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 BrownForman 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
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is called, Beverages Wineries and Distilleries (BF-B).

However, after surfing around on Mergent online for
financial information it seems that they classify BrownForman 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
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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
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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 BrownFormans 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
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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
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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
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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
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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
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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).
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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 longterm 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
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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. BrownForman 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
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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
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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 BrownForman 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
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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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