LVMH: Champagne Hurt but Spirits "Withstood the Storm"

FILED FEBRUARY 1, 2010

Dear Client:

In its fourth quarter and full year results, LVMH Moet Hennessy saw organic revenues decline
-14% for the year and -6% for the fourth quarter for its wine and spirits unit. “2009 was a turbulent year,” said Christophe Navarre, head of LVMH’s wine and spirits unit. “Eighty percent of the drop in revenue was attributable to champagne sales going down, particularly prestige vintages, whereas cognac and spirits withstood the storm.” It was “both consumers changing habits” and “significant destocking of distributors and trade,” particularly in Europe and the US, that took a toll on full year results. He pointed out that champagne always suffers most of all wine and spirits categories when there’s a crisis. The champagne region’s shipments were down -4% in the fourth quarter overall. Christophe said it usually takes about 5 years for the champagne market to recover from a dip like this, but once the market recovers it posts more growth than in the past. Moet Hennessy’s goal is to “shorten the recovery time,” he said.

Hennessy “demonstrated good resilience in 2009” and registered growth in Q4 thanks to “renewed momentum” in the US and China. Christophe noted that Hennessy is doing better than most of its competitors in the US and gained 4 volume market share points in 2009. Glenmorangie had an “encouraging performance” in the US in 2009, while Belvedere maintained “good resilience.” Meanwhile, sparkling wine had “good momentum” in the US.

MH says it will maintain its pricing policy in 2010. When asked about future acquisitions, LVMH chairman Bernard Arnault said the company is focused on organic growth and “prices are still very high.”

FRENCH GROWERS ACCUSED OF SELLING FAKE PINOT NOIR TO GALLO’S RED BICYCLETTE

Thirteen defendants from France’ Languedoc region are accused of selling millions of dollars worth of tainted pinot noir to Gallo for its Red Bicyclette brand, reports Decanter. The defendants include executives from two wineries and five co-operatives, as well as negociant Ducasse and conglomerate Sieur d'Arques. Executives from Sieur d'Arques are the only ones denying the charges. Prosecutor Francis Battut told Decanter that “executives from Sieur d'Arques maintain they were unaware the wine they were selling to their American client was not Pinot Noir, even though one of their own winemakers admitted it. I think they were mocking the court.”

After conducting a year-long investigation, Battut says the defendants “knowingly” cut pinot noir with less-expensive merlot and syrah. He recommended prison sentences and heavy fines to a three-person tribunal in Carcassonne. They will announce their verdict February 17.

French imports have had a hard enough time in the US in recent years, and a case like this will only likely hurt them. There’s a concern that the TTB may require guarantees from the French government, similar to what happened with Brunello in Italy. It remains to be seen...

DIAGEO FINDS WAYS AROUND NETWORK ADVERTISING BANS

It’s true that Diageo and other spirits companies have many roadblocks when it comes to advertising during sports events but the world’s largest distiller has gotten around it by partnering with the Redskins in 2002 and buying advertising on local television stations that don’t prohibit spirits ads. An interesting article from Washington City Paper details Diageo’s sponsorship deal with the Redskins, which allows for signs promoting Diageo brands to be installed at FedExField and for its advertisements to run on local television during Redskins-controlled programming. Former Redskins player Ken Harvey was also named “director of responsibility.” In this position, Ken directs community service projects and promotes Diageo programs such as “Safe Rides” and Fourth and Life.”

Don’t forget Diageo’s other marketing scheme that took place this November, when Eagles tight end Brent Celek struck the “Captain Morgan” pose during a game with the Cowboys. Diageo offered to donate $10,000 to a player’s charity of choice each time they struck the pose on camera. Before the marketing ploy became official, the NFL cancelled it by threatening to fine players. "This was fun for us. But the NFL has longstanding relationships with beer, and they were looking out for their partners' interest," said Diageo spokesman Dan Sanborn.

Despite criticism from alcohol watchdog groups, Dan says “80% of the NFL fans are legal drinking age plus, and more than 50 percent are between 25 and 54 years old.”

WASHINGTON POLICYMAKERS SPEAK ON PRIVATIZATION

You may recall that legislators in Washington are considering privatizing spirits sales to help pay for the $2.6 billion budget deficit. An interesting article by OPB News presents commentary from Democratic Senator Tim Sheldon, who supports the initiative, and Rick Garza, deputy administrative director Washington State Liquor Control Board, who opposes it. Rick points to data that suggests control states do a better job of keeping alcohol away from minors, while Tim scoffs “I think that's an exaggeration of their success. Of course since they're in the business and they tax and they regulate they are going to give you the best story, because it's a monolithic monopoly that wants to always protect itself.”

The fact that Washington spent millions of dollars five years ago on new ABC stores and a new distribution center could hurt privatization plans, not to mention the fact that Washington has started allowing spirits sales at some stores on Sundays. Gov Chris Gregoire is also not interested in privatization because it would take years for the state to see any savings.

DIAGEO REPORTEDLY OFFERED SWISS TAX DEAL TO MOVE HQ

The Swiss canton of Zug has reportedly offered Diageo huge tax breaks if they relocate their British headquarters to Switzerland, Mark Kleinman Skyy News first reported. Authorities in Zug reportedly told Diageo that 200 of its top executives would be exempted from paying personal income taxes. The company would also have the opportunity to negotiate a corporation tax rate of less than 10%, which is better than what Britain currently has. In his blog, Mark said he was “assured” that Diageo “has no plans to accept the Zug offer.”

A Diageo spokesperson said: “As we have said before, we see many advantages to remaining a British domiciled company, but we have also made clear time and again that it is important the Government takes steps to ensure this country remains and develops its position as a competitive place to do business.”

