Post on 14-Apr-2018
7/27/2019 Brown-Forman Initiating Coverage
1/96
North America United StatesConsumer Beverages
28 March 2010
Brown-FormanReuters: BFb.N Bloomberg: BF/B US Exchange: NYS Ticker: BFb
Whiskey, neat; initiate at Buy
Marc Greenberg, CFAResearch Analyst
(+1) 203 863-2355
marc.greenberg@db.com
Andrew Kieley, CFAResearch Analyst
(+1) 212 250-7817
andrew.kieley@db.com
Fundamental, Industry, Thematic, Thought-LeadingDeutsche Bank Company Research's Product Committee has deemed this workF.I.T.T. for investors seeking differentiated ideas. Here our beverage analystsinitiate coverage of Brown-Forman with a Buy rating, while assessing positivetrends in US spirits category relative to beer.
Forecasts and ratios
Year End Apr 30 2008A 2009A 2010E 2011E
1Q EPS 0.61 0.69 0.81A 0.87
2Q EPS 0.83 0.94 0.99A 1.08
3Q EPS 0.75 0.68 0.80A 0.85
4Q EPS 0.62 0.58 0.56 0.62
FY EPS (USD) 2.81 2.90 3.16 3.42
P/E (x) 19.9 17.6 18.1 16.8
Dividend yield (%) 4.2 2.2 2.1 2.2
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 106/05/2009
FITT Research
BuyPrice at 26 Mar 2010 (USD) 57.29
Price target 64.00
52-week range 58.01 - 38.32
Price/price relative
20
30
40
50
60
70
3/07 9/07 3/08 9/08 3/09 9/09
Brown-Forman
S&P 500 INDEX (Rebased)
Performance (%) 1m 3m 12m
Absolute 8.2 7.5 43.0
S&P 500 INDEX 5.7 3.5 43.2
Stock & option liquidity data
Market Cap (USDm) 8,466.2
Shares outstanding (m) 147.8
Free float (%) 100
olume (26 Mar 2010) 81,600
Option volume (und. shrs., 1M avg.) 3,750
Implied & Realized Volatility (3M)
0%
20%
40%
60%
80%
Nov 08 May 09
Realized Vol Implied Vol (ATM)
Company
GlobalMarketsResea
rch
Fundamental: Jack Daniels Alcohols strongest Americana brandThoughtful, consistent, long-term global investment behind the iconic whiskey itmade famous underpins our constructive view of Brown-Forman. Amidst beercategory decline (and in particular brand Budweiser), the old guy from Tennesseehas maintained growth. High-single-digit EPS growth, compelling ROIC, consistentreturn of cash and attractive long-term growth support out Buy rating, $64 TP.
Industry: Spirits leaders are focused on brand loyalty, beer on profitsRational beer duopoly (ABI and MillerCoors) matters little to consumers choosingbrands. Our research portrays spirits leaders as more innovative, promoting more,establishing loyalty with younger consumers. Our downgrade of TAP today factorsin domestic margin erosion as investment re-accelerates, pricing erodes.
Thematic: BF can win the marathon, if not the sprintBrown-Forman should continue to raise exposure to growth markets abroad andsegments at home gradually, via new distribution, brand acquisition, innovation.This approach may not make every quarter clean, but sustains a strong franchise.
Though Leading: Treated like a shareholder? YepRecent legacy of closely held or family controlled alcohol beverage companiesgives pause regarding the benefit from strategic deals like MillerCoors, formationof ABI, and various iterations at Constellation over the years, owing to both sharevolatility and limited return of cash. In contrast, Brown-Forman treats investors likefamily: 10-year annualized dividend growth: 9.4% (40% payout ratio), 10-yearshare price appreciation: 228% (12.6% annualized).
7/27/2019 Brown-Forman Initiating Coverage
2/96
7/27/2019 Brown-Forman Initiating Coverage
3/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 3
Fiscal year end 30-Apr 2007 2008 2009 2010E 2011E 2012E
Financial Summary
DB EPS (USD) 2.51 2.81 2.90 3.16 3.42 3.72
Reported EPS (USD) 2.51 2.81 2.90 3.16 3.42 3.72
DPS (USD) 0.93 2.36 1.12 1.18 1.25 1.36
BVPS (USD) 10.24 11.27 12.07 13.04 14.66 16.23
Valuation Metrics
Price/Sales (x) 3.1 2.6 2.4 2.6 2.5 2.4
P/E (DB) (x) 22.4 19.9 17.6 18.1 16.8 15.4P/E (Reported) (x) 22.4 19.9 17.6 18.1 16.8 15.4
P/BV (x) 5.0 4.8 3.9 4.4 3.9 3.5
FCF yield (%) 3.6 5.7 5.9 5.3 5.5 6.3
Dividend yield (%) 1.7 4.2 2.2 2.1 2.2 2.4
EV/Sales 3.4 2.9 2.6 2.8 2.6 2.4
EV/EBITDA 14.6 12.8 11.7 11.6 10.4 9.4
EV/EBIT 15.7 13.8 12.6 12.6 11.1 10.1
Income Statement (USDm)
Sales 2,806 3,282 3,192 3,196 3,301 3,448
EBITDA 647 737 716 773 840 897
EBIT 603 685 661 716 785 839
Pre-tax profit 586 644 630 687 751 810
Net income 390 435 439 469 502 543
Cash Flow (USDm)Cash flow from operations 355 534 491 490 510 577
Net Capex -41 -47 -37 -45 -53 -58
Free cash flow 314 487 454 445 457 519
Equity raised/(bought back) 27 -212 -45 -153 -93 -143
Dividends paid -143 -362 -169 -174 -182 -196
Net inc/(dec) in borrowings 595 -172 -6 -233 0 0
Other investing/financing cash flows -1,059 9 -13 0 0 0
Net cash flow -266 -250 221 -115 182 180
Change in working capital -80 28 -18 -41 -53 -30
Balance Sheet (USDm)
Cash and cash equivalents 369 119 340 225 407 587
Property, plant & equipment 506 501 483 471 469 469
Goodwill 670 688 675 675 675 675
Other assets 2,006 2,097 1,977 1,974 2,005 2,044
Total assets 3,551 3,405 3,475 3,345 3,556 3,775
Debt 1,177 1,006 999 766 766 766
Other liabilities 801 674 660 652 650 667
Total liabilities 1,978 1,680 1,659 1,418 1,416 1,432
Total shareholders' equity 1,573 1,725 1,816 1,927 2,140 2,343
Net debt 808 887 659 540 358 178
Key Company Metrics
Sales growth (%) 14.8 17.0 -2.7 0.1 3.3 4.4
DB EPS growth (%) 8.1 11.9 3.0 9.1 8.1 9.0
Payout ratio (%) 36.6 83.2 38.5 37.1 36.3 36.2
EBITDA Margin (%) 23.0 22.5 22.4 24.2 25.4 26.0
EBIT Margin (%) 21.5 20.9 20.7 22.4 23.8 24.3
ROE (%) 24.9 26.3 24.8 25.1 24.7 24.2
Net debt/equity (%) 51.4 51.4 36.3 28.0 16.7 7.6
Net interest cover (x) 37.0 16.5 21.3 24.9 23.4 29.0
DuPont AnalysisEBIT margin (%) 21.5 20.9 20.7 22.4 23.8 24.3
x Asset turnover (x) 0.9 0.9 0.9 0.9 1.0 0.9
x Financial cost ratio (x) 1.0 0.9 1.0 1.0 1.0 1.0
x Tax and other effects (x) 0.7 0.7 0.7 0.7 0.7 0.7
= ROA (post tax) (%) 12.4 12.5 12.8 13.8 14.5 14.8
x Financial leverage (x) 2.0 2.1 1.9 1.8 1.7 1.6
= ROE (%) 24.9 26.3 24.8 25.1 24.7 24.2
annual growth (%) -0.3 5.9 -6.0 1.1 -1.5 -1.9
x NTA/share (avg) (x) 10.1 10.7 11.7 12.6 13.8 15.4
= Reported EPS 2.51 2.81 2.90 3.16 3.42 3.72
annual growth (%) 8.1 11.9 3.0 9.1 8.1 9.0
Source: Company data, Deutsche Bank estimates
Model updated:26 March 2010
Running the numbers
North America
United States
Beverages
Brown-FormanReuters: BFb.N Bloomberg: BF/B US
Buy
Price (26 Mar 10) USD 57.29
Target price USD 64.00
52-week Range USD 38.32 - 58.01
Market Cap (m) USDm 8,466EURm 6,319
Company Profile
Brown-Forman is an alcohol beverage company in thepremium spirits and wine categories. Leading spirits brandsare Jack Daniel's, Southern Comfort and Finlandia, andFetzer and Korbel in wine. Brown-Forman biggest geographicmarket is the US, but it has an increasingly international
presence. Key non-US markets include the UK, Australia,
Mexico, Poland, Western Europe, China, Japan, Russia.
