Ben Lowe

Strategic Management

10/13/10

Brown-Forman Case Study

The Brown-Forman Company likes to refer to itself as a diversified producer of fine quality consumer products (Our Company). In reality this description could not be any more appropriate based on the companies heritage. The Brown-Forman Company was born in 1870 when George Garvin Brown decided that there was a strong need for medically appropriate whisky. Brown filled this need with the first bottled bourbon that he called, Old Forester Kentucky Straight Bourbon Whisky. Today, the Brown-Forman Company produces more than 25 different brands and employs over 4,000 people worldwide. The global expansion has taken their brands into 135 countries and has transformed the company into a leader in their industry (Our Company). The purpose of this case study is to take a quick look into the Brown-Forman Company and provide suggestions based on the information gathered.

The first section of the case will be the analysis of Brown-Formans industry and competitors. After a bit of research, the industry is referred to by a few different names. According to Yahoo Finance the competitive industry is called, Beverages Wineries and Distilleries (BF-B). However, after surfing around on Mergent online for financial information it seems that they classify Brown-Forman as in the industry of, wines, brandy, and brandy spirits (Highlights). Either way, it does not make a huge difference what the industry is called. The important fact is that they manufacture and distribute alcoholic beverages or spirits if you prefer. In all reality, their 25 different products make them a provider of alcohol in a variety of industries not just one.

According to the stock market, Brown-Forman is considered second in the industry behind the industry leader Diageo plc. Diageo is the industry leader in many categories including market capitalization, return on equity, and dividend yield (Brown-Forman (BFB)). The corporation is based in London and operates primarily in Europe and North America (Datamonitor 2010). Just with these facts alone Brown-Forman should consider Diageo the industry for-runner and the main focus of competitive action. The sale of the similar products in primarily the same region makes this a competition that will always be knocking on Brown-Formans door.

The next two competitors are relatively small in size compared to Brown-Forman and Diageo but still a source of concern for the two leaders. The third spot in the industry goes to Constellation Brands Inc. which is based in Victor, New York. Another U.S. based company; Constellation actually recorded higher revenues in 2009 than did Brown-Forman. However, the 500 million dollar difference in revenues did not compare to Brown-Formans lead in operating profit. Constellation Brands may employ more workers and bring in higher revenues but Brown-Forman had nearly 30 times as much operating profit (Datamonitor). Obviously, Constellation has much higher over head and operating costs which may hurt them in the future.

The final competitor that we will discuss takes the fourth spot in the industry with a market capitalization of 1.70 billion (Brown-Forman (BEB)). Central European Distribution Corporation operates in many countries including: Poland, Russia, Hungary, and the United States (Datamonitor-CED). Once again, they like many others have stationed their headquarters in the United States. Centrals financial records show an improvement over Constellation but are still no where near the two market leaders. Now that we know a bit about the industry and the competition lets focus in on Brown-Forman.

The next step in analyzing Brown-Forman is to conduct a SWOT analysis. The first and most obvious place to start is with the companies strengths. The one strength that stuck out before even conducting any research was the brand selection that they boast. Yes, their strongest brand is Jack Daniels but they also have many brands that are famous the world over. For instance, Canadian Mist and Early Times are established brands with a following of consumers and are two of the leading global brands (Datamonitor 2010). Also, their Finlandia Vodka has grown in the double digits over the past five years. In most cases, their brands are growing in popularity each and every year. When you have a great product it makes the running of a business a lot smoother.

The next piece of the analysis is to look at Brown-Formans weaknesses. Even the strongest of global companies have room for improvement. The most important weakness that datamonitor pointed out is, Lack of presence in Asia restricts future growth prospects (2010). This seems to be a trend in almost all of the competitors that we discussed earlier. There is a serious wealth of opportunity in Asia that these companies need to capitalize. The Chinese economy is booming and is expected to grow even large, The Chinese economy is expected to grow at an annual rate of 8%

during the period 201011 (Datamonitor 2010). Along with the economic growth, will be the growth of the consumption of alcoholic products.

One of the most important pieces of a SWOT analysis is the opportunity section. These opportunities are doors that the company can open to reveal huge profit potential and growth. The most significant opportunity that has been on the rise for a few years is the growing wine market. There has been an increased demand for wine in the United States and we have officially become the largest wine consumers in the world. Another positive for Brown-Forman is that, The average US retail price for a bottle of wine is more than twice as expensive as the typical bottle sold in France, and more than three times the average in Italy (Datamonitor 2009). This change in the American society is going to be a huge money maker if Brown-Forman can capitalize. In their current spot they should be able to increase profits dramatically in the wine sector.

