Five years ago, Bulleit Bourbon moved 40,000 nine-liter cases with a marketing budget of zero dollars.
Now Diageo (NYSE:DEO), the world leader of the premium spirits market with 27% share, plans to launch its award-winning Bulleit brand in 14 new markets across the globe and sell one million cases in the near-term. However, there's a catch. The company must do this secretly or it risks alienating its most loyal customers: hipsters.
How the leading distillery sells bourbon under the radar
Diageo boasts the world's best-selling spirit brand, Smirnoff vodka, which sells 26.3 million cases each year. It has the number one Scotch whisky in Johnnie Walker (20 million cases), and the top-selling Canadian whisky in Crown Royal (6 million cases). With Bulleit, Diageo has to use a totally different promotional strategy.
Instead of in-your-face, high-dollar ad campaigns that utilize television and the mainstream press, Diageo will work through back channels like trade magazines and bar managers, who in turn will evangelize bar patrons. This is the same marketing approach that Diageo used with the Ketel One and Ciroc vodkas.
Renovating a bourbon legend
In February, Diageo announced a plan to invest $2 million into renovating the historic Stitzel-Weller Distillery for Bulleit. Pretty much everyone knows the secret that Bulleit currently has no home. Four Roses, owned by Kirin, makes the bourbon, and MGP Ingredients in Indiana distills Bulleit Rye. However, Diageo's deal with Four Roses actually stops at the end of March.
The Stitzel-Weller distillery has been closed since 1991, but it has a ton of bourbon tradition behind it. Diageo has already started the renovations and it plans to open the doors on May 3, Kentucky Derby Day, the date when the original distillery opened in 1935. Bulleit's new home will be more of a gift shop than a distillery, but it's a step in the right direction. The Stitzel-Weller building will also house Diageo's newest Orphan Barrel venture as well.
True artisanal brands
Orphan Barrel is a new American whiskey project that Diageo has come up with so it can make hay with the super-premium segment of the bourbon/Tennessee whiskey market. Diageo will bottle bourbons sourced from the old Stitzel-Weller distillery and the Bernheim Distillery at its George Dickel facility in Tennessee. The first two releases -- Barterhouse and Old Blowhard-- should show up at any time, and they will be followed by Rhetoric in the near future.
Barterhouse is a 20-year old bourbon priced at $75, which makes it a good buy for bourbon that has been aged that long. Old Blowhard is a 26-year old bourbon priced at $150, while the 19-year old Rhetoric's price has not yet been determined.
Growing market for North American whiskeys
Both Bulleit and Orphan Barrel come as attempts by Diageo to capitalize on explosive growth in the North American whiskey market. Currently the category, which excludes Scotch whisky, makes up 7% of Diageo's net sales and trails the sales of Scotch (29%), beer (21%) and vodka (12%).
North American whiskey, which is classified as bourbon (think Jim Beam), Tennessee (think Jack Daniel's, owned by Brown-Forman (NYSE:BF-A) (NYSE:BF-B)), and Canadian whiskey (think Diageo's own Crown Royal) produced 53% of the total growth in the $21 billion U.S. spirits market in 2013 (with a year-end of Oct. 12) according to Nielsen. Bourbon and Tennessee whiskey exports also topped $1 billion for the first time according to a recent report from the Distilled Spirits Council.
Diageo sold around 300,000 cases of Bulleit in 2012. However, Diageo CEO Ivan Menezes estimated that 2013 volume would reach about 600,000 cases.
As a point of comparison, Jack Daniel's is the leading North American whiskey at 10.6 million cases sold across the globe (4.6 million in the U.S), followed by Beam with 6.3 million cases sold globally (3.15 million in the U.S.), and then Diageo-owned Crown Royal sold 5.2 million cases across the globe (4.16 million in the U.S.).
A Fool's bottom line
Diageo's foray into the American whiskey market will not make or break the company. However, a stronger presence in the bourbon category would solidify its position as the premier spirits maker in the world and add to its revenue and bottom line.
Even though Diageo has a solid Tennessee whiskey in George Dickel, it could use a world-famous bourbon -- or at least one in the global top 10. This would also alleviate the pressure on the company to strike a deal with a competitor like Brown-Forman.
It would be foolish -- in the true sense of the word -- to bet against Diageo's prowess to get it done.
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Chris Brantley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.