Price Performance
20
30
4050
60
70
Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09
Brow n-Forman S&P 500 INDEX (Rebased)
Margin Trends
20
21
23
24
26
27
07 08 09 10E 11E 12E
EBITDA Margin EBIT Margin
Growth & Profitability
232424252526262727
-5
0
5
10
15
20
07 08 09 10E 11E 12E
Sales growth (LHS)
Solvency
0
10
20
30
40
0102030405060
07 08 09 10E 11E 12E
Net debt/equity (LHS)
Marc Greenberg, CFA
+1 203 863-2355 marc.greenberg@db.com
7/27/2019 Brown-Forman Initiating Coverage
4/96
28 March 2010 Beverages Brown-Forman
Page 4 Deutsche Bank Securities Inc.
Investment thesis
Strong portfolio, growth, total return opportunity
We initiate coverage with a positive view of BFs brand portfolio, growth outlook, steady totalshareholder returns (among the best in CPG), and high ROIC which warrants premium
valuation comparisons to Coke are altogether fair. BF runs a focused portfolio of attractive
brands flagship Jack Daniels is one of the strongest US brands with consumers, anchors
US distribution, provides a platform for International growth and effective innovation.
Premium tequila brands (Jimador, Herradura) represent a faster growth opportunity, while
Finlandia has performed well globally. While BF has some lagging value brands, within the
portfolio these are monetizable to fund growth. Overall the portfolio is narrower than global
competitors, but focused and compensates for smaller scale. Our survey work also
demonstrates a modestly more positive spirits outlook among US retailers, and we perceive
an improving opportunity as beer weakens, as spirits innovation/promotion are better and as
beer cost-cuts to glory. This creates a wide berth for spirits companies to win consumers.
The second key leg of our thesis is an underappreciated and substantial International growth
opportunity, which balances off the more mature US. As Jack, Finlandia and the tequila
brands expand abroad, global profits have reached parity with the domestic side and are
growing faster. Long-term profit upside is considerable, despite quarterly/FX volatility.
Finally, BFs offers long-term investors an excellent track record of steadily compounding
total returns and attractive FCF. 10-year EPS growth 9-10%, EBIT growth 8%, dividends 9%,
and ROIC at 16-17% warrants premium valuation. While multiples appear somewhat high vs.
peers, we believe it is justified by high margins/returns, barriers to entry, FCF generation, and
global growth opportunity. We see valuation support from the outlook for stable high single
digit earnings growth and defensiveness of those estimates, as well as balance sheet
flexibility. Although BFB is likely to be viewed by investors as defensive, we would expect
significant multiple inflation if consumer spending reaccelerates. Our estimates for Q4 2010
and 2011 are generally conservative, in light of soft near-term consumer spending, trade-
down, competitor promotion, but our bias would shift with economic and/or category pickup.
Overall we look for 8% EPS growth in FY11 and high single digits annually in future years.
Although BF is a controlled company and Class B shares lack voting rights, we do not
believe they should carry a discount, since stewardship of patient family shareowners is
driving steady total return. However we also do not believe shares should embed any M&A
premium (despite being an attractive target), given family interest in independence.
$64 DCF valuation
We value BFB shares on a DCF-basis, and arrive at $64/share. Key assumptions are 10-yearEBITDA growth of 6%, WACC of 8% (post-tax cost of debt of 4%, 5% risk-free rate, 6%
equity risk premium, levered beta of 0.5, cost of equity of 8.2%), and perpetuity growth of 1-
1.5% (below long-term GDP growth given maturity of spirits industry). $64 valuation equates
to EV/EBITDA of 12.2x (FY11E), P/E of 18.7x, in-line with LT average of 12x EBITDA, 19x P/E.
Risks
Key risks are slower than expected volume growth, deterioration of brand equity or
ineffective marketing. Slower growth could also result from consumer trade-down, trade
inventory adjustments, or economic weakness abroad. Other risks would be more aggressive
price promotion in spirits, FX volatility, regulatory changes, higher excise tax, M&A activity.
7/27/2019 Brown-Forman Initiating Coverage
5/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 5
Table of Contents
Executive summary ........................................................................... 6US spirits overview ......................................................................... 12Limited economic sensitivity, solid demographics ...................... 16
Vodka dominates category growth ............................................... 20Brands come first within a fragmented market............................ 24Alcohol innovation trends............................................................... 313-tier system & regulation .............................................................. 35Brown-Forman overview ................................................................41Company innovation ....................................................................... 51Channel checks: JD strong amid trade down ...............................54The global story is bullish............................................................... 66A great financial picture..................................................................76Valuation: 14% upside potential, initiate at Buy........................... 85Risks..................................................................................................88
7/27/2019 Brown-Forman Initiating Coverage
6/96
28 March 2010 Beverages Brown-Forman
Page 6 Deutsche Bank Securities Inc.
Executive summary
We initiate coverage with a Buy rating $64 target price (18.7x FY2011 forecast of $3.42). We
believe Brown Formans Jack Daniels brand provides an excellent foundation for global
growth and high returns that warrants premium valuation, based on three factors:
High returns, exceptional track record of value-creation: Forecast ROIC is 17%. 10-
year EPS growth 9-10%, profit growth 8%, dividend growth 9%, with annual share price
appreciation of 12.6%. The view of a mature one-brand company seems quite difficult to
square with these results thats because it is incorrect, in our view.
You dont know Jack thoughtful leadership: Gradual inroads into global expansion
opportunities have steadily lifted the profit split close to 50-50 US/non-US, with
significant opportunities ahead. Jack Daniels brand (est. 47% US volume, 20% global)
has been a strong platform for premium innovation (Single Barrel, Gentleman Jack,
Woodford Reserve). BFs Herradura tequila and Finlandia vodka acquisitions brought in
quality brands in attractive segments, while divestment of non-core assets (wine,
luggage, jewelry) has focused the portfolio towards higher profitability. BFs long-term
approach may create quarterly volatility, but the payoffs have been lucrative over time.
Improving outlook for spirits category as beer weakens: The spirits category has
boosted innovation and promotion to stabilize top-line growth through this difficult
economic period. Conversely, we fear the beer industry has substituted cost-cutting and
price increases for brand development at the exact wrong time, presenting a wide berth
for leading spirits players to capture consumers. Our research highlights consumer
migration away from leading beer brands as they try new things and look for value. Our
retailer surveys indicate expectations for improving category momentum and generally
constructive outlook for BF.
1. Domestic spirits business is attractive
The US spirits category represents just 6% of the US beverage alcohol market by volume,
but is arguably the most structurally attractive, with superior LT consumption growth vs. beer
and high price points/margins in the premium segment. Although volume growth trails wine,
focus on leading premium brands creates attractive economics for leading brandowners.
Importantly, we believe the recent volume deceleration in beer -- the largest alcoholic
category in volume and value owes in large part to an overt profit focus, and has opened
the competitive door to brand-focused wine and spirits companies. In our view, it is not
oligopolies that ensure sustained profit growth, but brand investment. Spirits and wine could
win tremendous share by outshining the US beer industry in one critical area consumer
excitement and appeal.
7/27/2019 Brown-Forman Initiating Coverage
7/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 7
Figure 1: Est. Brown Forman volume contribution by brand
JackDaniel's,
47%
Canadian
Mist 17%
Southern
Comfort,14%
EarlyTimes,
6%
Finlandia,3%
Gent.Jack,
2%
ElJimador,
2%
Source: Impact, NABCA, IRI, DB estimates, NABCA
broadening consumer acceptance of spirits
Our research on the US spirits market demonstrates broadening acceptance. For instance,
our November 2009 survey of 1,010 consumers on alcohol consumption (see Whats
Facebook Drinking) indicated that 89% consume spirits, matching the popularity of beer.
We also found that while preference is highest in the 20-30 age group, spirits consumption is
robust across all age groups, and fairly even across male/female.
DB survey: Despite trade-down, retailers are optimistic on spirits outlook
Down-trading to lower-priced categories remains a key risk. Forty six percent of large format
retailers in our survey expect some degree of trade-down, while 17% expect to see things
improve and trend back to premium-lead positive sales mix. While a significant 30% of
sample still expects sales to remain flattish versus 2009, the majority (54%) expects growth,
and only 16% expect declines. This reflects improved confidence, particularly in light of
continued trade-down pressure, and we believe is a better outlook vs. consensusexpectations.
2. BFs domestic strategy has driven outperformance
In the US, new distribution channels and effective innovation/extensions have driven growth
of the flagship brand, despite not being a vodka the dominant driver of spirits category
growth for the last 30 years.
Whiskey, leave the bottle
Our prior consumer work indicates that taste is by far the dominant decision driver for alcohol
brands (cost ranks much lower). Both are favorable factors for lead brand Jack Daniels,
which scores high on taste and among the most popular of any spirits brand. In our 2009survey of alcohol brand preference, Jack Daniels ranked in the top 3 for spirits brands
mentions, above its overall #5 spot in US spirits, and close to the top scoring equity brand
Grey Goose. Despite economic challenges, BFs successful investments to drive super-
premium brands such as Woodford, and Gentleman Jack validate the primacy of taste for
consumers. Declining value brands in the portfolio are able to be monetized towards growth
elsewhere.
7/27/2019 Brown-Forman Initiating Coverage
8/96
28 March 2010 Beverages Brown-Forman
Page 8 Deutsche Bank Securities Inc.
