible voice

• Five Strategic Imperatives• Being responsible in everything we do; responsible drinking;

environmental stewardship; employee relations; community involvement

• Core Values• Integrity; respect; trust; teamwork; excellence

Existing Strategy• Competencies

• Brand quality• Diversity of their retail base

• Markets

Percent of Sales

United States - 45%

Europe - 27%

All Others - 28%

Existing Strategy• Objective

• Be the industry leader• Double business by 2020• Be a credible voice for responsible drinking

• Overall Strategy• Differentiation among brands on a global scale• Expand Jack Daniels family• Grow other brands faster than Jack Daniels• Grow U.S. business and grow market share of dollar sales• Grow international business faster than U.S. business• Be responsible in everything they do

Existing Strategy

• Target Market• All adults anywhere in the world of legal

drinking age• They are putting some emphasis on Eastern

Europe, Asia, and Latin America

• Global Strategy• Stick to what sells the best and market Jack

Daniels family

Product Strategy - Porter Framework

ROI

Market Share

Diageo

Brown-Forman

Jim Beam Brands

Constellation Brands

Mackmyra Svensk

Product Strategy - Product Life Cycle

Introduction Growth Maturation Decline

Old ForesterCanadian Mist

Tennessee Honey

Gentleman Jack

Ready-to-Drink

Single Barrel

Tennessee Whiskey

Woodford Reserve

Collingwood

Early Times

Early Times - 354

Country Cocktails

Product Strategy - Product Market Strategy

Market Penetration•Current Jack family in U.S. and Europe

Product Development•Expanding Jack family in U.S. and Europe•RTDs and Tennessee Honey

Market Development•Current Jack family in Asia, Latin America, and Eastern Europe

Product Diversification•RTDs in Eastern Europe

New Market

Old Product

Old Market

New Product

Product Strategy - Product Position

Taste - Taste +

Price -

Price +

Woodford

Jack Daniels

Jim Beam

Evan Williams

Maker’s Mark

Early Times

Black Velvet

Black Diamond

Jack Daniels SB

Crown Royal

Place Strategy

• Operate multiple distribution centers• Distribute directly to retailers and wholesalers• Set up partnerships with retailers that share the

same values about responsible drinking• They want to be the first company contacted

for raising awareness for responsible drinking• Brick and mortar retailers• LIFO inventory management

Promotion Strategy

• About $366 million spent on advertising• Responsible marketing

• Compliance with laws• Only to adults of legal drinking age

• Content restrictions• Placement restrictions

• Responsible consumption requirements• Good tastes and appropriate use

Price Strategy - Demand Curve

Price

Demand

Jack Daniels - $18Priced at kink

Strategy Issues and Problem Identification

•The overall problem is declining profitability and stagnant sales due to a limited product line

Overall Problem

•The root cause of the problem is the corporate management structure

Root Cause

Insert your sources here

Strategy Issues and Problem Identification

• Brown-Forman is not the name brand• Individual products have strong brand

recognition • Marketing strategy needs to be more focused • Product Line

Product

• Elastic (substitutes)• Brands Strategically placed • Cannibalism Price

Strategy Issues and Problem Identification

•Brick and Mortar only•Online buying could effect B&M policy•Distribution Network

Place

•Marketing must be responsible•Male dominated Ads•Creativity Needed

Promotion

Path of Continued Strategy

2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Current VisionWhat We DoAt Brown-Forman, we enrich the experience of life, in our own way, by responsibly building beverage alcohol brands that thrive and endure for generations.

Our vision is to be the best brand builder in the industry, and in order to accomplish that vision, we focus on five strategic imperatives that drive our actions.

Building Strong Consumer FranchisesBuilding powerful, long-lasting friendships between our brands and consumers is essential to growing brands.

Winning at the Point of PurchaseWe must engage the consumer and the trade with flawless execution of our brand plans through the optimal route to consumer.

Allocating Resources SuperblyBy deploying our financial and human resources to their highest and best use, we can focus on our priorities more effectively.

Developing and Engaging Exceptional PeopleWe strive to continually grow, enable, and recognize the people who build our brands profitably in all different ways throughout the company.

Being Responsible in Everything We DoTo us, this means leading by example. It means making decisions and taking actions that drive social, environmental, financial, civic, and personal responsibility.

