March 11, 2014: Iconic American Brands, Profits, and Future US Spending Power

I realize that the news of Suntory's purchase of Beam Brands is almost two months old now, but I had a few thoughts about that deal (and a few others) that I'm just getting around to writing down.

If you missed it, Businessweek had an article in January that you can read for back story. That news followed closely on the tails of a release I read on CNN Money about Italy's Fiat buying the final piece of Chrysler for $3.65 billion. Taken together, I believe it was a bad month for American companies and worse, for future US Spending Power.

Even if it's controversial, their Bourbon Whiskey is still delicious (Maker's Mark, Knob Creek, JB White Label)

Why my backlash? 

Well, Vauhini Vara of the New Yorker suggests that Americans might disapprove of the sale because they feel uncomfortable with foreign owners controlling their food and drinks. From the sound of it, the author expects to see a group of xenophobic Mid-Westerners sharpening their pitchforks and warming up their feathering tar. Even though we Mid-Westerners make easy targets, I don't think that's the reason why I oppose a sale like this. 

He goes on to write some strong points: brands can be better positioned for profitability or international sales through foreign acquisition and that the profit motive can be sufficient to broaden brand horizons. But it's this line of thinking that touches on where I found my major objection to the acquisition. 

Vara later cites a review of Budweiser's purchase by Belgian InBev that I think illustrates it best:

Is it un-American? Yes. I think it is. But maybe not for the reasons he mentioned.

Adam Smith, Wages, and Profits

So, like most JB drinkers (or ex-JB drinkers), I'm a fan of their spin on American Mythology, the 200 year history of the Beam family, and the picturesque farmland where the Bourbons are made. But my question in evaluating this deal is "where does the money go"?

(...to be continued)

February 25, 2014: Whiskituity® Economics

In our crowdfunding campaign on IndieGoGo (here), we’re offering our annual Whiskey-for-Life program, the Whiskituity® for $325. The Monthly version is $3,500.  

I realize that’s a lot of money, but I think you’re getting a lot for it.

Right now, our young Silver Sweet Corn Whiskey retails for around $25. As our Straight and Bourbon Whiskeys become available in the future, they’ll likely retail for $30 or $32.50. An important thing to remember is that, as a Whiskituity® holder, you’ll always be entitled to the best Whiskey we have available for sale. Prefer our Straight Whiskey to our Bourbon? You got it. Want a few years of Silver Sweet Corn Whiskey? No problem.

To help illustrate the value of the program, here are three scenarios that describe what you can do with your money: buy a Whiskituity, buy Whiskey at retail each year, or invest it. Now, I understand that inflationary pressures erode the future value of money, but let’s assume that The Indiana Whiskey Company raised prices each year in lockstep with that rate (makes the math a lot easier, whether or not that’s exactly what will happen). The retail price reflected here would then be identical to “today’s dollars”. I used the 20-year Treasury bond rates published 2/3/14 from treasury.gov as the risk-free investment rate under the same time horizon.

Here's what I came up with:

Results? Well, it looks like there’s a clear win for the Whiskituity over retail once you get to year 11. Over the course of your drinking lifetime, you could very well spend 5 times as much as $325. Obviously, if you’re 21 right now, you have a pretty good shot at living more than 20 years. If you’re 40, do you see yourself drinking Whiskey past 60? I know I do.

Now, if you just invested your money at the risk-free rate, you’d come out $296 ahead. That looks good until you realize you haven’t enjoyed a single bottle of Whiskey in 20 years. That price, according to me, is way too high.

It’s a risk for us too. 

Commodity prices are uncertain. In late 2012, Corn reached a peak of $6.75/bu. Today, it’s around $4.50/bu. If spikes like these occur in Corn, Wheat, Barley, LP or Natural Gas, our Whiskeys become more expensive to make per bottle, which means the price at retail would likely increase.

It could happen the other way too. Prices could drop from new farming technologies, better techniques, or weather conditions that improve crop yields.

Also, you could live to be 150 years old. Luckily, I probably won’t be around to worry about it at that point, but we still have to account for it.

So why would we offer it?

“if a deal is too good to be true” and all that…

Well, I think there are two big reasons to offer it: timing of cash flows and lifetime customers.

First, we expect our aged Whiskeys will be more profitable than our unaged Whiskey. We just have to wait a few years to sell them. So in a way, we’re using future profits to help subsidize current operations, and at a rate that’s more attractive than traditional bank loans or Preferred Stock.

Second, we’re able to get a customer for life. When I worked for MillerCoors, I was shocked to learn how much the company spent on advertising to new and existing customers. If we sell you a Whiskituity®, we’ll let the bottle each year speak for itself. Our guess is that you’ll want to tell everyone (read: gloat) about how much foresight you had when you invested your $325 with us.

In a nutshell

It's a $325 investment that lasts a lifetime. Whether you're getting it for yourself, your newborn son, a bride and groom, or one of your parents, it's going to be there for a long time.

-Charlie