Figure 2: Brown-Forman Whiskey brand growth estimates : 2000-2010E
24%
9% 8%
3%1%
4% 4%
10%
5%
0%
5%
10%
15%
20%
25%
Source: Deutsche Bank estimates, company data, Impact
Acquisition of the Casa Herradura high-end tequila brands in FY07 added a long-term
growth outlet to complement slower growth bourbon. US tequila growth is underpinned
by expanding awareness, particularly of smoother high-end products, growth of the Hispanic
population (although estimated 80% of tequila drinkers are Caucasian). Much of the growth
also falls in the super premium and luxury categories, in which BF is a major participant. BF is
the fourth-largest global tequila producer (Euromonitor) based on its presence in the
US/Mexico market. El Jimador is BFs largest tequila brand and fastest grower. It is
attractively priced at the higher end of the segment ($24-25) a premium to category leader
Jose Cuervo. Consumer value proposition owes to a low relative price point for a 100%
agave product. Jimador depletions are +6% YTD for BF globally, and have nearly doubled in
size since the acquisition.
3. International opportunity is underappreciated
We believe BF geographic diversification is generally misunderstood in the investment
community (perhaps in part due to limited financial segment disclosure by the company). We
believe this is one of the most overlooked pieces of the growth story. Outside of Coke, BF
offers the most international exposure among beverage companies we follow.
BF markets in 135 countries (23 of which have case sales over 100k).
We estimate more than 50% of revenue came from outside the US last year.
Growth rates are higher than at home.
Global expansion
Although US remains the single biggest sales market (48% of revenue), importance of
International has increased significantly in the past few years. Management initiated a
strategy to expand globally in the mid 1990s non-US sales were less than 30% in FY03
(before the Herradura acquisition), and have grown steadily since that time. In FY08, non-US
sales exceeded US for the first time. This primarily revolves around Jack Daniels, but
Finlandia had produces strong global growth rates, with a tequila opportunity still ahead.
7/27/2019 Brown-Forman Initiating Coverage
9/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 9
Equivalent to US spirits profits, and growing
Although we believe the International profit contribution is slightly below the 50% revenue
contribution because of lower margins (we estimate International EBIT at 46% of total,
matching US Spirits), it is the larger growth driver. We believe it should continue to grow
within the profit mix, based on higher volume opportunities as BF gains scale. We therefore
believe a single-minded focus by investors on the US (or even more keenly, Jack Daniels in
the US) is an extremely short sighted perspective.
Figure 3: BFB brand volume 2009E (mn cases) Figure 4: Volume CAGR, INTL vs. Total (2005-09E)
0
1
2
3
4
5
6
7
8
9
10
JackDaniel's Finlandia Southern
Comfort
Canadian
Mist
NonUS
US
10.1%
5.6%
3.4%
7.8%
2.9%
0.8%
0%
2%
4%
6%
8%
10%
12%
Finlandia JackDaniel's Southern
Comfort
International
Total
Source: mpact,NABCA, IRI, company data, DB estimates Source: Impact,NABCA, IRI, company data, DB estimates
Sound growth strategy
BF focuses on growing awareness and distribution of its brands in each market, and in some
cases, the category itself (i.e. tequila in Russia). Management expects International to
outgrow US over time, particular through opportunities in BRIC economies, Eastern Europe,
Asia, Latam, France and Australia. A key determinant will be the longer-term
premiumization/trading-up by foreign consumers similar to what has been evidenced
domestically over the last 10 years. As global premiumization is much less prevalent, we seeplenty of runway for BF brands abroad. In our view this trend is supported by the expanding
global middle-class growth highlighted by KO, PEP and most other global CPG companies
(although more challenging in alcohol vs. soft drinks). Of course, such exposures also elevate
volatility introduced by global macroeconomic factors, a greater skew to on-premise
consumption, execution in newer markets, foreign regulation, and currency.
4. US spirits poised to win vs. beer
Innovation presents a great share of stomach opportunity for spirits
We believe spirits have a fundamental share of stomach opportunity with US consumers
as leaders in beer have seen new product pipelines dry up, suggesting dangerous risk to any
beer investor or management seeking to cost-cut to prosperity. Consumers need a reason tobuy a product, or else they start to go away. As wines constant product flow is to a degree
systemic (new grapes, varietals, regions, etc.), the break-through potential squarely lay in the
hands of spirits and smaller craft beers at present.
7/27/2019 Brown-Forman Initiating Coverage
10/96
28 March 2010 Beverages Brown-Forman
Page 10 Deutsche Bank Securities Inc.
Figure 5: Alcoholic Beverage Category innovation: 2008-2010
New Product New Packaging Range Extension TotalSpirits 215 49 94 358Wine 398 71 68 537Beer 233 83 152 468
0200400600800
1,0001,2001,4001,600
Source: Mintel
Three-year innovation data from Mintel suggests greater volume of innovation in wine and bysmaller brewers, compared to a more concentrated and focused innovation strategy in
spirits. Much of the spirits industry innovation has focused on growth categories, primarily
white spirits, while whiskey has concentrated on high-end brands where growth still exists.
Brown Forman has successfully leveraged its leading whiskey franchise
Jack Daniels brand has served as a rich global foundation in a bid to extend growth. This has
included the flavored RTD Country Cocktails line, pre-mixed Jack and Cola (which has grown
particularly well in Australia), and premium bourbons (higher-priced Gentleman Jack, Single
Barrel). Beyond bourbon, more recently the company has rolled out flavored varieties of
Finlandia, and SoCo ready-to-pour cocktails. Of the major US line extensions we were able to
track with IRI data above, BF has a good track record of growth on bourbon products, and all
expect Country Cocktails gained ACV distribution and held or increased price points over the
past five years. We believe these products may present an effective strategy to address
ongoing consumer thrift, even once the economy improves.
Trends are gradually improving availability of spirits
There is some gradual progress in the US against more restrictive state laws the Distilled
Spirits Council states that 36 states now allow Sunday sales (with 14 of these having passed
since 2002), and a broader trend of modernizing spirits regulations across states over the
past five years, which clearly is to the benefit of spirits companies.
Initiate coverage with Buy Rating, $64 price target
BF does not use a formal growth model for top line, profits and earnings, but alludes to its
impressive 35-year 11% growth rate as a guide. We may see higher levels of volatility goingforward as global exposure ramps it comes with the new territory but dont expect it to
take short-cuts or protect against and odd quarter or two. Coupled its relatively generous
cash distributions, the shares are meant for investors looking to the next generation (like the
family that controls it).
Forecast: Balanced 5% top-line growth: We assume inflation-based US pricing and
modest volumes, with a few points of International volume growth per year and flat
pricing as modest pricing is offset by negative mix and promotion to drive growth. On a
year-to-year basis, there is likely to be some FX volatility against our forecasts, but
upside may come from renewed economic growth in developed markets.
7/27/2019 Brown-Forman Initiating Coverage
11/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 11
Mid-to-high single digit EBIT growth: Operating profit growth and margin
improvement have been fairly consistent long term, and we forecast growth in mid-to-
high single digits. This is based on mid single digit revenue growth and modest annual
margin expansion. It is also somewhat conservative vs. the long-term track record.
Strong free cash generator: We estimate EBITDA conversion to free cash flow (defined
as OCF less capex) at 40-67% annually over the past five years. Capex ($50-70mn p.a., 2-3% of revenue), working capital and interest expense are limited, and tax rate has
steadily declined (which we expect to continue as International grows). On a FY10
revenue base of about $2.5bn (ex-excise tax), we forecast FCF of about $450m.
Leverage is conservative, creating scope for higher returns to shareholders. Despite
undertaking bigger share repurchases the past two years ($262mn in FY08-09), paying a
$204m special dividend in 2008, increasing dividends to maintain 35-40% payout ratio,
financial leverage has declined and is fairly low. Leverage peaked in FY03 (net
debt/EBITDA of 1.7x) and we project 0.7x by YE10.
DCF value of $64: We value BFB shares on a DCF basis, and arrive at $64/share. Key
assumptions are 10-year EBITDA growth of 6%, WACC of 8% (we based this off post-
tax cost of debt of 4%, 5% risk-free rate, 6% equity risk premium, levered beta of 0.5,
driving cost of equity of 8.2%), and perpetuity growth rate of 1-1.5% (below long-term
expected GDP growth given relative maturity of spirits industry). Our $64 valuation
equates to an EV/EBITDA multiple of 12.2x (FY11E basis), FCF yield of 4.8%, and a P/E of
18.7x. This is essentially in-line with long-term 10-year historical averages of 12x EBITDA
and 19x P/E. Although BFB is likely to be viewed broadly by investors as defensive and
not as favorable in higher economic cycles, we would look for significant multiple
inflation if consumer spending does reaccelerate.
7/27/2019 Brown-Forman Initiating Coverage
12/96
28 March 2010 Beverages Brown-Forman
Page 12 Deutsche Bank Securities Inc.
US spirits overview
The U.S. spirits industry offers some of the most dynamic trends and attractive
economics in the alcoholic beverage sector, with a low to mid single digit growth
profile, high profit margins, and favor from the younger demographic. Cocktails have
made their mark on U.S. society, both on and off-premise, and spirits will remain one
of the most attractive categories in consumer products as flavor and brand innovation
continue to broaden, and spirits gain increasing acceptance, particularly at the high
end, among the younger consumer demographics. On a segment basis, beers waning
appeal appears to be spirits segments gain, as industry leaders have favored brand
growth as opposed to merely profit growth within the largest beer companies
Anheuser Busch Inbev and Miller Coors.
