John Teeling comments on sale

Update 21 Dec 2011: Ronan Morris kindly pointed me towards a new video interview with John Teeling, conducted by Clontarf.ie (the place, not the whiskey). Worth a look.

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The Sunday Business Post carries some revealing comments from John Teeling, founder and chairman of Cooley Distillery, regarding the acquisition by Beam. The most interesting points:

• Sales of Cooley whiskey are up 50% this year, a trend that will see the warehouses run dry by 2014.
• To cope with the forecast growth, an investment of €50m over the next 5 years is required. This drove the decision to sell now.
• There were approaches from five potential buyers in the last year (including from William Grant, noted here last May). Cooley favoured Beam, with whom they have been in talks for four years.
• Teeling believes Beam's top priority is building the Kilbeggan brand in the US.

Some numbers were disclosed too: Cooley buys a ton of maize for €300 and converts it to 1,200 bottles of whiskey which fetch €6,000 in export sales. That implies Cooley sells a bottle of whiskey for €5 at the factory gate.

The mention of maize indicates a grain-heavy blend - let's say for a supermarket's own label - that might sell for €15 or €16 in the UK. That's the high-volume, low-margin end of the business. What is fascinating about the whiskey trade is that there is also a low-volume, high-margin end based on the very same spirit. Leave it in the cask for a few more years, after all, and you can flog it for €95 a bottle (Kilbeggan 18yo, Irish retail price) or even for €250 a pop (Connemara Bog Oak).

It's a really neat business challenge, how to edge the average margin up without driving down volume. That would be the task of the branding and marketing alchemists, I presume. I think Cooley have already nailed the branding. Marketing, however, scales with budget and the Beam deal will help there.

Jim Beam buys Cooley

I was waiting for a flight in London Gatwick airport yesterday when I read the news of Jim Beam's purchase of Cooley Distillery. I mentioned it to the guy in the World of Whiskies shop there and his immediate reaction was "Cooley? But that's Ireland's only independent distillery!" Cooley have long relished pointing out that the competing distilleries in Ireland are foreign-owned (by Pernod Ricard and Diageo) but in so doing they created a hostage to fortune. One can't hide a twinge of sadness that this independent beacon of world-class Irish industry has fallen.

The deal is worth €73m and probably looks right based on the modest returns Cooley has been making recently (€2.5m profit in 2010). But it seems a bargain to me, given the the assets Cooley have painstakingly built up, namely two working distilleries (at Riverstown and Kilbeggan) and the warehouses full of maturing spirit. Cooley's difficulty has never been making a great product though, it has been in extracting the maximum value from those assets by getting their own brands in front of customers around the world. The Chairman's statement from the 2010 annual report lays out the problem:

While the long term objective of Cooley is to develop brands, route to market and rotation on shelves pose major obstacles. World spirits is dominated by two giant companies with a second tier of major multinationals. These companies dominate distribution channels and have advertising and promotion budgets hundreds of times greater than Cooley's total sales.

(The worst aspect of this deal for me is that we won't get such detailed and insightful annual reports again.)

Although Cooley has great whiskeys that it sells under its own brands (Connemara, Tyrconnell, Kilbeggan, etc), fully 50% of its sales are making whiskey for others, either under private labels or retailer own brands. These are usually cheap, young whiskeys. The business has kept Cooley afloat but it means a lot of whiskey leaves the distillery before it has reached the peak of its value. Ominously, the annual report warns that cheap Scotch has put even this market segment at risk in the last couple of years.

So Cooley has no choice but to look to its own brands, and that means a global distribution partner. So, who is Beam? Their portfolio includes 10 of the world's top 100 premium spirits brands and covers rum, tequila, vodka, cognac and other categories besides whiskey. Of course we are most interested in what it brings to the whiskey table and here the line-up includes Jim Beam and Maker's Mark bourbons, Canadian Club whisky, Teacher's Scotch whisky, and Laphroaig Scotch whiskey.

The Beam portfolio

Their knowledge of the US market is an obvious strength, and the mindshare among whiskey drinkers achieved by Laphroaig bodes well for Cooley's premium offerings. There is certainly a lot of potential upside with this deal for Cooley and for Irish whiskey. And, besides the loss of independent status, not much downside.

I have a feeling this will not be the end of the story though. With $2.7bn in sales in 2010, Beam dwarfs Cooley, but it's still a relatively small drinks multinational (Diageo's sales, for example, were about $20bn in the same year). Thus it must itself be a takeover target. If either Diageo or Pernod Ricard swallow it up, that would likely put Cooley back in play, to satisfy competition rules in Ireland.

Whatever happens, 2012 is already looking like a lively year for Irish whiskey. And there is a good chance we'll see at least one new independent Irish whiskey producer to claim that mantle from Cooley anyway.

I'd like to wish everyone at Cooley the best of success with this latest chapter of their adventure.