Position Statement

The Brown-Forman Corporation (BFC) has realized the necessity of segmentation between some of their brands of wine, however they have poorly executed any implementation of this realization. By dividing functions that could achieve strong synergies they have increased costs and caused duplication of effort. By not dividing their brands into proper segments they have not derived the greatest benefit from the flexibility that division of their brands can provide.

My recommendation is that BFC fold the wines currently being managed by Brown-Foreman's Wine Estates (WE) division back into the main Wine Division (WD). With all brands back under the same umbrella BFC can centralize tasks that are standard across all brands, and further decentralize tasks that can be best managed brand to brand. BFC needs to try to achieve the benefits of both a large streamlined company, while still getting the benefits of a smaller company. Breaking the company up the way it currently is hurts the company by causing duplication of effort and expense, and leads to underutilization of the expertise of top-level management.

Duplication of Effort and Expense

Running two separate entities requires that many tasks be done twice that result in higher costs. This is clearly illustrated in case exhibit 12, where WD and WE are already unnecessarily duplicating the functions of at least three departments (sales, finance, and pr/marketing).  Combining these functions could save money and allow the best managers within the two groups to be placed at the head of their divisions.

Sales Underoptimization

Off premises sales make up 78% of total sales volume in the wine industry, and has been the major focus of BFC's efforts. WD has built strong sales relationships with distributors through their Fetzer brand, which has benefited their other brands greatly. There is also a strong on-premises sales competency in WE that they acquired with the purchase of Sonor-Cutrer giving BFC a good opportunity to get the rest of their wines into restaurants, opening an additional 22% of the wine market. The combination of the competencies of the two sales units would give BFC a large amount of market influence and power.

Despite the fact that almost a quarter of wine sales happen on-premises none of BFC's top five wines, making up over 86% of it's portfolio, are effectively leveraging this market. Currently wine sales account for just less than 40% of BFC's $2.18 billion annual sales, or around $872 million. Even a 5% increase of on-premises sales would increase revenues $9.6 million.

Marketing Overlap

The major concern with marketing arises from the issue that if all wines in the BFC portfolio are marketed in the same way then the brands will begin to look more and more alike and this will lead to cannibalization of their own brands. While this is a valid concern, each brand marketing their own wines separately gives rise to the same issue (See Exhibit 2). What will add the most value to the corporation as a whole is a sophisticated and targeted marketing plan that will allow the various brands to cover the spectrum of the market, minimizing overlap.

Spreading out the brands to cover a broader spectrum of the market will prevent market cannibalization, which is important when 1% of the total market is worth $150 million. Putting that another way if WE introduced a brand that took away even 1% of Fetzer's sales it would cost the company as a whole  $3.14 million in sales. With the stakes so high it is easy to see why there is a preference to take market share away from competitors as opposed to their own brands.

Management has made an assumption that the only way (or at least the best way) to preserve separate brand identity and value perception is through the complete segregation of brands into essentially separate companies. Implicit in this is the assumption that the value created would be greater than any additional costs that would be incurred. I have to disagree with this assumption. An active and aware marketing department that will have a holistic view of the company and its brands can effectively segregate brands and maintain their value, delivering maximum return to BFC while minimizing costs.

Management Deficiencies

Combining the forces of WD and WE will allow the top specialized managers within BFC to steer the departments. As it currently is there are few high-level specialized managers at WE, and rather Steven Dorfman is the sole clear head of the organization effectively having control of things like finance, which he holds no special knowledge of.

A company as large as BFC needs the best mangers to make it successful. Spreading its talent over two groups is an underutilization of company resources. When BFC brings WD and WE back together they need to carefully evaluate who is the best and brightest of their current managers, who is an up-and-comer and should be groomed to lead the company in the future, and who is expendable and should have their position eliminated.

Economy of Scale

There is a clear economy of scale that can be created by BFC if it merges WD and WE through increased market power both with their suppliers (of glass, grapes, etc.) and buyers. They can also reap further efficiencies through access to larger financing options. This economy of scale opportunity can be taken even further by continued acquisitions of other vineyards and wineries. BFC should even consider (with its larger size) acquiring some companies that give it value added services like a wine bottle manufacturer.

This advantage that can be gained is apparent from the consolidation trend in the market with larger firms buying smaller companies and growing the company portfolio. BFC thinking it was a good idea to buck that trend and effectively divest a piece of its core business to itself is illogical, when the advantages it sought were attainable by far less drastic means.

Protecting Brands

As important as it is to save the company money and better utilize resources by centralizing some activities, it is equally important that the identity and unique characteristics of each brand be preserved. For this reason there are some activities that should be (or should continue to be) decentralized. For example even if a brand is pursuing a focused low-cost strategy (which is a corporate level marketing decision) then it is important the winery still produce a product of comparable quality to other products in the same segment, just at a better price. Both the quality of the wine, and how efficiently it is produced, are essentially up to the individual wineries.

In an industry like this there are very small switching costs for buyers (some information gathering and risk) so it is important to deliver a product as good as, or better than, what a consumer would expect for a particular price segment. After a consumer has developed a palate for a particular brand of wine their brand loyalty may increase and thus their propensity to switch will go down. As consumers continue to trade up from just wines to premium brands it is a good opportunity to capture them with a superior lower end product, with a goal of turning them into loyal customers.

