Beam and the new pricing reality

[flahute]

Lots has already been said about this topic most recently in the Booker's thread but also in reference to Booker's Rye, Knob Creek 2001, and to some extent, the end of OGD114 as those stocks get diverted to the more upshelf Basil Hayden's.

 

Why is this happening? The seeds for this were planted at the corporate level about a year ago and were revealed in an interview back in April with the President of the American division of Beam Suntory. If you've heard me refer to the premiumization effort they've undertaken, this is where that came from. What's happened since then is no surprise.

 

http://inthemix.on-premise.com/2016/04/interview-part-1-tim-hassett-president-americas-beam-suntory/

[Bbstout]

Beam's move reminds me of Omega watches decision years ago that they were undervalued in the premium watch market. They wanted to rebrand themselves as the new "Rolex" and raised prices substantially overnight. I don't like it but I am firm believer in capitalism.

[Harry in WashDC]

27 minutes ago, flahute said:

Lots has already been said about this topic most recently in the Booker's thread but also in reference to Booker's Rye, Knob Creek 2001, and to some extent, the end of OGD114 as those stocks get diverted to the more upshelf Basil Hayden's.

 

Why is this happening? The seeds for this were planted at the corporate level about a year ago and were revealed in an interview back in April with the President of the American division of Beam Suntory. If you've heard me refer to the premiumization effort they've undertaken, this is where that came from. What's happened since then is no surprise.

 

http://inthemix.on-premise.com/2016/04/interview-part-1-tim-hassett-president-americas-beam-suntory/

Oh, yeah, Steve.  THX for the reminder.  I do remember that discussion.  IIRC, I thought they meant they'd do special releases, like the KC 2001 and the $300 KC rye, but leave the basic releases, like KC and KC Rye, alone, just like Saz does with basic BT and BTAC, to keep us interested.  I guess too many people, me included, liked the 2001 but not at four times the price of basic KC.  Because Bookers already was a periodic release, I guess "they" decided to just make it all scarce and bump the price.  Like KC 2001 vs. basic KC, I like Booker's at its current price but won't pay double.

[jsrudd]

I think this "premiumization" strategy is likely driven by the 8 billion in debt Suntory took out to purchase Beam. After the acquisition, Suntory's debt was 5x EBITDA. The money to service that debt has got to come from somewhere.

 

This FT article from this summer mentions that "debt reduction has been slower than expected."

 

[Golferpimp1]

I think this "premiumization" strategy is likely driven by the 8 billion in debt Suntory took out to purchase Beam. After the acquisition, Suntory's debt was 5x EBITDA. The money to service that debt has got to come from somewhere.
 
This FT article from this summer mentions that "debt reduction has been slower than expected."
 

I don't think they are going to sell much at $100 a pop to help service the debt.
Assuming they have run models to prove I'm wrong.....but I'm not a buyer at 100 and was a scarce buyer at 55. Esp when I can get ecbp or stagg jr at near that price.

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[Saul_cooperstein]

I think part of the pricing strategy is to limit supply (and with the price increase align demand at the higher price point with the new reduced supply). With that strategy, if it works, they will be able to make the same amount of money but allow supplies to replenish and reverse declining age statements. 

[Kalessin]

The real problem is if the $100 buyers don't show up.  What does management do then?

 

[Saul_cooperstein]

If production down by 1/3 they need to sell for 1.5x price to keep revenue the same. At $50 retail they probably sell at $25-30 into the distribution channel meaning they need maybe $40-$45/btl to break even at the revenue line in wholesale sales with the supply reduction. This should give them lots of room for marketing, discounts, etc. Perhaps they get some sales in retail at $79 (they just starting pushing through Costco) to fill out demand which would still get them to where they want from revenue and supply perspective. 

[mbroo5880i]

18 hours ago, Kalessin said:

The real problem is if the $100 buyers don't show up.  What does management do then?