Broad & expanding consumer appeal
The US spirits category represents just 6% of the US beverage alcohol market by volume,
but is arguably the most structurally attractive, with superior LT consumption growth vs. beerand high price points/margins in the premium segment. Although volume growth trails wine,
the segment has renewed growth with focus on leading premium brands, creating attractive
economics for leading brandowners. Importantly, we believe the recent volume deceleration
in beer -- the largest alcoholic category in volume and value owes in large part to an overt
profit focus by the leading players, and has opened the competitive door to brand focused,
wine and spirits companies. In our view, it is not oligopolies that ensure sustained profit
growth, but brand investment. Spirits and wine could win tremendous share by outshining
the US beer industry in one critical area consumer excitement and appeal.
Figure 6: US alcohol consumption by volume (2010E) Figure 7: US alcohol consumption CAGR (2000-2010E)
Beer,
82%
Wine,
10%
Spirits,
6%
RTD&
Other,
2%
3.4%
2.9%
0.8%
0.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
WineSpiritsTotalAlcoholBeer
Source: Impact, Beer Institute, DISCUS, DB estimates Source: Impact, Beer Institute, DISCUS, IRI, Euromonitor, DB estimates
Building consumer awareness on-premise leads to
Cocktailing is a mainstay of the U.S. on-premise environment. The spirits industry therefore
relies heavily on this channel by as a trial occasion for consumers, given a greater tendency
to try new flavors and combinations in a single-serve setting. On-premise is a primary playing
field for building brand equity and consumer recognition. We expect acceleration of the
spirits category to continue over the long-term, as many of the previously established trade-
up and demographic trends continue long after the current recession.
Spirits will likely remain one
of the most attractive
categories in consumer
products as flavor and brand
innovation continue to
broaden, and spirits gain
increasing acceptance,
particularly at the high end,
among the younger
consumer demographics.
On-premise is a primary
playing field for building
brand equity and consumer
recognition.
7/27/2019 Brown-Forman Initiating Coverage
13/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 13
Secular improvement in spirits underpins Brown-Formans prospects at home. Additionally,
the factors below enable a favorable growth outlook:
Growing young adult acceptance as an alternative to beer.
Expanding distribution.
Tactical company marketing strategies.
Premiumization.
Figure 8: US spirits volume (mn cases) Figure 9: High-end & super-premium % US spirits vol.
146 150 153159 165
171 177184 187 189
195
0
2040
60
80
100
120
140
160
180
200
220
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
3.5%5.7%
13.2%
19.2%
22.3%24.3%
23.0%
0%
5%
10%
15%
20%
25%
30%
1970 1980 1990 2000 2005 2008 2009
Source: Impact, DISCUS, IRI, Euromonitor, DB estimates Source: DISCUS
broadening consumer acceptance of spirits
Our research on the US spirits market demonstrates broadening acceptance. For instance,
our November 2009 survey of 1,010 consumers on alcohol consumption (see Whats
Facebook Drinking) indicated that 89% consumer spirits, matching the popularity of beer.
We also found that while preference is highest in the 20-30 age group, spirits consumption is
robust across all (legal) age groups. Spirits consumption matches up fairly evenly acrossmale/female, showing broader and less compartmentalized appeal than we had expected.
Figure 10: DB survey -- Which types of alcohol do you
drink?
Figure 11: DB consumer survey -- Do you drink spirits?
Beer Wine Spirits
Yes 89.2% 88.3% 88.6%
No 10.8% 11.7% 11.4%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2024 2530 Over30
Idrink 91.4% 87.7% 80.4%
Idonotdrink 8.6% 12.3% 19.6%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Deutsche Bank November 2009 survey of 1,010 US consumers Source: Deutsche Bank November 2009 survey of 1,010 US consumers
7/27/2019 Brown-Forman Initiating Coverage
14/96
28 March 2010 Beverages Brown-Forman
Page 14 Deutsche Bank Securities Inc.
Risks & limitations
While the high-level growth trends look good for spirits and per capita consumption has been
increasing, we still have to consider longer-term risks (as with all other beverage categories)
to consumption, which could reverse the trend. Some potential limiting factors, and our take:
Figure 12: US alcohol consumption per capita (gallons)
1990 1995 2000 2005 2007 2008 2009 2010E
Beer 34.5 31.0 30.8 29.6 29.7 29.6 29.1 28.5
Wine 2.4 2.4 2.8 3.2 3.3 3.3 3.3 3.4
Spirits 2.1 1.7 1.8 1.9 2.0 2.0 2.0 2.1
0
5
10
15
20
25
30
35
Beer
Wine
Spirits
Source: Impact, Beer Institute, DISCUS, IRI, Euromonitor, DB estimates, NABCA
Cyclicality. Spirits consumption has over the very long-term been somewhat cyclical total
and per capita consumption declined in the 1980s and early 1990s for example, and based
on higher price points per bottle in premium spirits, consumption is somewhat exposed to
economic cycles. Our research also shows that spirits are still more of an occasion drink
than beer/wine. Frequency is significantly higher among the younger groups, which bodes
well for growth in our view, but also exposes it to volatility were it to fall out of favor (i.e
fashion risk).
Demographics. Boomer growth implies lower per capita as older consumers drink less.
Historically spirits consumption in US tends to correlate with growth of younger populations
in the 21-24 group, which could mean headwinds (see Figure 9 below).
Wellness trends. General shift to healthier lifestyles in the US might pressure spirits
consumption. Indeed this may have been a factor behind BFs decisions in earlier periods to
attempt diversification (i.e. wine/luggage). Relative to beer and spirits, wine appears best
positioned here, (i.e. moderation, French paradox). However we see this as becoming less of
a factor over time, as companies have done a good job marketing the spirits occasion in
moderation as an acceptable part of a balanced lifestyle just like wine/beer.
Our research shows that
spirits are still more of an
occasion drink than
beer/wine. Frequency is
significantly higher among
the younger groups, which
bodes well for growth.
7/27/2019 Brown-Forman Initiating Coverage
15/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 15
Figure 13: DB survey -- How frequently do you drink
spirits per week?
Figure 14: DB survey -- Do you expect to drink spirits
more or less frequently over the next year?
NotatallOnly
occasionallyFrequently
MostlyPrefer
to wine/beer
2024 5.3% 55.7% 31.7% 10.3%
2530 13.9% 66.4% 16.4% 3.3%
Over30 14.4% 62.9% 13.4% 10.3%
0%
10%
20%
30%
40%
50%
60%
70%
2024 2530 Over30
More 65.6% 29.6% 31.3%
Less 35.2% 71.3% 68.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Source: Deutsche Bank November 2009 survey of 1,010 US consumers Source: Deutsche Bank November 2009 survey of 1,010 US consumers
7/27/2019 Brown-Forman Initiating Coverage
16/96
28 March 2010 Beverages Brown-Forman
Page 16 Deutsche Bank Securities Inc.
Limited economic sensitivity,solid demographics
We highlight research below portraying spirits limited volatility as function of
economic weakness. While evidence of trade-down is clear, trade-out is not
happening as industry leaders position well to hold on to consumers in tough times.
This is especially critical for the Jack Daniels brand , a somewhat older, male crowd.
The industry also benefits from millenials a group of active tryers that appear
destined to follow the recent trend of growth in white spirits: rum, vodka and the
fastest growing tequila segment. On the latter, broadly Hispanic and Mexican cultural
influences in particular are seen underpinning growth.
1. Alcohol is a relatively defensive group
Alcoholic beverages tend to be defensive in times of economic difficulty. People may stopspending on expensive dinners out, vacations, shopping trips, and the like, but the vices are
often the last to go. That said, trade-down to more value is a fact of life across CPG, and the
best companies will adapt to what may be a more permanent state of thrift.
Short-term cyclicality:
Sensitivity to macroeconomic factors has taken on more importance in recent slowdown, and
requires more attention than we might otherwise devote to a category like spirits. Trade
down from high priced products to more affordable brands and alternatives is a realism in the
industry today, illustrated by our findings during recent channel checks (see section, Whats
Happening at Retail?).
Long-term defensive:
Constructively, longer-term data suggests spirits remains defensive broadly. We ran
correlations on 20 years of real US GDP growth data vs. consumer spending growth on
spirits and beer. Although visually we see more of a connection in the past 10 years, over the
entire period consumer spending on alcohol products shows no correlation to GDP growth.
Here we note that good or bad branding likely plays a greater role than just the economy.
Figure 15: Real PCE % Spirits vs. Real GDP Figure 16: Real PCE % Beer vs. Real GDP
6%
4%
2%
0%
2%
4%
6%
8%
10%
12%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
RealGDP%
Spirits
Rsquared=0.0003
10%
8%
6%
4%
2%
0%
2%
4%
6%
8%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
RealGDP%
Beer
Rsquared=0.08
Source: BEA Source: BEA
Trade down from high
priced products to more
affordable brands and
alternatives owes to
economic weakness as
illustrated by our findings
during recent channel
checks.