Investment In Non-Value-Adding Activities

BFC needs to make a decision. Are they a sprits and wine company, or are they a consumer durables company? The two make very little sense together. There is no apparent synergy between the two units, and more value could be added to BFC by divesting their consumer durables segments and putting that money towards related industries.

Many companies make the assumption that diversifying an organization means engaging in business unrelated to the core industry, and BFC seems to have the same understanding. It is up to shareholders to diversify in the market where they see fit by owning multiple companies in different segments, while individual organizations should only 'diversify' when they can use one of their competencies to add value to that line of business. Usually this is best done through vertical integration, or horizontal integration into related industries (like wine and liquor). 

With $116 million in cash and cash equivalents sitting on the balance sheet, and the potential revenues from divesting consumer durables BFC should be able to make a move if any good acquisition deals arise. They could alternatively use the additional cash to pay down some of their current and long-term liabilities and thus reduce their debt load and interest expense.

Action Plan

BFC needs to take advantage of advantage of synergies that will be created by combining their two wine groups as outlined above. Since the groups have only been segregated for a short time, the sooner this combination can happen the better.

Short Term Divestitures and Acquisitions

The first thing BFC needs to start on is divesting their consumer durables division. This process could take a fair bit of time to find a suitable buyer at a fair price and overcome legal hurdles. The cash that will be raised through offloading the durables division will come in handy for acquisitions down the road. The board may be resistant to this idea at first as BFC has never before divested a division it had previously acquired, but this could be shown as a good way to raise capital for future expansion as opposed to selling off a piece of the company.

As cash becomes available from the sale of the consumer durables divisions it should be used to take advantage of any acquisition opportunities that become available. These opportunities should be actively sought, and care should be taken to consider which takeover candidates make the most sense in fitting into the overall marketing plan.

Short Term Restructuring

WD and WE should be combined as soon as possible, but there are a few key steps that must take place first.

The combined management team must be selected, and if any corporate reorganization is going to happen now is the time. I have proposed in exhibit 1 that some restructuring take place, most notably the reinstatement and promotion of the "Vice President of Winery Operations" position to senior management who will be tasked with supervising the day to day operations of the separate wineries and vineyards. I have suggested Steven Dorfman fill this position because of his previous experience in the area. It is important that this not be seen as a demotion back to his old job so a new title may be in order.

Also important in this combination is the centralization of tasks that can best be done as one large wine conglomerate, and the decentralization of activities that are best done at the grass roots level. This division needs to be clear to avoid any confusion as to what tasks each group is responsible for. Each of the brands will need a manager appointed specifically to run their day-to-day operations.
Once this structure is in place then the two groups should be brought in under the same umbrella. This will essentially be a paper change, but will involve eliminating some activities and positions to centralize staff in the corporate financing, sales, and marketing departments. The best and the brightest within the current organization should be kept and supplemented by hiring outside the company where needed, and any unneeded staff should be released.

Since these changes are essentially paper changes costs should be minimal. Layoffs from combining groups will result in an initial outlay of severance costs, but even in the short term should be more than recovered by decreased salary expense. There may be some lost productivity while the groups are being restructured, but if top management moves quickly these losses will be minimized.

Once merged the new WD should take full advantage of the advanced tracking system acquired with Sonoma-Cutrer. It should be implemented across all BFC's brands and used to drive sales into existing accounts, and help with expansion into new accounts. There will likely be a large fixed cost to get the system up and running for all the brands, but if managed properly this system could develop into a large competitive advantage within the organization.

Long Term

The main focus of the new BFC Wine Group conglomerate will be to slowly shift its brands so that the portfolio covers the spectrum of the market. This will take more work for some brands that will need to make larger changes to their image than others, but in the end it will make the entire portfolio stronger. There will likely be some overlap (especially with continued acquisition and expansion of brands) but that can be beneficial so long as the overlap does not lead to the brands cannibalizing each other directly and may actually lead to increased shelf space and some illusion of choice for the consumer.

Once the new combined sales group is in place they will have sufficient expertise to set their sights on expanding distribution of their brands. Their focus will be to push existing brands further, both internationally and into on-premises and off-premises sales markets. Getting brands into more markets will lessen the risk that falling demand in one area will eliminate demand for the brand entirely.

With the combination of the two above efforts a maximization of firm value from each of its brands will be achieved. The goal will be to span as much of the market (in terms of distribution) as possible with a brand, while targeting a particular value point. In this way each brand will target a particular segment of consumer and will reach the maximum amount of target consumers.

The newly forged larger divisions will also give a larger pool for the discovery of talented managers. The company needs to take advantage of this valuable resource and promote good managers from within. This will give the organization consistency in the long term. As long as divisions stay innovative and productive this should be a positive for the organization, but when groups lag behind top management and the board of directors shouldn't hesitate to hire from outside the organization.

Risks

While this change in strategy creates some temporary instability at BFC, benefits in the long term make this worthwhile. The longer the two groups are separated the harder it will be to bring them back in under the same umbrella. To get this plan accomplished board and management support will be necessary, and should be relativity unresisting so long as it is clear how the brands will be preserved as separate identities, not cheapening each other. Getting Steven Dorfman on side is essential, and will make the transition far easier.

As has been the concern throughout the past few years at BFC, there is some risk that the brands will begin to blend together degrading the image of some brands. So long as marketing is cognizant of this risk it should be minimal. If the board finds that any of the combined groups are failing to maintain the separated brands images then the board should consider looking outside the company to hire new management to bring in new ideas.