CEO Paul Varga revealed the news about Fire as Brown-Forman reported its Q2 results for fiscal year 2015 ending October 31 – net sales grew 1.5% to $1.135bn on a reported basis; reported operating income fell 3% to $303m due to negative foreign exchange movements.
Announcing the Stateside launch of Fire – it debuted in Oregon, Pennsylvania and Tennessee in April, and reached another five US markets in October – Varga said it would help the company “seize one of the largest and fastest-growing opportunities in flavored whiskeys with a premium, cinnamon-flavor whiskey under the Jack Daniel’s trademark.”
'Conservative approach' to line extensions has been our strength - Paul Varga
Due to the time needed to gain distribution and build momentum with consumers – Fire will rollout nationwide later this fiscal year – Varga played down the impact of Fire on net sales and operating income growth in the firm’s FY 2015.
Comparing Fire to first JD flavour extension Tennessee Honey, the wildly successful March 2011 launch, Varga said a “conservative approach” was vital to safeguard the Jack Daniel’s trademark.
ANALYST INSIGHT: "Despite larger than expected [currency] f/x headwinds, we remain optimistic on Brown-Forman's ability to grow considering the long runway in overseas markets, as well as solid results reported in the US. We are encouraged by management's comments regarding testing results for Fire and expect the line extension to be a successful addition to their portfolio." (Vivien Azer, Cowen And Company)
Tennessee Honey now sells in excess of 1m cases each year, he revealed, at circa. $25 per bottle – and is growing in excess of 30% at this, the start of its fourth year in the United States.
“So part of this is to not to have these things be flash in the pan, and to make sure they are nice and enduring profitable growth brands at Brown-Forman’s,” he said.
“And so, Number 1, we just think we want to make sure we keep our eye on that, because the statistics I’ve just cited there, those three things are very unusual – to have brands of that size, at that price point, at that growth rate,” Varga said.
Whereas Brown-Forman went to an immediate nationwide launch in the US with Tennessee Honey, Varga said the company was being with cautious with Fire, “it being the second line extension in the flavored area, in a sort amount of time”.
Taking on cinnamon market leader Sazerac's Fireball
Varga said Fire would be positioned as a more premium product than current cinnamon whisky “market leader” (Sazerac's Fireball – a lower priced spirit with a significant millennial following in US bars) he said Fire could take volume from it, but that there was also room for a new entrant.
Premiumness, quality, authenticity and masculinity were all cues where Fire scored well against its rivals, Varga added – although he admitted that a higher price could be an “inhibitor for some”.
“Just remember, the other thing – the results of Tennessee Fire in its test markets have been as strong or stronger than what we would have seen from Honey in the early days. And what really heartens us is that we really have had no media support behind it to speak of,” he added.
Tough trading background for spirits remains
Reflecting on H1 results in line with expectations, Varga said the world trading backdrop for the spirits industry remained tough, but that the underlying trends remained favorable for Brown-Forman as it approached the vital holiday sales season.
In addition to net sales up 39% on a reported basis for Honey, another plus point for the company was accelerating sales of core brand Jack Daniels ‘Black Label’, which Varga attributed to improved relative pricing (as competitors have taken price, closing the gap with JD this year).
Improved ‘consumer posture’ was another vital factor, Varga said, with lower fuel prices unlocking more discretionary income and encouraging occasional drinkers of JD to trade up more frequently.
“And I would add to that – entering FY15 we consciously mobilized our US sales and marketing teams with a renewed focus on the Jack Daniel’s Black Label brand,” he said.
“In some ways I would call it asserting our category leadership – just making sure we weren’t taking for granted the fact that Brown-Forman was the leader of the American whiskey in the United States, at a time when it was booming,” Varga added.