Over the entire periodconsumer spending on
alcohol products shows no
correlation to GDP growth.
7/27/2019 Brown-Forman Initiating Coverage
17/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 17
Trade-down focus. High-end players have greater exposure to economic weakness.
The below charts portray these trends during the recent downturn, with growth in higher
priced spirits stalling while value tiers accelerated. Indeed on a state level, higher levels
of spirits consumption correlate with higher disposable income (DC has highest spirits
per capita consumption in the US according to Impact, and CA has highest per cap
consumption within the bourbon market), so there is economic sensitivity in play.
Figure 17: US spirits volume by price category (2009) Figure 18: Spirits volume growth % by bottle price
Value
41%
Premium
36%
HighEnd
16%
Super6%
(6)
(4)
(2)
0
2
4
6
8
10
12 Under$10
$10$15
$15$20
Over$20
Source: DISCUS Source: IRI data for Food/Drug/Mass channel, all US spirits brands by average bottle price
Another look at this from DISCUS data shows much more profound weakness in the highest-
priced spirits tiers in 2009, and a decline in their share of US spirits.
Figure 19: US spirits volume growth by price segment
0.6%
3.7%
0.6%
1.7%
5.5%
0.6%
3.5%
5.1%6%
4%
2%
0%
2%
4%
6%
8%
Value Premium HighEnd Super
2008
2009
Source: DISCUS
2. Demographics favor continued growth
Premium spirits and bourbon in particular face solid demographic trends in the coming years.
White male boomers represent a dominant population segment and they like their whiskey.
For marketers, the challenge is recruiting new old guys to the category, something
Diageos Johnny Walker brand has done quite successfully. At the same time millenials or
echo boomers provide a favorable backdrop for long-term, stable growth in the top white
spirits categories, vodka, rum, and tequila.
7/27/2019 Brown-Forman Initiating Coverage
18/96
28 March 2010 Beverages Brown-Forman
Page 18 Deutsche Bank Securities Inc.
BFs largest driver, the bourbon category skews largely male and significantly older than
other categories like vodka, rum, and tequila. BFs core demographic market centers on the
Jack Daniels brand, which skews even more male (estimated at 82% in terms of brand
preference) than the bourbon category, somewhat younger, and heavily Caucasian (estimated
84% of drinkers).
This creates a far more concentrated core user group for BF. Marketing is therefore amore narrowly focused endeavor compared to most CPG companies, leading to more easily
identifiable demographic target markets. The key risk is the somewhat younger skew may
help Jack Daniels outpace competitors and take share thus the importance of its recent
tequila acquisition Herradura and the El Jimador brand specifically as it captures both young
and Hispanic consumer trends.
Figure 20: US spirits drinkers by sex Figure 21: US spirits drinkers by age
0%
10%
20%
30%
40%
50%
60%70%
80%
90%
100%
Bourbon Vodka Rum Tequila
Female
Male
23%30% 30% 30%
43%42% 45% 47%
33% 28%24% 22%
0%
10%
20%
30%
40%
50%
60%70%
80%
90%
100%
Bourbon Vodka Rum Tequila
55+
3554
2134
Source: Simmons Market Research, Impact 2007 Source: Simmons Market Research, Impact 2007
The data below outlines general demographics of Jack Daniels buyers specifically, showing
its share of US bourbon drinkers by characteristic. Most noticeable here is the skew towardshigher income levels, Caucasians, and the 21-24 age group.
More Jack and Coke over here! This means some clear opportunities to increase
penetration in non-core groups namely female consumers, African Americans and
Hispanics. However, given bourbons strong taste profile, expanding into new groups may
require renewed emphasis on mixability as it does not blend as smoothly as vodka or rum.
Unlike these however, the co-branding: Jack and Coke, Jack and Ginger is legendary and
offers an alternative to those eschewing whiskey , rocks or neat. As the chart below
highlights, 45% share of 21-24 year olds favoring Jack Daniels brand over-indexes overall
share.
Whiskey/Bourbon: Skews male,
older
Vodka, Rum, Tequila: Skews
younger, female
Given bourbons strong
acquired taste profile,
expanding into new groups
requires creativity around
mixability - its harder to
swallow for many vs. vodka
or rum.
7/27/2019 Brown-Forman Initiating Coverage
19/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 19
Figure 22: Jack Daniels share of US bourbon drinkers
10%
15%
20%
25%
30%
35%
40%
45%
50%
Source:Simmons Market Research, Impact 2007
7/27/2019 Brown-Forman Initiating Coverage
20/96
28 March 2010 Beverages Brown-Forman
Page 20 Deutsche Bank Securities Inc.
Vodka dominates categorygrowth
The last 10-years have been much kinder to spirits than the 90s. Ability to advertise
more freely, new distribution channels and importantly the rise of RTD brands
(Smirnoff Ice, Jack and Cola) all played a role. Remarkably Jack Daniels has grown
despite not being a vodka the dominant driver of spirits in the last 30 years. Brands
do matter. That said, migration of the portfolio into tequila was not only timely, but
quite vital to long-term growth in our view.
1. White spirits driving 3-4% annual category growth
White spirits growing 4-5%: White goods consist primarily of vodka, tequila, and rum,
which have driven the lions share of growth in spirits for the last several decades. The charts
below illustrate these trends since 2000, showing that the top white goods categories haveout-performed the industry since 2000 while other categories, namely whiskey, have under-
performed.
Whiskey & other specialties flat to +2%: Whiskey in particular has experienced a long-term
maturation process and stabilized into a modest volume growth category. However, the
growth in white spirits has driven this category down from more than 50% share of U.S.
spirits before 1970 to less than 25% for 2010E. White spirits have taken over the category at
over 50% share.
Figure 23: US spirits consumption by volume (2010E) Figure 24: US alcohol consumption CAGR (2000-2010E)
Vodka,
31.4%
Imported
Whiskey,
12.8%Rum,13.0%
Cordials,
11.1%
Domestic
Whiskey,
10.6%
Brandy,5.8%
Tequila,6.2%
Gin,5.6%Other,
3.6%
5.0%4.7%
4.3%
2.7%
1.9%
1.3%
0.4% 0.3%
0.2%
1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Vodka Tequila Rum Tot.
Alcohol
Cordials Brandy Dom.
Whiskey
Imp.
Whiskey
Gin
Source: Impact, DISCUS, Euromonitor, DB estimates, NABCA Source: Impact, DISCUS, DB estimates
Niche growth opportunities for 2010 and beyond: DB expects niche areas to offer some
of the most significant growth opportunities over the next few years. These would include
luxury bourbon and vodka, tequila, new and exotic flavors across a variety of categories. This
should add incremental fuel to volume growth for heavy whiskey players like Brown-Forman.
As noted earlier, the demographic convergence appears to set up quite well for tequila.
White goods consist
primarily of vodka, tequila,
and rum, which have driven
the lions share of growth in
spirits for the last several
decades.
7/27/2019 Brown-Forman Initiating Coverage
21/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 21
2. A slow but stable US growth outlook
Low single digit growth: BF does not maintain specific company-level volume targets, but
in terms of the LT outlook, management expects the US spirits market to sustain modest
volume growth. The company stresses BFs low overall share of US spirits (we estimate 5-
5.5%) leaving room for continued upside, and the long-term premiumization trend in spirits,
which would benefit its higher priced lead brands vs. the overall category.
Niche markets are most compelling: In addition to driving uptake of the lead Jack Daniels
franchise, we also think some of the most significant growth opportunities will come in the
smaller niche growth categories (i.e. luxury bourbon and tequila) and further line extensions.
This should add incremental fuel to volume growth, but the fact is that BF is tied to the
relatively low-growth whiskey category and Jack Daniels already has high penetration. In our
minds this suggests that a low single digit volume growth outlook in the US is
reasonable for our estimates. This assumes per capita consumption in trends remain
stable, BFs brands and marketing relevant and effective, and of course depending on pricing.
Consistency is the critical factor: BF offers entry into stable growth categories and has
some higher-growth niches, but it is important to temper expectations. Against the broaderUS spirits industry, BFs chips are stacked hugely in the whisky category, and to a much
lesser extent, vodka and tequila. Faster growth in the smaller luxury whiskey and tequila
categories are a good supplement, but Finlandia has struggled to top growth of vodka
category, and most of BFs growth is tied to the slower whiskey segment. Therefore while
no reasonable investor will expect high volume growth rates in the US market, in our view
the most important criteria investors will be delivering modest but consistent volumes with
consistent profit growth.
3. Whiskey, leave the bottle
The broad whisky category (including domestic whisky, bourbon and imports like
Scotch/Canadian) is the second largest in the US as a category, behind vodka. If we drill
down further, domestic whiskey including the bourbon category is fourth largest (behind
imported whiskey and rum). It has performed at an essentially flat volume CAGR from 2000
through our 2010 estimate (+0.4%), which is at the low end of the spectrum (i.e. vodka and
tequila +5%).
Losing share to white spirits:
Although volume CAGR has been slightly positive this decade, domestic whiskey has
therefore lost share within spirits over the past decade. In our view long-term favorability of
white spirits like vodka owes to:
1. Drinkability less distinct taste profile and milder vs. bourbon, scotch, etc.
2. Mixability, which easily lends itself to marketing flavored line extensions and
combinations with various mixers.
