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Philip Bowman of Allied Domecq: Improved spirits

CEO Bowman's restructuring of the U.K. beverages group left some strange mixes -- cognac and doughnuts anyone? -- but along with a revival in "brown spirits," it quadrupled profits.

Rapper Busta Rhymes's 2002 hip-hop hit, "Pass the Courvoisier," improbably hastened an ambitious brand makeover for Napoleon's favorite cognac. Allied Domecq, the food and beverage group that owns the Courvoisier label, had been worried that the French brandy was being consumed mostly by a shrinking pool of older drinkers; the Bristol, U.K.­based company was eager to position it to be more appealing to a younger, hipper crowd. The American rapper's unsolicited endorsement helped spark a 15 percent jump in sales.

"Busta Rhymes certainly did us no harm," acknowledges Philip Bowman, Allied Domecq's chief executive officer. Nonetheless, Courvoisier's sales rose a much more modest 1 percent in 2003, so this March Allied Domecq signed up hip-hop personality Fonzworth Bentley to promote the spirit.

Since becoming CEO in August 1999, Bowman has used any means at his disposal to shake up Allied Domecq, whose earnings had lost their fizz. The 51-year-old Australian, who had been CFO of Down Under department store chain Coles Meyer, recalls that when he took over, Allied Domecq's then-chairman, Sir Christopher Hogg, who is now nonexecutive chairman of GlaxoSmithKline and Reuters Group, offered him "a few great truths." One was that so-called brown spirits -- basically, any liquor other than vodka or gin -- were dead.

"Bad luck," says Bowman. "The portfolio I was inheriting was almost all brown spirits." These included Ballantine's scotch, Canadian Club whisky and coconut-flavored, rum-based Malibu. But the new CEO, who had worked at U.K. ale maker Bass from 1985 to 1995, didn't buy Hogg's wisdom.

Bowman made several divestitures -- the biggest was the £2.75 billion ($4.4 billion) sale of Allied's pubs and restaurants business to Punch Taverns Group in 1999 -- and refocused Allied Domecq on wines (including California's Clos du Bois, New Zealand's Montana and France's Mumm Champagne) and quick-service restaurants (Baskin-Robbins, Dunkin' Donuts and Togo's). But he didn't toss out the brown spirits.

Allied Domecq still runs a distant second to London-based spirits giant Diageo in sales and earnings, but its performance under Bowman has improved significantly. The company's net income for its fiscal 2004 first half, ended in February, was £184 million -- more than twice what Allied Domecq made in all of fiscal 1999, Bowman's initial year. The company's share price hit a five-year peak of £4.80 in mid-April before falling to £4.66 in mid-June.

Plenty of challenges remain for Bowman. Besides marketing brown spirits to a new generation, he must cope with a slowdown in revenue growth, from 16 percent in 2002 to 2 percent in 2003 to 1 percent in the most recent half-year. The CEO recently discussed Allied Domecq with Institutional Investor Assistant Managing Editor Jeffrey Kutler.

Institutional Investor: Why did you take on this challenge?

Bowman: Allied was pretty down on its luck. Some people said I was completely lunatic taking the job. I looked at it differently: There was only one way it could go -- it couldn't get any worse.

Do you ever have second thoughts?

At my first stockholder meeting [August 23, 1999], I began to wonder what I had gotten myself into. Our reputation in the U.K. media and markets was appalling, and we weren't really known in the U.S. at all. At that stage we had a number of curious businesses -- 4,500 pubs and restaurants in the U.K., a bread baking business in Spain and property assets left over from previous acquisitions and divestitures. In 1999 and early 2000 we had a period of cleanup, disposing of those.

Why keep the fast-food operations?

We took the view that we could run the quick-service restaurants a lot better than they had previously been run. We've proved that since; the business has grown dramatically in scale and profit.

How does wine fit in?

The company had been in wine for many years, but it was almost as if it were a guilty secret. There was no mention of wine in annual reports, even though it made up 10 percent of net earnings. We were subscale and faced the classic dilemma: Double the business or quit. The board decided to expand because at that time demand for distilled spirits in most developed markets was flat or declining, while wine had been growing in low double digits for nearly ten years. We spent north of £1.5 billion adding businesses in New Zealand (Montana Wines), Argentina (Graffigna), Spain (Bodegas y Bebidas) and California (Buena Vista). We've grown wine profits over the past two years -- without any more acquisitions -- by more than 30 percent.

What about the spirits business?

It wasn't performing well, either, and the portfolio was heavily biased toward brown spirits. When we made a fresh start in August 1999 -- the company had to be reorganized and relisted on the London Stock Exchange [to make the payment to stockholders from the disposal of the pubs and restaurants tax-free] -- we set out to fill two voids: an international vodka brand and a decent rum brand. Over the next two and a half years we did a deal that gave us rights to Stolichnaya in the U.S. and several other countries. And, as a result of the breakup of Seagram Co., we acquired Malibu -- to the dismay of Diageo, which ended up with most of the other Seagram brands.

How do you match up against Diageo -- a much bigger company?

It's very much a brand-versus-brand competition. Take Spain, where we and Diageo are strong. The battle is between Ballantine's and J&B. We compete fiercely in price, in support to the brand and support to the trade. In that kind of market, where the consumer calls for a product by name, the brand is key, and we invest in that. Our strategy over four years has been to strengthen the portfolio and to address the significant underinvestment in the brands during the 1990s. We've significantly upped the money spent on advertising and promotion and targeted it better. I inherited relationships with more than 130 advertising agencies. By rationalizing that we've moved £20 million to £30 million a year that we used to pay in fees into promotional efforts that really reach the consumer.

You're U.K.-listed but also trade in New York -- has that altered your approach to investor relations?

For our wine business, we went out very publicly with [financial] milestones -- contrary to the usual course of U.K. companies, which don't tend to give earnings guidance. That was two years ago, when we felt we had to educate sell-side analysts who knew very little about wine because there were no listed wine companies in the U.K. We've been in line with or slightly ahead of those targets, but I believe the regular practice of less-specific guidance is quite healthy. You can get too tied down: It's very hard to make long-term decisions when you're trying to hit earnings targets every quarter.

Have investors' attitudes changed along with the regulatory climate?

There is a complete difference, in culture and methodology, between U.S. and U.K. institutional investors. In the U.K. there is only one other listed spirits company, Diageo, which is three times our size. A U.K. fund manager's investment philosophy goes something like this: "If we believe Diageo is worth this much on this sort of rating, then because Allied Domecq is smaller, it should be at a discount." You can only argue over how much. It's what I call the relative valuation school. Carry that to its logical conclusion. If Diageo has a terrible set of results that relate purely to its circumstances and its stock price tanks, Allied's will tank in sympathy, which doesn't make a lot of sense. In the U.S. the people in most institutional meetings are much better briefed on the industry.

To what extent do you have to pay attention to the U.S. Sarbanes-Oxley Act?

We do because we are listed in New York -- ironically, since the day before the law took effect. But we have ever-increasing compliance burdens being imposed in the U.K. Those are being added to by the compliance burdens coming out of the European Union. And of course the EU is adopting new accounting standards, so for a period of time we'll be reporting in U.K. GAAP, EU (or international) GAAP and U.S. GAAP. So we are looking at an enormous amount of time and effort and cost. If you stand back and you look at it with a critical eye, you have to ask what are the benefits. As one finds with most forms of regulation, it doesn't stop people who are determined to do something wrong, but it catches everybody else in the slipstream, with all the associated costs. Maybe the pendulum has swung a bit far.

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