Heublein, Inc.

views updated

Heublein, Inc.

P.O. Box 388
Farmington, Connecticut 06034-0388
U.S.A.
(203) 240-5000

Wholly-owned subsidiary of Grand Metropolitan plc
Incorporated: December 2, 1915
Employees: 28,500

When Heublein was acquired by R. J. Reynolds in 1982, it was a diversified alcoholic beverage and food products company. Shortly afterwards, Reynolds merged with Nabisco, and many of Heublein’s non-beverage operations were sold to other divisions or companies. Heublein itself was sold to Grand Metropolitan in March of 1987; it was then essentially a distiller of vodka (Smirnoff, Relska, Koskarva, Arrow, and Popov brands), and importer of other beverages, such as Harvey’s Bristol Cream sherry, Bell’s scotch, Guinness Stout, Bass Ale, and Rose’s lime juice.

In 1875 Gilbert and Louis Heublein were working in their father’s restaurant in Hartford, Connecticut. The Connecticut Foot Guards hired the Heublein restaurant to prepare one gallon of martinis and a lesser amount of manhattans for their annual picnic. The picnic, however, was cancelled by rain and the cocktails were stored. After several days, Gilbert and Louis’s father instructed an employee to throw away the mixtures, but the curious clerk tasted the cocktails and declared that they were still good. Gilbert and Louis later decided to sell pre-made cocktails in the restaurant, and when demand for them increased, the two brothers established a distillery to mass-produce the product.

Gilbert and Louis Heublein increased sales by bottling their cocktails for the carriage trade. Their success in this field was facilitated by promotions and creative advertisements which emphasized the “charms, conviviality, and good taste” of the martinis and manhattans.

In 1892 the Heubleins bottled the first pre-mixed cocktails sold to hotels and restaurants, and later offered the cocktails for sale directly to consumers. As the Heubleins’ product gained wider popularity, the distillery introduced a line of whiskies: Heublein Private Stock, Old Waverly, Powderhorn, and Forest Park. Gilbert and Louis invested the profits from their growing operation in smaller companies such as the A-l Steak Sauce Company, which they purchased in 1906.

With the advent of Prohibition, Heublein’s profits from alcohol were completely eliminated. The steak sauce operation, which was heavily undervalued when it was acquired, helped to maintain the company’s profitability as its only marketable product.

In 1933, after Prohibition had ended, Heublein’s distillery operations were revived by John G. Martin, who was named president of the company upon the retirement (and subsequent death) of his grandfather, Gilbert Heublein. Martin’s first act as president was to diversify the company’s line of alcoholic beverages. In 1939 Martin purchased the trademark and distilling process of Smirnoff vodka from a Russian emigré named Rudolf Kunett. Kunett originally purchased an American franchise for Smirnoff vodka from Vladimir Smirnoff, whose vodka recipe had remained with his family since 1818, but whose vodka was neither popular nor profitable in Russia. Due to competitive pressure and the American public’s lack of enthusiasm for vodka, Kunett’s franchise soon became unprofitable. As a result, the Smirnoff rights were greatly undervalued when they were purchased by Heublein for only $14,000.

Shortages during World War II led to heavy restrictions on alcohol production. Heublein was not permitted to sell Smirnoff until the war ended. The company was, however, allowed to continue manufacturing its pre-mixed cocktails, because they contained less alcohol and were therefore not as strictly regulated. When the war ended, however, Americans had become unaccustomed to the strong alcoholic taste of regulated spirits such as vodka. Heublein inaugurated an advertising compaign intended to restore the American taste for liquor—in favor of Smirnoff vodka. The campaigns promoted Smirnoff as the vodka that “leaves you breathless,” and emphasized its versatility, as it could be combined with a variety of mixers. Vodka’s supposed lack of odor attracted noontime drinkers. Sales of Smirnoff increased.

Heublein became the American sales agent for Grey Poupon mustard in 1946. Despite this broadening of the product line, other distillers felt that Heublein relied too heavily on vodka sales. But instead of diversifying into other alcoholic beverage lines, Heublein popularized more diverse uses for Smirnoff; bloody marys, screwdrivers, and Moscow mules were the trendy and popular drinks of the 1950’s.