Forging long-term, sticky connections with consumers:
In contrast whisky and bourbon are a harder initial sell given a much more acquired taste
profile. On the downside this makes initial consumer acceptance more difficult, but on the
upside creates more category/brand loyalty once the initial connection is established.
We believe it also means that bourbons, like Jack Daniels, with a more unique taste and
brand message will be stickier with consumer and can outperform the category.
Against the broader US
spirits industry, BFs chips
are stacked hugely in the
whisky category, and to amuch lesser extent, vodka
and tequila.
7/27/2019 Brown-Forman Initiating Coverage
22/96
28 March 2010 Beverages Brown-Forman
Page 22 Deutsche Bank Securities Inc.
This also means the bourbon category can do a better job at marketing. For instance, the
larger Canadian whisky segment has been able to outgrow bourbon in the US. BF
management specifically sees opportunities to improve marketing around Jack Daniels
mixability, as an alternative to the scotch occasion, and as a shot alternative to tequila.
Figure 25: BF bourbon volume CAGR (2000-2010E)
24%
9% 8%
3%1%
4% 4%
10%
5%
0%
5%
10%
15%
20%
25%
Source: Impact, DISCUS, IRI, DB estimates, NABCA
High end = growth:
Some of the best growth in whisky has been in higher-end bourbons, which BF has
capitalized on, and which have gained share in the category. It is another indication of the
ability to adapt and market successfully. Consider the fact that the core Jack Daniels brand
tracked behind Jim Beam as the #1 US bourbon until 1995, when it overtook the #1 spot. BF
has also enjoyed great success with the high-end brands Gentleman Jack (FY09
volume +20%, nearing 300k cases) and Woodford Reserve, launched in 1987 and 1996respectively. These brands still comprise a small share of the category (luxury brands are a
relatively new category within the past 10-15 years) but provide a source of growth for BF.
Tequila A growth category, expensive is better
Attractive growth characteristics:
In the US, tequila growth is underpinned by expanding awareness, particularly of smoother
high-end products, and growth of the Hispanic population (although estimated 80% of tequila
drinkers are Caucasian). Tequila is also more geographically concentrated than other spirits --
CA comprises 20-25% of tequila sales, with TX the second largest state (highest per capita
consumption in NV, DC, CA). Aside from its attractive leverage to growth of the US Hispanic
population, tequila is also one of the highest priced spirits categories, and drinkers skewslightly higher income than spirits overall, and slightly younger (54% of drinkers are under age
45). This helps explain the category ability to sustain high growth rates at higher price points.
Compelling BF opportunity:
Much of the growth in tequila falls into the super premium and luxury categories, in which BF
is a major participant. BF is the fourth-largest global tequila producer (Euromonitor) based on
its presence in the US/Mexico market, and is positioned well against a growth tailwind in
these markets. BFs acquisition of the Casa Herradura high-end tequila brands in FY07
added a long-term growth outlet to complement the slower growth bourbon category
and Jack Daniels. BF tequila depletions came in at +6% globally in FY09, with constant-
currency sales +6%.
Jack Daniels brand tracked
behind Jim Beam as the #1
US bourbon until 1995,
when it overtook the #1
spot.
Much of the growth in
tequila falls into the super
premium and luxury
categories, in which BF is a
major participant.
7/27/2019 Brown-Forman Initiating Coverage
23/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 23
Figure 26: US tequila market (thous. cases) Figure 27: US tequila CAGR by price tier (2000-07)
3.3%
3.4%
3.5%
3.6%
3.7%
3.8%
3.9%
4.0%
4.1%
4.2%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
Competitorbrands
BFbrands
BFshare
45%
10%
5%2%
1%5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Luxury( +$40) S upe r
premium($25
40)
US Tequila
Mkt
Premium
($1025)
Subpremium
(
7/27/2019 Brown-Forman Initiating Coverage
24/96
28 March 2010 Beverages Brown-Forman
Page 24 Deutsche Bank Securities Inc.
Brands come first within afragmented market
Sprits consumers try a lot, but more than other categories are drawn to badge and
image. Premium brands dominate, but the Top 10 brands represent just 28% share or
just a bit more than Bud and Bud Light total in beer. The Top 100 represent 75-80%
share, but within brand houses more than 50% of share rests within the Top 5, (BF is #6
with a 5% share.) In short, even the giants are not insurmountable, and consumers are
more willing to try new things. This creates opportunity to innovate, but challenges in
rising above the din.
1. Brand equity is the key to success
Brand equity is king in the spirits industry, and the most significant driving factor in brand
equity is taste profile, according to our extensive proprietary research. The fragmented natureof the spirits industry creates intense competition relative to other beverage categories like
soft drinks and beer.
Figure 28: US spirits market share (2009E)
Other,
32%
Diageo,
23%
Bacardi,
9%
Fortune,
9%
Pernod,
7%
Sazerac,
7%
BF,5%
Heaven
Hill,5%STZ,3%
Source: Impact, NABCA, DISCUS,, IRI, Deutsche Bank estimates
Brand leadership is critical to competitive edge
Given the high profitability of successful spirits, it makes for a relatively tough playing field
against a large number of entrants, and highlights the central importance of brand equity.
Despite BFs smaller scale vis--vis the Diageo, Fortune and Pernod, and lack of presence in
some categories, we believe that strong brands in its chosen categories and brand-buildingcapabilities provide competitive advantage and long-term growth potential.
Must-Have, Must-Stock - Jack. Lets be honest, can it really be a fully stocked bar without
Jack Daniels? And can you really say that as readily about any other brand? Brand leadership
is essential to gaining leverage with distributors and retailers, commanding shelf/display
space, and generating marketing buzz. Despite limited portfolio breadth, we believe BF is
well positioned by owning the #1 bourbon brand, Jack Daniels, which has among the
highest channel penetration of any spirits brand, the #3 Canadian whiskey brand in the US,
significant niche brands in Southern Comfort, Finlandia, and a strong tequila growth portfolio.
The fragmented nature of
the spirits industry creates a
competitive environment,
with only about 28% market
share held by the 10 largest
US brands.
Brand leadership is essential
to gaining leverage with
distributors and retailers,
commanding shelf/display
space, and generating
marketing buzz.
7/27/2019 Brown-Forman Initiating Coverage
25/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 25
Figure 29: Top 10 US spirits brands & BF brands (2009E case volume)R ank B rand 2009E case vo l.
1 Smirnoff (Diageo) 10.1
2 Bacardi (Bacardi) 8.6
3 Cpt. M organ (Diageo) 6.1
4 Absolut (Pernod) 4.7
5 Jack Daniel's (BF) 4.6
6 Crown Royal (Diageo) 4.27 Jose Cuervo (Diageo) 3.8
8 E&J (E&J Gallo) 3.7
9 Grey Goose (Bacardi) 3.3
10 Jagermeister (Sid. Frank) 3.1
Canadian M ist (BF) 1.7
Southern Comfort (BF) 1.4
Early Times (BF) 0.6
Finlandia (BF) 0.3
Gentleman Jack (BF) 0.2
El Jimador (BF) 0.2
Pepe Lopez (BF) 0.1
Tuaca (BF) 0.1 Source: Impact, NABCA, IRI, DB estimates
Taste is critical to brand leadership
Our research indicates that taste not image, not price -- is by far the most important
decision driver for consumers in the alcohol category. Jack Daniels carries a certain
successful image among its drinkers, but its differentiated taste profile appears most
important to consumer loyalty, once they try it. If you hitch your wagon to a few horses,
youd better have good horses, and BF does.
Figure 30: DB survey -- Why do you prefer your favorite alcohol brand?
Taste Price Drinkability Image Other
2024 83.7% 30.7% 50.2% 11.2% 2.8%
2530 86.7% 7.6% 45.7% 8.6% 1.9%
Over3087.2% 11.6% 31.4% 5.8% 5.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Deutsche Bank November 2009 survey of 1,010 US consumers
Strong brand with great taste = pricing power & competitive barriers
While the spirits category operates at a higher price point and therefore can be more price
competitive than other categories, brand equity and taste profile can create a competitive
barrier at the brand level.
Much of Jack Daniels success in our view is attributable to (1) consistency of marketing
(driving premium equity and awareness), as well as (2) differentiated taste attributes. Given
that bourbon is an acquired taste (and differs across products to a far greater extent than in
vodka for example), we believe there is a greater propensity for bourbon drinkers to stick to
their brand.
Much of JDs success in our
view is attributable to (1)
consistency of marketing
(driving premium equity and
awareness), as well as (2)
differentiated tasteattributes.
7/27/2019 Brown-Forman Initiating Coverage
26/96
28 March 2010 Beverages Brown-Forman
Page 26 Deutsche Bank Securities Inc.
This also makes the marketing investment and effectiveness critical, and BF has proven
successful at doing so. Marketing the Jack Daniels brand remains the overwhelming focus
of BF management, and by reinforcing it over time, has created high levels of consumer
loyalty, which in turn allows the brand to sustain high price points and profits per case. It also
lends itself to an ability to grow Jack Daniels -brand line extensions (more below). Finally, we
note that this (plus long production times) enhances high barriers to entry.
