It takes different kinds of companies to make up the distilled spirits business. One way to divide them is between brand companies and commodity companies.
The brand companies base their business on household-name brands, which become and remain household names because the companies spend a lot of money to support them. They count on consumer demand to pull product off the shelf.
Commodity companies base their business on narrow margins, high volume, and efficiency. They push their products into distribution with price, and count on the distributors and retailers to push them out to value-conscious consumers. Commodity companies spend almost nothing on marketing support. Both types of companies make money, it's just a different approach.
Of course, brand v. commodity is a simple dichotomy and, consequently, not entirely accurate . Most of the brand companies have a few commodity products tucked away, and many commodity companies have a recognizable brand name or two.
Heaven Hill and Sazerac would be classed as commodity companies, for example, but Heaven Hill's Evan Williams is a serious brand, #3 in American straight whiskey. So is their Pama Pomegranate Liqueur, and a few others. Same with Sazerac (Blanton's, Weller, Van Winkle).
The commodity companies, generally, are privately-owned, while the brand companies are public. The announcement of this transaction, for example, came from Beam, not Luxco.
On the other side of the coin you have Beam, Diageo, Pernod, and Brown-Forman. Brown-Forman especially has a very lean portfolio, but it's packed with category leaders like Jack Daniel's and Woodford Reserve. Diageo, Pernod, and Beam--all much bigger than Brown-Forman--emphasize their category leaders, but they all have some 'cats and dogs' in their stables too.
So it is that, periodically, a brand company will off-load some of its commodity brands (also known as 'value' brands) to an established commodity company, as Beam announced it was doing this week. The buyer, Luxco, is a St. Louis-based rectifier and bottler (they don't distill).
For $65 million, Luxco got Bellows and Calvert, both of which Beam acquired in 1987 when it bought National Distillers. Bellows and Calvert are pretty old brands, but they never got off the bottom shelf. Calvert is blended whiskey, both Canadian and American, as well as gin. Bellows is bourbon, American blended whiskey, gin, rum, scotch, and vodka. Luxco also got a couple of vodkas, most notably Wolfschmidt, and a couple of other Canadians.
Wolfschmidt is a good example of a commodity 'brand.' It's a top seller in some markets, but strictly because of its distribution and price. Skol, a similar brand, was once described by its owner as the company's 'aircraft carrier.' Its profit margin was minimal, but its volume was so great that it paid to roll the trucks. The company's smaller but more profitable brands rode for free.
So a move like this is good for both companies. Beam gets $65 million and gets rid of what, for it, were mostly nuisances. Nobody at Beam wanted to manage Bellows. That's not how you advance your career.
Luxco, for its part, got that much more volume. It will keep selling everything Beam sold everywhere Beam sold it. Nobody is going to stop buying Wolfschmidt vodka because it's now sold by Luxco instead of Beam. Luxco will absorb its new acquisitions easily, because that's the business they're in.
The deal should close at the end of this month. Beam will continue to produce and bottle the brands for Luxco until at least January of 2014, according to Beam.