By 1960 vodka consumption had risen to 19.4 million gallons from 1.3 million in 1951, largely as a result of aggressive promotion. In 1961 Martin introduced nine new pre-made cocktails intended for consumers who were inexperienced as home bartenders. Despite the growth and success of the cocktails and Smirnoff, Martin continued to feel pressure to diversify from industry analysts who believed that Heublein would be devastated if either its cocktails or vodka lost popularity. In response, Martin purchased Timely Brands, which made cake decorating products, and Escoffier Ltd., which produced London brand specialty foods. These purchases were particularly timely, as increasing competition in the vodka market depressed profits.

Still, Martin aggressively promoted Heublein’s less expensive vodka labels, Relska and Popov. When asked what the difference was between Relska and Smirnoff, Martin admitted that the two liquors were of approximately the same quality, but differed in “pricing policy.” The cheaper brands grew in popularity during the 1960’s. Heublein’s earnings grew to $115 million in 1963—four times the figure in 1959. At this time 73% of Heublein’s sales volume was derived from vodka.

In an effort to continue Heublein’s diversification, Martin decided to purchase the Arrow liqueur line in 1964. Martin also negotiated the rights to distribute such products as Harvey’s Bristol Cream sherry (imported from England), Lancer’s rosé (from Portugal), Bisquit cognac (from France), Bertani table wines (from Italy), and Jose Cuervo tequila (from Mexico).

Ralph A. Hart was elected president upon Martin’s retirement in 1965. Formerly an executive with Colgate-Palmolive, Hart brought to Heublein a marketing philosophy which permitted the addition of new product lines only on the conditions that they had great sales potential and were compatible with existing distribution channels and marketing techniques.

True to that philosophy, Hart purchased the Theo Hamm Brewing Company of St. Paul, Minnesota, the nation’s eighth largest brewer. The company’s beer was sold in 31 states, although principally in the American midwest and far west. This acquisition caused a sharp controversy among Heublein executives because it was the first time Heublein had purchased an established firm. Hart, convinced of Hamm’s potential, encouraged the brewery’s introduction of the first draft beer in a can. The success of this raised prospects for Hamm’s and proved Hart’s ability to identify superior takeover targets.

In the 1960’s many consumers shifted from drinking in saloons to drinking at home, and showed a growing preference for a wider variety of liquors. Through advertising, Hart asked consumers to try more drinks mixed with vodka, noting that, unlike other liquors, one did not have to “acquire a taste” for vodka.

Hart was promoted to chief executive officer in 1966. He was replaced as president by Stuart D. Watson, a marketing expert. Watson was aware of the company’s continued over-reliance on sales of vodka. Hamm’s had failed to consolidate its market share; the beer lost popularity because store managers were not instructed to rotate their inventories of Hamm’s beer. As a result, much of the beer was sold stale—a problem which disenchanted even loyal Hamm’s drinkers. Watson acquired the Beaulieu Winery and United Vintners, the second largest wine-makers in the U.S., for $33 million. He also decided that Heublein should expand its food production operations, a sector which at the time accounted for only 5% of total sales. The firm purchased the Coastal Valley Canning Company, which produced tomato juice and Ortega brand salsa sauce. The tomato juice addition was particularly beneficial since it could be promoted as a complement to vodka in advertisements featuring bloody marys. These acquisitions, and a much larger advertising budget, led to sales of $384 million in 1968-a 337% increase from 1963.

Sales of A-l steak sauce in 1968 had increased 113% over 1961; Lancer’s rosé was the fastest growing seller of its type in the United States, Arrow liqueurs generated $17 million in sales; and Smirnoff was being produced in 32 countries. Watson’s corporate diversification strategy had reduced Heublein’s reliance on vodka production, and led to positive growth in all its markets.

Heublein acquired Kentucky Fried Chicken in 1971 as part of Watson’s desire for the company to move into more “contemporary” consumer product lines. By 1973, however, Kentucky Fried Chicken’s sales growth had slowed dramatically, causing the division to lose some of its market share to competitors.

Heublein’s financial position was further compromised by United Vintners, which, as a result of price controls, was prevented from passing on radically increased grape costs to the consumer. These developments weakened Watson’s position as leader of Heublein, and prompted him to form an “office of the chairman,” consisting of four group vice presidents and himself. The goal of this committee was to set corrective marketing policies and to form future strategies. Another group, the corporate management committee, was comprised of other executives who concentrated solely on administrative matters and shifted the burden of more routine operating decisions to lower management levels. Both groups later recommended the sale of Hamm’s to Olympia Brewing, as Heublein was unable to revive the operation.