 

 

They can make up a some sort of back story that imparts extraordinary value on the product.  A couple of fake news stories streamed on Facebook and boom...cash!

[garbanzobean]

I think those doubting that Booker's will sell like hotcakes at $100 would do well to remember that its sales skyrocketed when they started marketing the batches with cute names instead of batch numbers.  The market is supremely tolerant of $100 bourbon, and the word "allocated" is like crack to many buyers.  What it really means is that B-S will allocate the most to regions where it is a hot seller, which will likely create even more demand as soon as folks get around to "clearing all those dusties." Why?  Because in a seller's market it is easy to create the appearance of "in demand" simply by shifting around allocations.  Booker's two biggest problems have always been that it was easily obtainable and boringly marketed.  B-S has corrected the latter, now they are fixing the former.

 

If the strategy works well, Booker's will become more "allocated," and will go up in price to $150, even $200.  Suntory has no problem whatsoever with doubling prices annually (Yamazaki 18, anyone), and there's no reason to think they won't happily apply that strategy here if the market will bear it.  If it won't, they'll run sales and work on rebranding, or redoing the packaging.  Then they'll try again if the market tests work out.  And maybe succeed.  Corporations can certainly be friendly, but it is not their job to be nice to your wallet.

 

Look guys, I know a lot of us were living with our heads in the sand, hoping this boom would blow over soon and we'd be back to business as usual.  The truth of the matter is, the boom isn't going anywhere just yet, and the major  established brands are going to start taking profits anywhere they think the market will bear it.  I think the new large distilleries that have come online recently will certainly help ease market demand, but they are all a long way off from 6-10 year old barrel proof bourbon with an established reputation.

 

I would absolutely LOVE for this scheme to be an epic fail.  That would be amazing, and would be an excellent sign that the premium bourbon market actually does have realistic constraints and things might slowly be reaching equilibrium.  I guess I'm just really cynical about that these days.

[smokinjoe]

11 minutes ago, garbanzobean said:

I think those doubting that Booker's will sell like hotcakes at $100 would do well to remember that its sales skyrocketed when they started marketing the batches with cute names instead of batch numbers.  The market is supremely tolerant of $100 bourbon, and the word "allocated" is like crack to many buyers.  What it really means is that B-S will allocate the most to regions where it is a hot seller, which will likely create even more demand as soon as folks get around to "clearing all those dusties." Why?  Because in a seller's market it is easy to create the appearance of "in demand" simply by shifting around allocations.  Booker's two biggest problems have always been that it was easily obtainable and boringly marketed.  B-S has corrected the latter, now they are fixing the former.

 

If the strategy works well, Booker's will become more "allocated," and will go up in price to $150, even $200.  Suntory has no problem whatsoever with doubling prices annually (Yamazaki 18, anyone), and there's no reason to think they won't happily apply that strategy here if the market will bear it.  If it won't, they'll run sales and work on rebranding, or redoing the packaging.  Then they'll try again if the market tests work out.  And maybe succeed.  Corporations can certainly be friendly, but it is not their job to be nice to your wallet.

 

Look guys, I know a lot of us were living with our heads in the sand, hoping this boom would blow over soon and we'd be back to business as usual.  The truth of the matter is, the boom isn't going anywhere just yet, and the major  established brands are going to start taking profits anywhere they think the market will bear it.  I think the new large distilleries that have come online recently will certainly help ease market demand, but they are all a long way off from 6-10 year old barrel proof bourbon with an established reputation.

 

I would absolutely LOVE for this scheme to be an epic fail.  That would be amazing, and would be an excellent sign that the premium bourbon market actually does have realistic constraints and things might slowly be reaching equilibrium.  I guess I'm just really cynical about that these days.

As usual E, you present an honest, logical, and entirely centered opinion, and that is why I enjoy reading your thoughts so much.  And, they always make me step back and re-think again.