The most important piece of SWOT that all companies have to keep in mind is the threats that are external. One of the most prominent threats to the company is the rising labor costs in the United States. A positive family tradition is now hurting their profit margin. Over the past few years the minimum wage requirement has gone from under $6.00 to now over $7.00. Employing over 4,000 workers in which 80% are full time is really going to make a large dent in the budget. (Datamonitor 2010) As the cost of living tends to increase so will the minimum wage. Eventually, Brown-Forman will be faced with the same problem of moving operations outside the borders to cut costs.

A separate and distinct part of this case study is to identify the five competitive forces that are associated with the industry. Porters first force is the intensity of rivalry in a particular industry. In Brown-Formans case the rivalry is always going to be very intense. In a discussion with the CEO Phoebe Wood she explains, To give you a sense of the size of the US spirits business, it is about a 164 million case market (Company Interview). In an industry of this size and magnitude there is going to be a rivalry over who will take the relative market share. Not only was the market this big in 2005 but it continues to grow every year. When this interview was done the past two years had seen a 3% growth, which is unheard of. Every winery and distiller in the industry is fighting for a piece of that 164 million. If rivalry had to be rated on a continuum it would be nearly at the end of high.

The second and also very important force is the availability and ease of substitutes. Once again, this force is extremely high in this industry. A college student knows very well that there is always a cheaper alcohol. It may not have the same taste and quality but it all has the same effect. Just walk into a liquor store today and there will be twenty different varieties of the same bourbon or vodka. Luckily, Brown-Forman has a variety of different brands so they have a good chance of being one of those substitutes. On a continuum the availability of substitutes would be at the highest point possible.

The third force goes in a completely different direction on the continuum scale. Every company is afraid of the threat of new entrants to the industry. This is a normal activity that will occur in many industries. However, in the industry that Brown-Forman participates in this is not a large concern. All of the competitors of Brown-Forman are multi-billion dollar companies that were started decades ago. Lets give a little refresher, the current Chairman of the Board is, Geo. Garvin Brown IV, a descendant of the founder, is part of the 5th generation of Brown Family members engaged with the company (Our Company). In order to have a fifth generation family member as a leader in you compnay you couldnt have started up last year. The business has been around for more than 140 years. In an industry with compoanies like that a new enetrant is not a threat. The continuum would put new entrants near the lowest end.

Now come the two forces that deal with bargaining power. Bargaining power of customers can sometimes be a huge factor in small businesses. In the alcoholic beverage industry this is not so much of a concern. Actually many times public pressure will keep the prices of certain staple products down. This has been an issue in gorcery stores over the poast few years. On the other hand, alcohol continues to grow with inflation despite pressure. You can see this fact in Exhibit 68 from European Beverages: Cheap Booze (2009).

The continued inflation shows that even with poressure the customer does not have a lot of bragaining power. Even If the prices are too high they will continue to purchase alcohol. On a continuum the nargaining power of customer would be somewhere in the middle betwee medium and low.

The final of Porters five forces is the bargaining power of suppliers. Depending on the size of the compnay and its suppliers the bargaining power can change drastically. Just from the information that has been obtained so far it seems that Brown-Formans suppliers most likely do not have a large amount of bargaining power. Due to the fact that they have been in business for so long Brown-Forman would have contracts with all of their suppliers. When you have done business with one supplier for long enough the agreed upon price becomes standard. Even price changes would not be a big deal because these suppliers do not want to lose the Brown-Forman contract. On a continuum it would rank between low and medium-low, depending on the size and longevity of the relationship between manufacturer and supplier.

When conducting a case analysis there are many things that consultants can use to break down a company. One of those most effective ways of developing a companies true identity is to identify their core and distinctive competencies. Brown-Forman has one thing that they do very well inside their company, this is their core competency. The competency that really stands out with Brown-Forman is their ability to acquire new brands. Most of the twenty five brands that they boast today have been acquired through buyouts. A great example is the acqusition of Finlandia Vodka. One of their most popular sellers today Brown-Forman became the sole importer in 1996, this move gave them an opportunity to expand in the growing U.S. vodka market (Our Company). A great overall staement of this fact was made by Don Berg the CFO at a food and retail conference, We have strong corporate values, and we have a portfolio of world class brands, that for the most part has been added through acquisitions over the long run -- Jack Daniel's in 1956, Southern Comfort in 1979, Finlandia in 2000, Chambord and our tequilas in 2006 and 2007 (Deutsche Bank Global). Continued growth and expansion into already exsisting products has allowed them to maximize profits without assuming an immense amount of risk.