Figure 31: Leading bourbon brands, price per bottle (4Q09)
$0
$5
$10
$15
$20
$25
$30
$35
$40
Gent.
Jack
Maker's
Mark
Wild
Turkey
Jack
Dan.
Black
SoCo Jim
Beam
Evan
Williams
Early
Times
Old
Crow
Source: IRI
Our prior consumer research indicates taste is by far the dominant decision driver for alcohol
brands, and that cost ranks much lower. Both are favorable factors for JD, which scores high
on taste and among the most popular of any brand. In our 2009 survey of alcohol brand
preference, JD ranked in the top 3 for spirits brands mentions, above its overall #5 spot in USspirits, and close to the top scoring equity brand like Grey Goose.
Figure 32: DB survey What is your favorite alcohol brand?
05
10
15
20
25
30
35
40
GREYGOOSE
COORS/LIGHT
SMIRNOFF
BUD
BUDLIGHT/LIME
JACKDANIELS
ABSOLUT
KETTLEONE
CAPTAINMORGAN
SKYY
CORONA
SAMADAMS
BLUEMOON
HEINEKEN/LIGHT
BACARDI
GUINNESS
MALIBU
MILLER/LITE
JAMESON
JOHNNIEWALKER
JIMBEAM
BELVEDERE
KEYSTONE/LIGHT
MAGICHAT
NEWCASTLE
SVEDKA
MARKERSMARK
NATURALLIGHT
PATRON
SIERRANEVADA
STELLA
YUENGLING
BAREFOOT
BOMBAY
JAGERMEISTER
JOSECUERVO
STOLICHNYA
Source: Deutsche Bank November 2009 survey of 1,010 US consumers
7/27/2019 Brown-Forman Initiating Coverage
27/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 27
2. Category price elasticity in detail
A higher margin business
Spirits offers higher profit margins given higher average unit price points. For instance, BFs
leading position in the premium spirits and above-category pricing strategy drives high
margins/profits per case, supported by a narrower portfolio of strong lead brands, and brand
stickiness/loyalty in bourbon. Our research indicates that price points rank relatively low as a
decision driver for spirits drinkers, allowing BF to thrive and grow with some of the highest
priced brands in the industry.
with greater vulnerability to price competition
Higher prices foster vulnerability to consumer trade down in times of economic difficulty,
illustrated by the promotional skirmishes prevalent throughout the 2009 downturn. This trend
has had a clear negative impact on BFs price/mix gains, even as global volume growth
remained stable through the downturn. Since BF provides no sales decomposition in terms
of price/mix vs. volume, the best proxy we have is IRI retail pricing data. Below we have
broken out retail pricing growth for BFs spirits portfolio in IRI it is an imperfect indicator
since it also captures changes in distributor/retail pricing, but gives us a gauge nonetheless. It
confirms is that pricing power has stayed resilient, but there has been a clear impact from theeconomy, as gains decelerated in 2009.
Figure 33: Avg. price/volume of BF brands (FY09) Figure 34: Retail pricing growth of BF spirits
$0
$10
$20
$30
$40
$50
$60
Herradura
Chambord
Woodford
Gent.Jack
ElJimador
JDBlack
JDGreen
SoCo
Finlandia
PepeLopez
Spiritscategory
CanadianMist
EarlyTimes
0
1
2
3
4
5
6
7
8
04/01/05
07/01/05
10/01/05
01/01/06
04/01/06
07/01/06
10/01/06
01/01/07
04/01/07
07/01/07
10/01/07
01/01/08
04/01/08
07/01/08
10/01/08
01/01/09
04/01/09
07/01/09
10/01/09
01/01/10
Source: IRI Source: IRI
Given the intense competitive field, this makes the longer-term direction of US
pricing/promotion a key issue for investors. While we believe BF boasts excellent pricing
power overall (especially around Jack Daniels), we remain cautious on price/mix forecasts,
for three reasons:
Increased promotion to sustain share. High degree of competition and promotion in
spirits, which has intensified in 2009 as consumer spending slowed and does not appear
to be improving yet.
Industry pricing below CPI historically. It has been mix, not front line pricing that has
improved rev per over the past two decades, as spirits category pricing has had trouble
keeping up with CPI inflation. This in our view is a function of brand fragmentation and
slow consumption growth in the industry.
Our research indicates that
price points rank relatively
low as a decision driver for
spirits drinkers, allowing BFto thrive and grow with
some of the highest priced
brands in the industry.
Spirits is generally
estimated to be at the
higher end of the alcohol
beverage scale in price
elasticity.
7/27/2019 Brown-Forman Initiating Coverage
28/96
28 March 2010 Beverages Brown-Forman
Page 28 Deutsche Bank Securities Inc.
Figure 35: US spirits price/volume growth vs. CPI
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
USCPI%
Spiritsprice%
Spiritsvol.%
Source: Impact, BLS
Price elasticity greater than beer:
Although estimates vary, spirits is generally estimated to be at the higher end of the alcohol
beverage scale in price elasticity. While elasticity it is not as high as in soft drinks for example
(less-easily substitutable product), there still is significant responsiveness to price changes.
This is aggravated by the large number of brands/competitors in the space in our view there
is no rational duopoly here like in beer. Below we show two of the most widely cited price
elasticity estimates from academic research.
Figure 36: Price elasticity (Leung/Phelps
study)
Figure 37: Price elasticity (Nelson study)
(0.3)
(1.0)
(1.5)(1.6)
(1.4)
(1.2)
(1.0)
(0.8)
(0.6)
(0.4)
(0.2)0.0
Beer Wine Spirits
(0.2)
(0.6)
(0.4)
(0.7)
(0.6)
(0.5)
(0.4)
(0.3)
(0.2)
(0.1)0.0
Beer Wine Spirits
Source: S.F. Leung and C.E. Phelps, My Kingdom for a Drink, 1993 Source: J. P. Nelson 1997
BF recently deployed tactical pricing to hold share
The risk of trade down makes price promotion a key tactic to increase brand popularity and
relevance, especially in periods of economic weakness. In 2008 amid the teeth of the
downturn, BF management laid out a strategy for incremental promotion on Jack Daniels(which is promoted frequently off-premise) on a market-by-market basis to address
affordability issues, while avoiding a race to the bottom in pricing.
Short-term: BF will use price promotion as a strategic lever, as we have seen this year, with
global price/mix up only about +0.5% YTD, US retail pricing growth flattening out and
Finlandia repositioned.
Long-term: We are not seeing a change to long-term pricing strategy (with the exception of
Finlandia), and as long as we do not see significant negative pricing, this helps keep the
brands relevant and well positioned for an eventual economic upturn. Management also will
not reposition the lead brands on a price basis simply to generate volume growth
this is crucial in our view to guard against damaging brand equity.
7/27/2019 Brown-Forman Initiating Coverage
29/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 29
Alternative tactics: bundling: Alternatives include couponing on Jack Daniels brand family
(i.e. to offer value but also trade consumers up to Gentleman Jack), and non-price based
tactics like line extensions and repackaging to offer value in other ways.
Figure 38: US spirits volume growth by price tier
(6)
(4)
(2)
0
2
4
6
8
10
12
03/01/05
05/01/05
07/01/05
09/01/05
11/01/05
01/01/06
03/01/06
05/01/06
07/01/06
09/01/06
11/01/06
01/01/07
03/01/07
05/01/07
07/01/07
09/01/07
11/01/07
01/01/08
03/01/08
05/01/08
07/01/08
09/01/08
11/01/08
01/01/09
03/01/09
05/01/09
07/01/09
09/01/09
11/01/09
Under
$10$10$15
$15$20
Over$20
Source: IRI data for Food/Drug/Mass channel
In 2009 category price promotion was a source of pressure, as competitors and distributors
have been more aggressive, particularly around the holiday season. We view it as one of the
key risks to monitor, not only for the impact on profitability but also because it registers as
one of the biggest factors for investor perception of the company. BF management has
spoken plainly about a more aggressive promotional environment this year, and although this
is factored into our estimates, we would like to see some abatement. Although BF isinsulated somewhat by its leading position in bourbon and global growth opportunities,
promotion is a key risk to the extent that the larger players would be willing to use it as a
blunt competitive instrument. In 2009, more promotional pressure derived from size leaders
Diageo/Pernod, and less from smaller competitors. As a smaller player, irrational pricing
would exert proportionately more pressure on BF, although one wonders if cheap vodka or
gin can truly effect whiskey as consumers tend to have varied tastes by occasion.
3. Scale: bigger is not always better
Scale is important to growth, given the need to command attention from US distributors,
retailers, and on-premise bartenders. Scale also leverages the cost of direct sales and
advertising/marketing spend across the portfolio more dollars to put behind the brands.However, bigger does not always mean better.
Small stable, with strong lead horses. Although there are clear advantages to scale, we
believe a small stable of good lead horses can provide a solid backdrop for superior sales and
profit growth. Despite its smaller size vs. global spirits competitors (#6 in the U.S.), BF
appears well positioned based on the following factors:
1. Jack Daniels is a must-have, based on high profitability and #1 position in bourbon
2. Strong brand portfolio, with leading up-and-comers in attractive categories.
Although there are clear
advantages to scale, we
believe a small stable of lead
horses can provide a solid
backdrop for superior sales
and profit growth.