 

[jfw]

It's a shame with Bookers.  It's usually my go to at nice places that don't carry much bourbon.  It's the one "premium" bourbon that always had great distribution to nice (non bourbon) bars.  So, I would splurge and order one for $13-15ish.  For $30ish, I'm not a buyer.   I'll have a mixed drink or Crown Royal (yes, I like CR).    If they put a 10-12 year BP Bookers on the market at $99, it might be a different story for me. 

 

It's been pointed out that Stagg Jr. is $50ish and about the same age.  Smooth Ambler SBBP is 50ish and generally older at 9-11 years.   I prefer both to Bookers anyway.    I'll buy one of those two or Blanton's for $50ish.  

 

I can see what they are looking at though.  GTS, WLW, Handy, etc. are all BP and in the $100+ range so maybe our top end BP bourbon should be too.  Handy is about the same age at Bookers.  People are buying that, so why not. 

 

BUT, Bookers has always sat on the shelf around here.  I stopped looking for the new batch releases because a LOT of stores still have bottles from 2015 on the shelf.   Heck, it's on sale at several stores in my area for  < $50  right now and has been for months because it doesn't move.   The only way I see this working is if they cut the number of bottles released by 2/3 (assuming somebody will buy those) and let the other barrels age for special releases.  Of course, I didn't pay $300 for the rye,  but lots of people did so maybe it will work out for B/S.  

 

Bookers is old looking in it's packaging.  It's from Beam and not Buffalo Trace.  It doesn't have a lot of buzz around it.  Beam products are like WT products, they might be good, but they aren't sought after generally.  WT diamond and Master's Keep are proof positive that the special releases don't always sell.  Diamond is still on the shelf two years later. 

 

More power to whoever wants it.  I'll move on.  There is plenty of good bourbon out there (and in my basement).  

 

I'm not going to bunker it either  (full disclosure, I did bunker a "few" 25th Anniversary which WAS worth the price).  But, I might just pick up a few more Smooth Ambler SBBP...

 

Joe

[mbroo5880i]

1 hour ago, garbanzobean said:

I think those doubting that Booker's will sell like hotcakes at $100 would do well to remember that its sales skyrocketed when they started marketing the batches with cute names instead of batch numbers.  The market is supremely tolerant of $100 bourbon, and the word "allocated" is like crack to many buyers.  What it really means is that B-S will allocate the most to regions where it is a hot seller, which will likely create even more demand as soon as folks get around to "clearing all those dusties." Why?  Because in a seller's market it is easy to create the appearance of "in demand" simply by shifting around allocations.  Booker's two biggest problems have always been that it was easily obtainable and boringly marketed.  B-S has corrected the latter, now they are fixing the former.

 

If the strategy works well, Booker's will become more "allocated," and will go up in price to $150, even $200.  Suntory has no problem whatsoever with doubling prices annually (Yamazaki 18, anyone), and there's no reason to think they won't happily apply that strategy here if the market will bear it.  If it won't, they'll run sales and work on rebranding, or redoing the packaging.  Then they'll try again if the market tests work out.  And maybe succeed.  Corporations can certainly be friendly, but it is not their job to be nice to your wallet.

 

Look guys, I know a lot of us were living with our heads in the sand, hoping this boom would blow over soon and we'd be back to business as usual.  The truth of the matter is, the boom isn't going anywhere just yet, and the major  established brands are going to start taking profits anywhere they think the market will bear it.  I think the new large distilleries that have come online recently will certainly help ease market demand, but they are all a long way off from 6-10 year old barrel proof bourbon with an established reputation.

 

I would absolutely LOVE for this scheme to be an epic fail.  That would be amazing, and would be an excellent sign that the premium bourbon market actually does have realistic constraints and things might slowly be reaching equilibrium.  I guess I'm just really cynical about that these days.

 

Eric, this is an excellent post!  I agree with Joe, your posts are always well constructed and thought provoking.  

