The Diageo/Brown-Forman Spat: What Investors Should Know

Recent news about the labeling of "Tennessee Whiskey" is just noise as far as investors are concerned.

Mar 25, 2014 at 2:06PM

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? 

The law
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.

Would you like to retire wealthy?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers