Soco

The Southern Comfort liqueur has been a drag on Brown-Forman's performance, but selling it to competitor Sazerac may make the distiller's job harder. Image source: Brown-Forman.

Although Jack Daniel's maker Brown-Forman (NYSE:BF-B) and distiller Sazerac had locked horns in court over their competing cinnamon-flavored whiskey brands, that apparently didn't preclude them from laying aside their differences for a while to consummate a deal. In fact, it may have helped spur it.

Brown-Forman is selling to Sazerac for $544 million two liqueurs: the once popular Southern Comfort and the lesser known Tuaca.

The sale is part of Brown-Forman's effort to focus more closely on its "highest strategic priorities," mostly its Jack Daniel's family of brands but also its Woodford Reserve, the super- and ultra-premium whiskey label. But it also reflects the failure of the distiller in being able to gain any traction for the Southern Comfort brand. It had launched a big marketing campaign around it, but volumes still fell.

While it has a purportedly storied past, one that includes having been the drink of choice of legendary blues artist Janis Joplin, net sales of the liqueur have been steadily falling, down 7% over the first six months of the current fiscal year and 4% lower in fiscal year 2015. In comparison, Brown-Forman's Jack Daniel's family of brands grew 7% year over year in the first half of FY 2016, and its Fireball cinnamon-flavored whiskey is up 14% from last year over the same period.

There's a reason for that. Flavored whiskies are hot right now, accounting for 12% of all whiskey sales, and none is hotter than cinnamon-flavored spirits, which saw sales double in 2014 and continued to push revenues for distillers higher in 2015.

According to various state alcohol control boards, whiskey has become the best-selling spirit, surpassing vodka, driven higher by flavored whiskey sales like those for the cinnamon concoction. Sazerac's Fireball, in fact, was tops in states like Pennsylvania, where sales surged 88%, far outpacing the 27% gains seen in the broader flavored-whiskey category, and it outsold Brown-Forman's Fire cinnamon whiskey 10-to-1. In Iowa, Fireball was fourth overall, while Fire was 97th.

The competition between the two cinnamon-flavored whiskey brands landed in court last year after Sazerac accused Brown-Forman of buying search engine keywords to confuse consumers looking for its Fireball whiskey. Instead of the Sazerac brand, they'd end up landing on Jack Daniel's Tennessee Fire page.

But Sazerac quietly dropped its lawsuit against its rival late last month without offering an explanation for the decision. Considering just a few weeks later it was buying the Southern Comfort brand, perhaps the two are related.

Brown-Forman began unloading the brand last year, and The Wall Street Journal reports Sazerac's president, Marc Brown, was conciliatory in purchasing the spirit, noting its rival had "done an excellent job of building" the brand, though the company's chairman told Shanken News Daily that Sazerac can do better now that it owns it. "One key reason why Southern Comfort has struggled is that it's been losing share to Fireball," he said.  

With half of Southern Comfort's sales generated internationally, Sazerac has an opportunity to expand its own global brand portfolio, which also just added flavored Scandinavian spirit Aquavit last week. Last quarter SoCo enjoyed surprising strength in Germany and South Africa, though volumes fell in the U.K. and Australia. What will be key will be its ability to overcome weakness domestically.

Yet it's the continued popularity of premium and flavored spirits that Sazerac is counting on to drive growth, a niche in which Southern Comfort neatly fits. Coupled with the shared history in New Orleans the two have -- SoCo was created by French Quarter bartender M.W. Heron in 1874 while Sazerac was a drink before it was a company, a blend of brandy, absinthe, and a dash of bitters (the Sazerac) made by Creole pharmacist Antoine Peychaud in 1838 -- the distiller could capitalize on the trend toward authentic, craft spirits.

That authenticity could be the difference for Sazerac succeeding where Brown-Forman stumbled, and may mean the distiller ends up regretting selling the liqueur to its rival.

Rich Duprey 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.