 

[BigRich]

Reality is that with every boom of any product producers are going to push the boundaries. And they are going to keep pushing until somebody blows it. Is that Beam with Booker's? I don't know. I hope it is but who knows? We may be years from finding out. It still pisses me off and speaks of blatant opportunism on Beam's part with not thought of even trying to obfuscate it. At least if you are going to screw me come at me from behind.


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[flahute]

While this move is having the predicted effect of pissing off pretty much every enthusiast out there, Beam is clearly calculating that there are plenty of new as of yet untapped consumers out there who will be willing to pay this price without batting an eye. They are probably right. As has been said in both this post and the other, Beam is "catching up" so to speak with other distilleries who already price highly. Michter's has been getting obscene prices for whiskey with no provenance. Other NDP's convince buyers to pay $100-$150 for whiskey with no provenance or age information. Willett has taken it to an entire different level. Insane amounts of money trades hands on the secondary market.

 

Few of these people will be excited about $100 for Booker's but with no end in sight for the current boom there are still likely plenty of people with money to burn yet to come into the hobby. As we've seen from the examples above, these newcomers have no problem dropping the cash on high end bottles.

[garbanzobean]

I know this isn't a direct 100% comparison, but the next time any of us feels especially poopy-faced about price increases and quality declines, we would be well advised to do a google search on the golden age of scotch whisky.  Sure there are still great whiskies available (I'd argue bourbon still has a huge QPR advantage $50 and below. . . for now), but the sheer amount of butthurt over whiskies that once cost $150 or less now being sold at MSRP for the equivalent of a car . . . Or the quality floor falling out of the market for $30 and below malts . . . Yeah.  I'm glad I've bunkered a fair bit.  

I don't think it'll get nearly as bad with bourbon, particularly given the number of distilleries that will eventually come online and lower sunk cost in the product, but I think this is the beginning of a new phase in our hobby.  The other distilleries are going to be scrutinizing the Beam move closely, and if it is successful, we are going to get new price floors for a lot of products.  Hopefully the adjustments will be more gradual than this less than classy move.

[miller542]

On 12/9/2016 at 10:24 PM, jsrudd said:

I think this "premiumization" strategy is likely driven by the 8 billion in debt Suntory took out to purchase Beam. After the acquisition, Suntory's debt was 5x EBITDA. The money to service that debt has got to come from somewhere.

 

This FT article from this summer mentions that "debt reduction has been slower than expected."

 

 

Yes, smells like Suntory is trying to squeeze every ounce of profit from the current bourbon boom.  Maybe this strategy will work, but if it does, it won't be because of my dollars.

 

 

[Kalessin]

 

I sure do miss the scotch golden age.  Like some others here, its passing is what brought me to bourbon and rye.

 

Cognac, armagnac, and maybe even grappa all seem to have had the same market strategy applied to them as scotch had.  Spirits which have little or no aging and which can be produced industrially for the bottom of the market, like vodka, gin, rum and tequila are all over the market, but you can get okay examples of each for not much money.

 

Wine, of course, has its own market insanity, but it has so many producers that it's possible to get decent $10 bottles if you don't go for the big names.

[mark fleetwood]

I had thought that Beam would not engage in the super premium pricing game because any revenue would still be miniscule compared to the behemoth that is Jim Beam sales.  ie let's worry about global penetration with a well known brand.

As usual, I'm wrong. But, as an earlier poster noted, Suntory likes high prices and that pesky debt may drive a lot of decisions. Gotta make it look good to the BOD that you've a plan to get moving on that debt.

[Harry in WashDC]

On 12/9/2016 at 10:24 PM, jsrudd said:

I think this "premiumization" strategy is likely driven by the 8 billion in debt Suntory took out to purchase Beam. After the acquisition, Suntory's debt was 5x EBITDA. The money to service that debt has got to come from somewhere.

 

This FT article from this summer mentions that "debt reduction has been slower than expected."