By expertly executing these imperatives, we will outperform the industry over the long term, deliver consistent, exceptional performance, and ultimately create a growing and enduring Brown-Forman

New Mission Statement

Builds off Corporate slogan “Building Forever”

Our highest purpose is to enrich the experience of life, by creating a growing family of brands that encompasses every

adult in a worldwide community of responsible drinkers

Objectives

• Promote a community of responsible drinkers

• Build a family of brands that encompasses every kind of drinker

• Capture traditionally neglected markets

• Evoke a spirit of friendship among U.S. regions

• Create a sense of patriotism in every sip

Overall Strategy

• Go Private

• Purchase 4 regional breweries

• Implement a “Drink Local, Drink America” campaign

• Leverage Trading Up/Trading Down to capture shifting markets

Addressing The Problem

• Beer is in a high growth cycle • Product diversification

• Beer is a lower cost, faster cycle market than spirits• Lower costs and quicker results

• Go Private • Addresses misalignment between

management and share holders• Further enhances family image

Porter Framework

ROI

Market Share

SABMiller

In Bev

Molson Coors Craft Beer

Price

• Regional differences allow for dynamic pricing

• Utilize expertise of local distributors

• Under price high end beer market, but over price general market

• Utilize EDLP

Price

Price

• Existing market

• Existing price points/Anchoring effect

• Lower cost strategy

Target Market• Men and women ages 21-35.• College Educated• 35k or more a year income• People who are wanting to trade up with regards to beer of

choice

New Product Strategy

• “Drink Local Campaign”

• Sales associate team for all 4 brews

• Billboard campaign on interstates entering major cities throughout the country

• Beer tastings

• Grass Roots Approach

Place• Rogue Ales- New Port, Oregon• Sweet Water-Atlanta, Georgia• Magic Hat- South Burlington, Vermont• Shiner Bock- Shiner, Texas• Expand promotion of each beer within its surrounding regions

before launching a national campaign• Grocery and Package stores

Local Recognition

National Recognition

Promotion

• Seek out sponsorship opportunities at local community events within each outlined region of the country

• Tie in with the “eat local” campaigns found in cities and small towns

• Farmers Markets• Beer tastings performed by sales associates at

community events, grocery stores, package stores, etc• Sponsorship in locally owned businesses and events.• No national chains strategy is to seem uniquely apart of

the community

Forecast – Financials - RecapCurrent Income Statement & Projected Statement

Period End 4/30/2011 4/30/2021

Reported in Millions

Total Revenue $3,404.00 $17,041

Total Cost of Revenue -$1,680.00 -$6,986

Gross Profit $1,724.00 $10,055

Operating Expense -$2,549.00 -$3,663Other Expense -$26.00 -$37Total Expense -$2,575.00 -$3,700

Net Income $829.00 $6,355 Net Income (Less Tax) $572.00 $4,321

**Dividends have been paid every year since 2007 to common stock**

Forecast – Financials - Recap NPV ANALYSIS

YEAR 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Sales 3404 3847 4385 5174 6106 7144 8501 9946 11736 14201 17041

Market Share (current strategy) 20% 21% 22% 21% 20% 19% 18% 18% 17% 15% 14%

Market Share (based on planned strategy) 20% 21% 23% 26% 24% 30% 31% 36% 37% 37% 39%Incremental Market Share (% points) 0% 0% 1% 5% 4% 11% 13% 18% 20% 22% 25%

Incremental Margin (Gross Gain After Investment) $0 $0 $44 $259 $244 $786 $1,105 $1,790 $2,347 $3,124 $4,260

Product investment (development cost of Craft Beers) $75 $30 $10 $5 $5 $5 $5 $25 $10 $10 $10Place investment $0 $24 $10 $5 $5 $5 $5 $10 $10 $10 $10Price investment $0 $3 $3 $2 $1 $1 $1 $1 $1 $1 $1

Promotion investment $0 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100Total incremental investment $75 $157 $123 $112 $111 $111 $111 $136 $121 $121 $121

Cash Flow (Incremental margin less total incremental investment) ($75) ($157) ($79) $147 $133 $675 $994 $1,654 $2,226 $3,003 $4,139

Discount Factor (figures represent 10% cost of capital) 1 0.9091 0.8264 0.7513 0.683 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855

NPV (Cash flow x discount factor) ($75) ($143) ($65) $110 $91 $419 $561 $849 $1,039 $1,274 $1,596

Cumulative NPV (NPV summed year by year) $5,655

Forecast – Financials - Recap

•Net Income has increased 43 percent since 2007•EPS Analysis•Revenue Growth vs. Expense Increases•Handled recession well

Currently at Brown-Forman

•Add four additional brands of Craft Beer•Increase revenue by 23 percent and Net income by 8 percent•Distribution and infrastructure utilization •Targets “Beer Drinkers”

After Recommendation