Tuesday, November 13, 2018

Diageo's Loss Is Sazerac's Gain

Diageo CEO Ivan Menezes
Many years ago, when I was working at a marketing services company, one of our executives issued an edict that our company would, in the future, not accept any clients that billed less than $100,000 a year. It was one of his many pronouncements that seemed, to me, to make little sense. Although I was young, I knew enough about business to know the size of an account doesn’t determine how much money you can make from it. I was pretty sure that a small but profitable piece of business was preferable to a large but unprofitable one.

This memory came to me yesterday when Diageo announced that it had ‘disposed’ of 19 brands by selling them to Sazerac. The portfolio includes several Seagrams-branded Canadian whiskies, some rums, some vodkas, and a bunch of liqueurs. Some are names you may know, such as Seagram’s VO, Goldschlager, Scoresby, Booth’s, and Myers’s. All are ‘cats and dogs,’ an industry term for small, low-margin brands with little growth potential.

In the official statement, Ivan Menezes, Chief Executive of Diageo, said: "The disposal of these brands enables us to have even greater focus on the faster growing premium and above brands in the US spirits portfolio."

In other words, the world’s largest drinks company can’t walk and chew gum at the same time. It can’t advance its most profitable segments while also making a healthy profit from the rest.

Is that fair? Sazerac paid about $550 million for the lot. That was not an act of charity. Sazerac believes it will make money where Diageo could not. Sazerac has a massive portfolio of brands, probably the largest in the distilled spirits industry.

Different companies and the managers who run them have different strategies. That doesn’t make one right or the other wrong. Unlike Diageo, Sazerac is privately-owned, so they don’t have to justify in public everything they do. Investors seemed to like Diageo’s move.

Brown-Forman has long had a firm ‘no cats and dogs’ policy. Not long ago it sold Southern Comfort, a household name, because it wasn’t performing up to expectations. Beam Suntory and Pernod also unload brands they consider unpromising. Heaven Hill has always had a lot of cats and dogs, and still does, but it has not been acquiring more of them.

Sazerac is not alone, but it dominates the segment. Most of its competitors are regional; Sazerac is everywhere.

It is a tough business because margins are so tight, but especially when you are as big as Sazerac it tends to be less volatile than high-flying brand marketing, which is more like the movie business in needing blockbuster hits to offset inevitable big budget disasters.

Sazerac doesn't shoot for the moon, although it hits it from time to time anyway, e.g., Fireball.

This week’s news is one more strange coda to the Seagram’s story. Once the world’s largest distilled spirits purveyor, Seagram’s ceased to exist as a company 20 years ago. As a brand name it lives on at several different places. Diageo still has Seagram’s Crown Royal (Canadian whisky) and Seagram’s Seven Crown (American blended whiskey). Pernod has Seagram’s Gin. Sazerac now has Seagram’s VO, Seagram's 83, and Seagram's Five Star (all Canadian whisky). Coca-Cola owns the Seagram’s mixers (ginger ale, tonic water, etc.).

Meanwhile, thousands of new brands are created every year, many by new, tiny companies. Thank you, distilled spirits industry, for keeping it interesting.