Watson was replaced as president by Hicks B. Waldron, Jr. in 1975. Unlike Watson, he believed that the entire staff should contribute to corporate decisions rather than just the top executives. He made the executives, middle managers, and line foremen aware of their contributions to Heublein’s earnings.

A year earlier, Waldron authorized the expansion of Kentucky Fried Chicken’s menu to include fried codfish. This, however, prompted a law suit from Colonel Harland Sanders, the founder of Kentucky Fried Chicken, who claimed that Heublein could not use his name to promote any product but chicken. The codfish proved unsuccessful in any case, and was withdrawn from most franchises.

Kentucky Fried Chicken, however, suffered from several more crucial problems; cleanliness and quality control were low, individual stores were managed poorly, and even Colonel Sanders proclaimed its chicken the worst he had ever tasted. Waldron assigned two Heublein executives, Mike Miles and Dick Mayer, to restore the operation. They recommended more centralized management control, the renovation of many outlets and a reduction in their number, greater promotion of lunchtime business and more disciplined quality control. Heublein undertook all of these measures at great cost, and despite intense competition from Church’s Fried Chicken and grocery store frozen brands, Kentucky Fried Chicken’s sales began to increase.

In the beverage markets, United Vintners lost a substantial market share to Gallo, and growth in vodka sales slowed to 3% annually, largely as a result of competition. With the exception of isolated successes in some foreign markets, sales of Heublein products had declined.

In 1977 Waldron became ill and relinquished the company presidency to his predecessor Stuart Watson. Watson, however, was unable to reverse Heublein’s decline until 1979. That year, United Vintners’ sales recovered, largely due to the increased popularity of its Inglenook label—despite a brief (and belated) accusation by the Federal Trade Commission that Heublein’s acquisition of United Vintners, ten years before, was anti-competitive. (In 1980, however, the Commission dropped its charges.)

In cooperation with the Reverend Jesse Jackson’s Operation PUSH program, Heublein spent $180 million between 1982 and 1986 to create 9000 jobs in the black business community—mostly at black-owned Kentucky Fried Chicken franchises.

With an improved public image and profits restored, Heublein petitioned the Bureau of Alcohol, Tobacco, and Firearms to alter its definition of distilled spirits. The Bureau classified liquor of less than 40% alcohol as “diluted,” a term which was unattractive to many consumers. The request, however, has yet to be reviewed.

At this time, R. J. Reynolds Industries, a food, tobacco, energy, and shipping company, purchased Heublein for $1.2 billion. Soon after the acquisition, Reynolds sold some of Heublein’s select wineries and brands to Allied Grape Growers, and though this did not have a significant impact on the company’s earnings, it did mark the beginning of a planned restructuring for Heublein. Heublein continued to sell a variety of products, and it had the added financial and marketing support of Reynolds when experimenting with new products.

Heublein’s international sales increased substantially in the 1980’s. A new vodka distillery was built in Brazil, a growing market, where the population was expected to rise from 112 million to 200 million by the year 2000. In 1985 Heublein formed a joint venture with the Mitsubishi Corporation, called Heublein Japan. The company was also forced to abandon its business in Iran, which had become unworkable since the Ayatollah Khomeini came to power in 1979. In the United States, Heublein became the American agent for Wild Turkey Bourbon and other Austin Nichols brands.

During a corporate restructuring in which R. J. Reynolds merged with Nabisco (to form RJR Nabsico), Kentucky Fried Chicken was made a wholly owned subsidiary and was later sold for $800 million. Another subsidiary, the Heublein Grocery Products Group, was subsequently merged with RJR Nabisco’s Del Monte group. RJR Nabisco reduced the Heublein product line to a core of beverages, and in March of 1987 sold Heublein to Grand Metropolitan for $1.3 billion.

John Furek, president and chief executive officer of Heublein, and John A. Powers, chairman of the board, have remained in charge of Heublein since shortly after the company was acquired by R. J. Reynolds. Under their direction, Heublein has concentrated much of its marketing strategy on emerging tastes in the American market for lower-alcohol beverages. In fact, attention to satisfying the demands of the American public is the unique factor which had led the Heublein company to its past success. Now, as a subsidiary of Grand Metropolitan, Heublein will largely depend on this consideration for its future success.