7/27/2019 Brown-Forman Initiating Coverage
30/96
28 March 2010 Beverages Brown-Forman
Page 30 Deutsche Bank Securities Inc.
Structural limitations on scale: The three-tier US distribution system is also something of a
leveling factor for successful brands. Unlike in beer, where a distributor is majority aligned
with a given brand house and puts most of its resources against those brands, the large
spirits distributors typically carry a full product portfolio across categories/brands, and interact
with a wider array of suppliers. These distributors live or die by leveraging sales and margins
against a fixed cost base, which also makes profitability at a brand-level crucial to them.
Therefore a spirits companys sheer size can add leverage to the relationship, but strength ofindividual brands (popularity, growth prospects, profit per case) is most important. This is a
key positive for BF, since a brand like Jack Daniels is must-have in terms of popularity and
profitability.
Alliances & Partnerships: A secondary tactic utilized by BF to improve leverage in the trade
is the sales alliance. In 2008, BF launched alliances with Bacardi and Remy Cointreau in
certain US markets, with a committed sales force across the three brand portfolios, to
increase clout with retailers and on-premise channels. New York was the first alliance
market launched, and in 2009 this partnership was stepped up to include more states. This is
a similar strategy to that deployed by STZ in wines this year: consolidating distributors in an
effort to gain more committed sales representation in the field.
Outside the US (which we discuss further in the International section of this report), BF
employs a mix of owned distribution and partnerships. Partnerships with other spirits
companies allow it to capitalize on their strength and distribution in each local market (i.e.
Campari in Italy). BF management also believes that distribution scale is less of an issue in
many of the overseas markets, given a higher concentration of drinkers in certain of these
geographies (meaning not as much geographic coverage is needed through an owned
distribution system). The downside is obviously reliance on partners and less control over the
selling process (as well as less cost leverage), but we expect increasing investment in
distribution to improve control in key overseas markets as BF gains scale.
7/27/2019 Brown-Forman Initiating Coverage
31/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 31
Alcohol innovation trends
We believe spirits have a fundamental share of stomach opportunity with consumers
as the leaders in beer domestically have seen new product pipelines dry up,
suggesting a dangerous risk to any beer investor or management seeking to primarily
cost-cut ones way to prosperity. Consumers need a reason to use ones product or
else they may just go away. As wines constant product flow is to some degree
systemic (new grapes, varietals, regions, etc), the break-through potential squarely lay
in the hands of spirits and smaller craft beer at present.
Three-year innovation data from Mintel suggests a greater volume of innovation in wine and
among smaller brewers beer compared to a more concentrated and focused innovation
strategy in spirits. Much of the spirits industry innovation has focused on the growth
categories, primarily in white spirits, while whiskey has seen innovation activity in high-end
brands where growth still exists for this category.
The wine industry has introduced the highest number of new innovations compared to othercategories, (538) with beer coming second at 468 and spirits third with 358. Wine also leads
in new product introductions versus packaging or line extensions, while beer has relied more
on packaging and range extensions. Spirits ranks in the middle in terms of proportionate use
of new products, which comprised 60% of all innovation. Here we note the highly
fragmented nature of wine, regular shift in varietals and regions explains some of this.
Figure 39: Alcoholic beverage new products in US since 2007
New Product New Packaging Range Extension TotalSpirits 215 49 94 358Wine 398 71 68 537Beer 233 83 152 468
0200400600800
1,0001,2001,4001,600
Source: Mintel
1. Wine category: Loading up on new brands
Wine has been the most innovative category in the industry over the past three years in
terms of quantity of new product, mostly in the form of new brands. Constellation Brands,
Wine Group, and Gallo lead, each with about a 5% share of new products. Overall, six major
wine companies account for about 20% of all innovation, showing the extreme fragmentation
in the industry. Brown-Formans wine businesses created 1% of industry innovation during
this period, suggesting spirits is rightly the focus.
The wine industry has
introduced the highest
number of new innovations
compared to other
categories, with beer
coming in second, and
spirits third.
7/27/2019 Brown-Forman Initiating Coverage
32/96
28 March 2010 Beverages Brown-Forman
Page 32 Deutsche Bank Securities Inc.
Figure 40: Wine Innovations by Company since 2007
New Product New Packaging Range ExtensionFoster's 1 8 1Altria/UST 2 0 2Brown-Forman 3 1 1E & J Gallo 15 6 3The Wine Group 11 1 7Constellation Brands 13 17 4
01020304050
Source: Mintel
2. Beer: Can you really cost-cut your way to prosperity?
Beer under indexes against its share of the alcohol market in terms of innovation. This
owes in part to high new brand launches in wine, however beer also has innovated
proportionately less than wine/spirits in new product, and been more reliant on repackaging
and line extensions. More ominously, the leading 4 brand houses ABI. MC, Heineken
and Crown delivered just 23% of product innovations despite controlling 80% of
market share. While some of this is due to rapid innovation in craft segment, ABI and Miller
Coors number of new products is far below their share of the beer market. MC in particular
has been heavily reliant on new packaging formats as opposed to new products, while we
see smaller players strongly outpacing in terms of line extensions, such as SAMs successful
line of seasonals. These data highlight spirits clearest opportunity in our view. The zeal withwhich ABI in particular cuts cost has a risky downside: its consumer base will look
elsewhere for new drinks.
Figure 41: Beer innovation by company since 2007
New Product New Packaging Range ExtensionBoston Beer 1 0 10Diageo 0 0 2Constellation Brands 2 6 0Heineken 1 5 1Molson Coors 3 24 19Anheuser-Busch 15 16 19
0102030405060
Source: Mintel
7/27/2019 Brown-Forman Initiating Coverage
33/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 33
3. Spirits - white spirits lead growth
US spirit industry has released an estimated 358 innovations over the past three years. Six
major companies with operations in the US account for just over 50% of volume and about
30% of innovation. Brown-Forman ranks fourth, tied with Fortune Brands, with about 5% of
all innovations in this period. Diageo and Pernod lead, with 7% and 8% respectively, and
have been most active with new products versus repackaging and line extensions.
Figure 42: Spirits innovation by company since 2007
New Product New Packaging Range ExtensionBacardi 3 8 2Pernod R icard 11 7 10Diageo 12 1 11Fortune Brands 5 3 10Constellation Brands 1 1 2Brown-Forman 4 7 6
01020304050
Source: Mintel
The chart below reveals that the vodka category has introduced the largest number of new
products (particularly reformulations, line extensions), reflecting its leading size position in
spirits and consumption growth. Whiskey ranks a distant second, and perhaps most
surprising is the large amount of new tequila products vs. its small share of the category, afunction of more brands and companies chasing growth.
Figure 43: Spirits innovation by type since 2007
New Product New Packaging Range Extension TOTALWhisky 26 13 13 52Vodka 92 17 55 164Tequila 43 3 4 50Others 54 16 22 92
050100150200250300350400
Source: Mintel
The vodka category has
introduced the largest
number of new products
(particularly reformulations,line extensions), reflecting
its leading size position in
spirits and consumption
growth.
7/27/2019 Brown-Forman Initiating Coverage
34/96
28 March 2010 Beverages Brown-Forman
Page 34 Deutsche Bank Securities Inc.
BF Innovation Strategy: Line extensions are BFs innovation brand of choice, and have had
relatively good success based on existing equity of the Jack Daniels brand and bona fides in
bourbon. Increasingly the company is also having success with revamped packaging for
priority brands.
Although this strategy creates some controversy in terms of potential for over-extension or
risk to brand equity, as long as it is disciplined, we regard it as a viable support for growth, forseveral reasons. (1) Strong brand equity and consumer awareness of the lead brands
provides a good platform. (2) Raises awareness of the base brands and creates more
consumer impressions. (3) Success of previous line extensions such as Gentleman Jack and
RTD Jack Daniels cocktails. (4) BF has a track record of introducing new product in limited
form and avoiding over-extension. (5) This strategy avoids the cost of completely new
product launches or M&A to exploit growth opportunities.
7/27/2019 Brown-Forman Initiating Coverage
35/96
28 March 2010 Beverages Brown-Forman
Deutsche Bank Securities Inc. Page 35
3-tier system & regulation
Spirits regulation is a significant factor for the industry. We highlight the regulations
governing the distribution and retailing of alcoholic drinks below. In 19 control states,
state government has a total or partial monopoly on distribution of alcohol, while 31
open states operate in the three-tier system, which regulates production, distribution,
and retailing of alcohol under three independent groups. Federal taxes, and then
varying taxes at the state level can present a significant impediment to growth.
Broadly, taxation and distribution limits present greater challenges for spirits than beer
or wine.
Figure 44: Alcohol Segment availability by channel in 30 most populous states
=permitted =partia l = not permitted
Grocery C-store Liquor Grocery C-store Liquor Grocery C-store LiquorCal iforniaTexasNew YorkFloridaI l l inoisPennsylvaniaOhioMichiganGeorgiaNorth CarolinaNew JerseyVirgini