GLENROTHES AND CUTTY SARK SWAP OWNERS

Berry Bros. & Rudd announced plans to sell its Cutty Sark blended Scotch whisky brand to The Edrington Group in exchange for Edrington’s The Glenrothes single malt brand. Edrington will retain ownership of The Glenrothes distillery. Once the transaction is completed, Edrington will acquire all of Cutty Sark’s distribution contracts. Maxxium will continue to distribute The Glenrothes in key international markets and is also expected to provide a distribution option for other BB&R brands. The agreement is expected to be finalized by April 2010. Further financial details were not revealed.

VIRGINIA ABC CONSIDERS ALCOHOL MARK UP

Gov McDonnell is in the process of reviewing former Gov. Timothy M. Kaine's proposed budget for 2010-12 that includes fee increases of more than $150 million. McDonnell won the election on an anti-tax platform, but says he is open to fee increases that are tied to the government service they fund. One fee proposal would be a 2% price markup on alcoholic beverages sold in state-owned liquor stores. The Kaine budget estimated that would raise $4 million in each year of the biennium. This increase can be done administratively without the budget and was supposed to start this week, but the Department of Alcoholic Beverage Control has decided to wait to see how much money might be needed. Virginia currently has a $4 billion deficit.

WSD BRIEFS:

COSTCO NAMES NEW PRESIDENT. Earlier this week Costco named Craig Jelinek president and coo earlier this week, which is viewed as possible succession for chief Jim Sinegal, the 74-year-old co-founder and ceo. The company also created an Office of the President, which includes Craig, Jim, chairman Jeff Brotman and Dick DiCerchio, a senior evp. The four men will coordinate on “major company matters.” A Costco spokesman said there have been “no heir-apparent discussions,” according to WSJ, but there is also speculation that a succession race was set-up between Craig and Dick DiCerchio.

SMALL PRODUCERS SUPPORT SCOTLAND’S MINIMUM PRICING. Small, independent whisky and beer producers are supporting a proposal in Scotland for minimum alcohol pricing. The policy is part of the Scottish Government's Alcohol Bill (introduced in November 2009) and mainly targets cheap alcohol (often private-label) sold at supermarkets. The Alcohol Bill would also ban promotions that encourage binge drinking; encourage retailers to only sell alcohol to 21-year-old adults and older; and introduce a “social responsibility” fee on some retailers.

THE BRITISH HIGH COURT ruled that Intercontinental Brands can continue using the Vodkat name provided it’s made clear that the product is not vodka. Recall that Diageo won a case against Vodkat last month, alleging it misled consumers into thinking it was vodka when in fact it’s only a vodka-based drink. In the European Union, vodka must be made of 100% distilled alcohol and at least 37.5% abv. In a statement, ICB direct Paul Burton said: “ICB will be asking the trade and all its customers to position Vodkat away from vodka, and alongside products such as liqueurs, other schnapps and light spirit products. This process has already started.”

RESTAURANT CLOSURES IMPROVE. The number of US restaurants fell -0.3%, or 1,652 restaurants, to 578,353 locations in the fall of 2009 compared to the prior year, according to The NPD Group's ReCount data. The bright side, though, is that the rate of closures has improved from last spring when they dropped -1%, or 4,000 restaurants.

SEVERAL HUNDRED SOUTH AUSTRALIAN VINEYARDS are ripping up vines in reaction to the country’s on-going over-supply problem. According to the Bureau of Statistics, about 360 growers ripped up an estimated 1,250 hectares of vines since the 2008 harvest. Most grapes were lost in the Lower Murray region, followed by Barossa Valley and Mounty Lofty regions.

WAL-MART says it’s laying-off 300 workers in corporate affairs, finance, human resources, information systems and legal departments at its Arkansas headquarters. The company has cut almost 14,000 jobs in the past 13 months. The lay-offs are in effort to improve efficiency and performance as even Wal-Mart has struggled in the recession. Although it’s benefited from wealthier consumers trading down, Wal-Mart’s core consumers are also spending less and trading down.

BACARDI USA MOVES TO NEW HQ. Bacardi USA today inaugurated its new headquarters in Coral Gables, Fla. The fifteen-story, Mediterranean-styled building houses more than 300 employees of the Bacardi Americas region who were “spread throughout seven different buildings” in the past, said chief John Esposito. The company said it will be seeking certification from the U.S. Green Building Council's 'Leadership in Energy and Environmental Design' (LEED) for the design of its environmentally friendly interiors.

THE INDIANA SENATE version of a controversial bill died yesterday. The bill proposed a limited exemption to the ban on beer and spirits being sold in the same wholesaler house, and also would have provided "equity protection" for wholesalers. The house version was killed last week, so it looks like the bill is effectively dead for the year. To view our past coverage, click here.

A NEW JERSEY DIRECT SHIPPING PUBLIC HEARING is being held today by the Senate Law and Public Safety Committee. Senate Bill 766, based on the model direct shipping bill, which would allow consumers to order direct shipments from wineries. Currently in-state and out-of-state wineries are banned from shipping directly to residents.

MORTON’S RESTAURANT GROUP has named Christopher Artinian president and ceo, replacing Thomas Baldwin, who resigned. Chris most recently served as vp of Eastern operations.

SOUTHERN WINE & SPIRITS has appointed Mary Barranco to the position of national director of training. This newly-created position will become effective March 1. Mary will report to Andrew Harman, vp of organizational development.

DIAGEO’S CIROC VODKA is launching its first flavor extensions, “Red Berry” and “Coconut,” available nationally beginning February 1.

COSTCO’S January same-store sales rose 8%, the company said today.


Until tomorrow, Megan

“To invent, you need a good imagination and a pile of junk.”
Thomas A. Edison

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