 

Excellent catch.  THX.

[mark fleetwood]

On 12/9/2016 at 7:29 PM, Harry in WashDC said:

Oh, yeah, Steve.  THX for the reminder.  I do remember that discussion.  IIRC, I thought they meant they'd do special releases, like the KC 2001 and the $300 KC rye, but leave the basic releases, like KC and KC Rye, alone, just like Saz does with basic BT and BTAC, to keep us interested.  I guess too many people, me included, liked the 2001 but not at four times the price of basic KC.  Because Bookers already was a periodic release, I guess "they" decided to just make it all scarce and bump the price.  Like KC 2001 vs. basic KC, I like Booker's at its current price but won't pay double.

That is a great reminder. Fear there may be more.

Today, nearly 3 years since Suntory acquired Beam, it's stock price is $20.52, up 14% (no, not 140%). Yikes.

Anyone know/track performance of the spirits business, because I admit I don't know all the ins and outs of the deal, share splits, etc. Maybe 14% over 3 years is laudable.

If not, and they are concerned about how slowly their debt is being "serviced" (worst word Wall Street ever appropriated from the "human pleasure" industry), we might see prices for the rest of the SBC head up.

Or, the Board spins off the premium brands to a new company in order to "enhance and unlock shareholder value."

Edited December 12, 2016 by mark fleetwood
spelling

[Harry in WashDC]

2 minutes ago, mark fleetwood said:

. . .

 

Anyone know/track performance of the spirits business, because I admit I don't know all the ins and outs of the deal, share splits, etc. Maybe 14% over 3 years is laudable.

. . .

 

I'm not sure how the whole spirits market is going, but I do know I bought MGPI four or so years ago at under $6 a share, and today it's $49.80.  (No, I don't own it anymore - sold it long ago when it quadrupled.  Put the money in OGD 114 and VOB 6YR BIB) FOR MY OWN CONSUMPTION - no flipper's going to make a dime off this old faht.

 

Another way to look at it: inflation over the last few years has been between 3.2% (2011) and 0.1% (2015) with most years closer to the lower end than the higher.  So, any return that beats inflation is better than what you can get at a bank.

[dcbt]

But 14% over 3 years is awful when you could have earned many multiples of that in an S&P 500 index fund over that timeframe. Don't have it in front of me right now but I think the market is up 35ish percent over last 3 years.

[fishnbowljoe]

I'll post this here too I guess.  An answer to an email I sent Beam.

 

Hi Joe,

Thanks for reaching out to us with your question. As you know, Booker’s is a really special bourbon, and Booker Noe had high standards when it came to making it. This robust, full-bodied whiskey is culled only from barrels in the center floors of his favorite rackhouses, where the aging environment and resulting liquid profile were just right. As demand for Booker’s prized creation has continued to boom, our supply of these special barrels has diminished. As a result, there will be fewer batches of Booker’s Bourbon released in the coming years. We adjusted the pricing to reflect the premium nature of Booker’s and to offset the fact that our fans’ demand for the product, which we are so lucky to have, has limited its supply.

We understand that this new price can be difficult for our loyal fans to adjust to. We appreciate your patience and understanding during this time of change, and hope to have you as a fan for many years to come.

Megan
Small Batch® Customer Care Representative

 

[skiwez2]

I think the only keeping the bourbon market from going to the levels of single malts is that collectively the distillers in Scotland have decided to limit supply. Not many have invested in the expanding like they are here in the states. Currently there is ready access to cheap capital. All the majors are adding capacity. like others have stated in order to service that debt they are raising the floor for the bottom shelf. They pulled us in hook line and sinker. There is still quite a bit of room for them to raise prices before we get tired of these prices. Their looking get the prices so high on the premium side that an extra dollar or two added to Jim Beam white label or Jack Daniels won't even be noticed to the consumer but will reap huge rewards to the bottom line