he front page of the Marketplace section of The Wall Street Journal's March 18 edition highlighted an almost comical spat between American whiskey giant Brown-Forman (NYSE:BF-A) (NYSE:BF-B) and international liquor giant Diageo (NYSE:DEO) about the use of the term "Tennessee Whiskey."
Last year, Brown-Forman successfully lobbied Tennessee lawmakers to write a law on the specifications of a product that can be labeled "Tennessee Whiskey." The law specifies that, to be labeled "Tennessee Whiskey," the product needs to be, more or less, Brown-Forman's leading brand, Jack Daniel's. Brown-Forman has quite a bit of interest in preserving the Jack Daniel's brands, as the entire family of brands accounted for 19 million of the 38 million cases of liquor the company sold in 2013.
As the Associated Press just reported today, a decision on rewriting or abolishing this law will not be voted on by Tennessee lawmakers during this session; however, they may review this issue over the summer. If and when this law is changed, will it have a significant impact on Brown-Forman?
According to the Journal, the Tennessee law states that not only does the liquor need to be made in Tennessee to carry the name, but it also has to be "made from at least 51% corn, filtered through maple charcoal and aged in new, charred oak barrels."
Diageo and smaller-craft distilleries are claiming that the law strangles innovation, as anything labeled "Tennessee Whiskey" has to be very similar to Jack Daniel's. Brown-Forman, on the other hand, which holds an incredibly large market share of whiskey made in Tennessee, says Tennessee Whiskey is under attack.
Why wording matters
Some may say this is a silly argument, and they may be correct, as two industry giants are fighting over use of "Tennessee Whiskey," while agreeing that "whiskey from Tennessee" and other variations are perfectly acceptable. However, Tennessee Whiskey is big business for these distilleries. Just as there are specifications on what makes bourbon bourbon and what makes scotch scotch, calling a drink "Tennessee Whiskey," according to some, should reflect a certain style or quality of drink.
A look at the actual business side of things explains why this branding is important. Tennessee Whiskey is a large and fast-growing segment of the liquor market, as sales rose 6.8% last year, compared to 1.9% growth in liquor sales overall. Brown-Forman is currently in first place in the market, as the company sold 11 million cases of its Jack Daniel's Tennessee Whiskey in 2013, with Diageo in second place in the Tennessee Whiskey market with its George Dickel brand, selling an almost insignificant 130,000 cases in 2013.
If the law is overturned, how will it affect Brown-Forman?
In its 2013 Annual Report, Brown-Forman makes it obvious how big the Jack Daniel's Tennessee Whiskey brand is to its business. Along with the traditional Jack, the company also sells Gentleman Jack, Jack Daniel's Tennessee Honey, and many ready-to-serve drinks, all of which saw exceptional growth in 2013. It's estimated that Jack Daniel's holds only 7% of the world's whiskey market, and the company predicts plenty of further growth.
"Tennessee Whiskey" is obviously important to Brown-Forman, but the outcome of this law is not. The brand loyalty and market share it has already built is most recognized by just "Jack Daniel's," rather than "Jack Daniel's Tennessee Whiskey."
As far as an investor is concerned, Brown-Forman is still an exceptional company, and the brand-name competitive advantage it has built with Jack Daniel's would be nearly insurmountable for smaller rivals wanting to label their products as Tennessee Whiskey. Brown-Forman will lose a minuscule amount of time and resources fighting this battle, but business will go on as usual one way or the other.
Brown-Forman will continue to grow its flagship Jack Daniel's brand, with no major issues about the phrasing of the name. Over the next six months to one year, we may hear more about this argument; however, investors should think of this particular issue as short-term noise that won't make a difference in the business, and nothing more.
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Jacob Meredith has no position in any stocks mentioned. The Motley Fool recommends Diageo. 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.