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JULY 28, 2003
By Faith Arner A Reason to Drink at Allied Domecq? Although the British spirits outfit expanded into wine at a tough time, it's still looking forward to a vintage payoff When Philip Bowman took the helm of Allied Domecq in 1999, he knew that he would have to do something dramatic to goose growth at the British spirits company. After all, spirits was a mature business that provided slow, not spectacular, growth. So Bowman started buying up vineyards, shelling out about $1.5 billion over the next three years for a global plunge into the wine business. He didn't buy just any old plonk, though. Allied Domecq's big bet was on "premium" vintages, or bottles selling for $10 and up. The question for investors: When can Allied expect to reap the harvest from its investment? Soon after it acquired vineyards, the U.S. and Australia ran headlong into a grape glut that pushed down wine prices. On top of that, some analysts say Allied overpaid for properties such as Clos du Bois in California, Montana in New Zealand, and champagne labels Perrier Jouet and Mumm. And they cringe at the relatively low return on invested capital of 4% to 5% projected for the year ending Aug. 31. "ACCORDING TO PLAN." Allied says vintage years lie ahead. It predicts that the return on investment will rise to 7.5% in the year ending August 31, 2005, and 10% by 2007. But some analysts remain skeptical. "To get that degree of uplift, you have to have very strong growth in profitability over the next two years -- against a backdrop [of] tough trading conditions in the wine industry," especially in the U.S., says Simon Hales, HSBC's European beverage analyst. The worry is that consumers won't trade up to premium brands like Allied's because the glut has helped push prices for good wines below $10. But Allied says its wine business is on track to meet its targets. For the six months ended Feb. 28, it reported that sales rose 7%, volumes were up 5%, and operating profit climbed 12%. "We're very happy with the performance of the business," says Stephen Whitehead, corporate affairs director at Allied. "Everything is going according to plan." Allied, which ranks 60 in BusinessWeek's listing of top European companies, based on the Standard & Poor's Europe 350, has kept sales and profits up in the toughest wine market in years, thanks mainly to diversification. Sales in New Zealand and Spain -- which did not suffer from overplanting -- are nearly as large as in the U.S. in Allied's portfolio. New Zealand accounts for an estimated 22% of Allied's wine sales, Spain 21%, and the U.S. 23%. STOCK REVIVAL. Better yet, the oversupply in the U.S. and Australia is beginning to ease. For the year ending Aug. 31, analysts expect earnings per share to be up slightly, to 32.73 pence (52.2 cents). They're more bullish for 2004, forecasting a 9% jump. The brighter outlook has drawn investors back to the stock, which trades on the London Stock Exchange. Though Allied shares lost more than one-third of their value from August to March, they have regained ground since then, climbing 24% to close at 337.25 pence ($5.38) on July 15 in London. And the stock is relatively cheap, trading at a price-earnings ratio of 9, compared with a p-e of 20 for its much larger competitor, Diageo. Even with its grape emphasis, Allied hasn't neglected its house brands, which include Beefeater gin, Courvoisier, and Kahlua. It has been trying to bolster sales of Ballantine's Scotch with a lively new ad campaign launched last year. The "Go Play" ads feature stick figures dancing in a bar. The unstated message: Scotch isn't just an old man's drink, swilled in the swirling mist in Scotland. Allied says the campaign helped it increase market share slightly in Europe, from 10.8% to 11.4%, an all-time high. KEEPING FOOD FRESH. Analysts generally credit Bowman for the improved numbers. "When he arrived, the company wasn't in particularly good shape, but he has done a pretty good job in reshaping the business and improving performance," says Nigel Popham, a research analyst with Teather & Greenwood in London. Bowman is also trying to keep Allied's food division from going stale. In January, he named former Popeye's chief Jon Luther head of Allied's quick-service restaurant division, overseeing Dunkin' Donuts, Baskin Robbins, and Togo's. The three combined made up 9.5% of Allied Domecq's revenue and 13% of profits in the year ended August 31, 2002. Luther aims to boost those numbers primarily by expanding the Dunkin' Donuts chain farther beyond its New England stronghold (see BW Online, 7/3/03, "Can Dunkini KO Krispy?"). "Dunkin' Donuts' weakness is that it isn't national, but it will be," he says. Allied expects revenue growth of 10% annually from the division. More important than getting Americans to eat more doughnuts, though, is getting them to drink more wine. If Bowman & Co. can get the estimated 50% of Americans who have never tried wine to give it a sip, Allied will be able to cash in on its big gamble, and investors will be able to get drunk on the proceeds.  Arner is a correspondent in BusinessWeek's Boston bureau Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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