The distinctive competency of Brown-Formn is what sets themselves apart from the competition. The competency that they have developed is that of a tight knit well organized company. As was stated earlier the Brown family is still involved after five generations and they have one of lowest number of empolyees compared to their competition. The lowest number in comparison is over two thousand more than Brown-Forman. The only possible way that this can happen is if they hire the perfect people for their positions and they are extremely organized. A competency like this is hard to show on paper but when a company is running so well with such low numbers it is obvious. Another statement by Don Berg gives some insight on this subject as well, We believe that through the family ownership, it provides us a long-term view that you don't see in many other companies, and we believe there's a strategic advantage in that long-term view (Deutsche Bank Global). The long-term view has carried them for one hundred and forty years and will continue for many more.

Arguably one of the most important parts of analyzing a company is to prepare a financial analysis. Brown-Formans financial statements are defined by thousands of numbers. However, there are a few keys numbers that one can look at when deciding how well a company is doing. The first number that stands out is their net income. As of 4/30/2010 they have a net income of 449 million dollars this is an immense number to even think about. It makes it a little easier if you compare it to their total revenues. As of the same date they brought in 2.47 billion dollars in revenue. These numbers mean that 18% of all revenue that comes into the company is going to make it through to net income. This is an amazing percentage, especially for the products they are selling. Many of the products will sit on the shelves for a few weeks before they are sold. (All information retrieved from Mergent Online)

Another number that stood out and also fits in with our discussion earlier is the net income per employee. Brown-Forman is making over $115,000 per employee; of course, they arent all getting paid that much but that is why they have been so successful. In order to make serious profits a company must keep their fixed expenses low, wages are one of these expenses. The most basic of evaluations can be made, lower number of employees = less salary expense.

There are two ratios that are very important when looking at companies financial statements. The ROA or return on assets is the net income divided by the total assets. Brown-Forman has an ROA of 13.27% which is above any ROA that would be considered normal in most industries. If a company has anything close to 10% it would be outstanding. Also, they have an even higher ROI which is return on investment. A simple way to explain this is ROI is the return that you get for each dollar invested. Brown-Forman recorded an ROI of 26.25% which is once again an amazing achievement.

The financial analysis as a whole shows that not only has Brown-Forman been successful they have numbers that would blow most companies out of the water. The only way that they could be beat is on higher revenue numbers or something of that nature. It has already been determined that they are not the industry leader but it could be said that they are one of the most efficient of the financial side. Any investor would be crazy not to invest in this company with a reputation like theirs.

Now comes the section of the case study where suggestions need to be made. As an outsider there were two suggestions that could be used to increase profits and efficiency. The first and most blatant is the lack of importance that has been placed on the Asian market. China in particular is growing like wild fire and the absence from the market will be a missed opportunity. Even if there are just a few brands that could be implemented into the market there would be no harm in testing the market. Yes, there may be additional costs. However, the increased profits should make up for these costs two fold. Pick a few of the key brands like Jack Daniels and Southern Comfort and see how the Chinese culture responds to whisky.

The second suggestion will help more in sales than anything. One thing that was apparent is the current lack of advertising. Most of the brands that are owned by Brown-Forman are not properly advertised. Sure, Jack Daniels is a normal occurrence but what about the smaller brands that are not as popular and well known. Expansion of these acquisitions can not be achieved without the proper attention paid to each and every product. A huge problem with owning so much is that some products slip through the cracks. If not currently in place, there needs to be special groups assigned to each individual product and work exclusively on advertising and public image. The prohibition has passed its about time Brown-Forman starts making themselves a household name.

The Brown-Forman Corporation is one of values and distinctive products. George Garvin Brown began the company in the hope to help the medical field and now they have reached the world through spirits. Great leadership and determination has brought the Brown-Forman Corporation to the top of their industry. The world is ever changing but the grounded companies are those that stand the test of time.

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