THE PHOENIX Ian Bankier has tired of being in the spotlight recently but fortunately had just one interview left in him for the SWR. LFW: What is your job? I am chief executive of CL World Brands, a new company created at the beginning of 2003 to hold all of the drinks industry investments of CL Financial of Trinidad. This includes the best part of Angostura, a majority stake in Todhunter of Florida—a major producer of rum and other alcoholics, cooking wines and vinegars—the whole of Hine, two French distribution companies and Burn Stewart. There are four operating bases: France, the Caribbean, United States and Scotland. Each is a fully-fledged company with its own managing and sales directors and interfaces with a network within CL World Brands, now headquartered here in East Kilbride. We in turn report to CL Financial. LFW: What is CL Financial? A conglomerate with four prime interests: energy (oil & gas), financial services, real estate and now beverages. The group has turnover of billions of dollars and has thousands of employees. It is basically the creation of Mr. Laurence Duprey, a visionary Trinidadian of French extraction who owns most of the stock and likes to create and build things and a better economy for Trinidad and Tobago; his enterprises represent a very substantial part of the gross national product. CL started in Life Insurance and then got into other financial services; it has a very substantial part of one of the island’s biggest banks. It’s a family business; I think CL stands for Cyril Lucian, the grandfather. Now because Laurence has no successors, part of his logic in acquiring Burn Stewart is to find competent management capable of looking after his empire; he’s past ‘retirement’ age. The buy-out of Burn Stewart has been described as a ‘Trojan Horse’ deal, where we have sold ourselves but actually are now inside the gates; a nice description. CL Financial have a lot of assets with exposure to the Caribbean and they wanted to get a global rating. Beverages are a way to get exposure to a number of markets around the world with a relatively low risk. I think there is going to be more consolidation in the drinks industry with many other opportunities—now we have quite a deep pocket behind us. CL moved into drinks in 1998 with the acquisition of Angostura who, in addition to the famous bitters brand have a substantial rum distillery in Trinidad. They are a very significant supplier to Bacardi (who don’t actually produce any rum themselves). We also have a stake in Belvedere S.A. who own three Polish vodka distilleries and enjoy a big part of the domestic Polish vodka market. LFW: What are Angostura bitters? They won’t give me the recipe! It’s a mixture of spices, herbs, and botanicals on an alcohol base. It started as a medicinal compound by a German, Doctor Siegert, and by the turn of the century it became a part of cocktails. Soon the British aristocracy took it for their pink gins and so it travelled around the world. The UK is the third biggest market, mainly in cocktail bars. One of our tasks is to find new uses: cooking, coffee, ice cream, fruit, water… an ‘Angostura Spring’—water with a couple of dashes in it—is very nice! Angostura is a high profile company and one of the jewels in the Trinidad crown, it’s very prestigious. At present I go to Trinidad every second month. Angostoura is part of my charge. LFW: Were you at the start of Burn Stewart? No, I started in 1994. Originally Burn Stewart was a small whisky-broking company owned by the Hillman family who were well known in the industry. In 1988 Bill Thornton, formerly of Hiram Walker, bought Burn Stewart as he wanted a vehicle to create a fully vertically integrated Scotch Whisky company and then to buy some brands. He did very well—the only person since the war to create such a whisky company—but the brand-buying ambition was never fulfilled as events in the marketplace conspired against him. He had narrowly missed buying Whyte & Mackay from Brent Walker. As he didn’t want to be in the same position again whereby he was held up by speed of funds, in 1991 he listed Burn Stewart on the London Stock Exchange to get access to the capital market and started looking for another Whyte & Mackay. At the time of the flotation Burn Stewart had the Scottish Leader blend and Deanston Distillery but the principal product was bulk blend and ‘own label’ supermarket bottlings. He was handicapped that he had no branded business. I joined as a troubleshooter a couple of years after listing, when things were beginning to get sticky. My background is finance and law—and boy! Here I had to shoot some trouble! The Scotch private label market was going seriously negative in terms of pricing and we got to our worst position in 1997 but now have dug ourselves out of it. LFW: What went wrong? Pricing, pricing and pricing. Look at the airline industry today—never been fuller but making less and less money. Why do people do that? In the nineties the Scotch industry got into the same pickle (still is) by cutting prices. When we started there were margins of up to 45%, now we’re down to almost nothing and still going down. Private label supermarket supply became an interesting sector in the late eighties. Supermarkets led by Marks & Spencer got the notion that a non-branded value-for-money offering was what the consumer wanted. This business made Invergordon in particular lots of money and Burn Stewart was a player as well. But it became too interesting and other significant players moved in, creating turf wars while buying business; you can’t get into that sort of low cost trade except on cut-throat pricing. They brought the price down and that’s the way it’s been going ever since. Similarly with bulk whisky. In the good old days bulk to Japan made millionaires of some people. Today bulk is cut-throat, penny sensitive and not sustainable if you want to create equity in your business. Our response has been to get out of it. Burn Stewart made spectacular losses between 1997 and 2002—our margins were sliced while we were dropping business. By shaking off the low-end business we lost 35% of volume in one year. Because of the investment process unique to Scotch whisky it took three or four years to change direction, but we generated enough cash to survive that process. By and large we are now out of it. These days Invergordon are the main providers of bulk, with Angus Dundee and Inver House heavily involved as well. LFW: How do you get out of that sort of business? You price yourself out, make a stand, and look critically at your returns on capital. The unique thing about Scotch is you can’t make it today and sell it tomorrow, so it doesn’t fit the text book model of marginal pricing, efficiencies and cost reductions—you have an ongoing investment process to consider. If you go deeply into the private label and bulk supply business then you will find that you have a very large investment in a business that is very fragile. You have got to ask yourself ‘is this a good return for the money I have invested or should I have put the money in the building society?’ If you have a one or two million case sales volume with the supermarkets you have a very substantial cash investment in Scotch—but it’s all for them! It’s a very poor investment for the risk involved—you take the risk, and they get the profit! We looked at ourselves critically and took a view that we would not be persuaded to continue, so we haven’t had the supply contracts renewed. We still maintain business with two grocers, M&S and Waitrose, but both are added-value accounts and looking for more than just a bottle with their label on it. There is a living to be had from that. We are in the process of handing Asda over to Glenmorangie who have an appetite for this sort of business. LFW: Why? Glenmorangie regard themselves as having a winning formula; they have a strong brand that makes a solid contribution, but which does not come close to filling what is an enormous bottling capacity (acquired from Bell’s) so they marginally cost everything else with the view that if it fills surplus capacity then they can do it. It’s their choice but personally I don’t think it is a robust business model. Burn Stewart’s business is now very substantially branded. We have one bulk contract remaining for a brand called Scotch Blue, the no. 2 brand in Korea. We are the sole providers and it is ‘bulk’ but not in the marginal spot pricing sense. They look after us and we look after them. LFW: And your new babies. With our recent acquisitions Burn Stewart has strong brands, three distilleries, a bottling facility in East Kilbride and a blending and maturation warehouse complex in Airdrie. Bill Thornton’s dream is reality. Burn Stewart first bought Deanston Distillery from Invergordon with whom we had a good working relationship. Deanston single malt is not setting the heather on fire but I like it. It’s unchallenging and quite sweet and so favoured as a blending Scotch; it is a permanent constituent of a number of very high profile blends. It’s now ten years since we acquired Tobermory—hitherto not very glamorous either but we have plans. Tobermory was closed more years than it was open and previously the bottling was an unaged, vatted malt because there were insufficient stocks. A while ago it became 10 year old and a single and now on our 10th anniversary it is all our liquid; previously we had to scratch around, buy a cask wherever we could. Until now we have been able to do little with it but now plan to focus on it. It will become quite glamorous because it is unique. It’s the only malt from Mull, the flavour is different—neither island nor mainland – somewhere in between. There are very few such malts and Tobermory has a unique selling point. At Tobermory distillery we have two different styles of distillation; about 60% of production is ‘Ledaig’. The peated variant is very popular with the blenders as an alternative to Islay. The unpeated production is what goes into the ‘Tobermory’ bottle. LFW: How do you tell your new owners you want £5.5m to buy a distillery? Not just Bunnahabhain, a brand as well. I told them it was absolutely pivotal; this gives us the step up we’ve been waiting for. Brands like this don’t come round very often and we could be waiting a long time for the next. I think that by that time they had a lot of trust in my judgement. They just said ‘go for it’. We had to slow down the negotiations to get the sale of Burn Stewart to CL sorted out first. Ian Good of Edrington was very anxious to make an announcement to the distillery workers and appreciated that we would be a benevolent owner. He was very keen to say something to relieve their concerns. In the end it was settled in April; they were all very patient. Some moaned that Edrington neglected Bunnahabhain and to an extent that’s true—they were not on the letter paper. Small things like that are important to people, especially if they live on an island. The transfer has given them a real change. Now they’re into something as a key and that’s given them a great buzz. We’re thrilled to have ‘Bunna’—it’s a fantastic whisky. In truth I didn’t realise how fantastic it was until we bought it. Some of the special casks they’ve bottled are sensational. LFW: And Black Bottle a well respected blend too. I looked at Black Bottle the first time it was up for sale, but we were not sufficiently developed in our thinking about it. At that time Highland Distillers allegedly paid a strategic price in order to protect The Famous Grouse (Black Bottle might have threatened Grouse territory). The then boss, Brian Ivory, was especially fond of Bunnahabhain and took a personal interest in the marketing. He saw a link with Bunnahabhain and Black Bottle, as do we. LFW: But they did very little with it. They looked after the brand very well. I have a great regard for the Edrington Group, a real example to follow, and they lead the industry properly. The Bunnahabhain brand has been largely untouched, that’s part of its attraction. Nobody has been monkeying around with the labelling and there are things that can be done for it, like giving it a nickname of “Bunna”. But speaking for everyone in Burn Stewart, we are very reluctant to do anything in a hurry. We are watching it, getting to know it. I saw the acquisition of the two Bs as pivotal to Burn Stewart. We had our two brands, Tobermory and the budget-priced Scottish Leader, plus Deanston and Wallace liqueur, but it was all hard work. The two Bs bring us several things including real credibility as a brand owner. Now we have brands with a history to them and right at the top of the sector. It’s a great opportunity for us. LFW: Black Bottle 10yo is unusual and well regarded. I think the 10yo should be seen as part of the single malt category. We are not looking to sell hundreds of thousands of cases, just to keep it growing and keep the margins and make an acceptable return on capital—end of story. Keep it steady, look after it, and don’t break it. Since buying the two Bs we have gone on to buy Hine, once a great Cognac brand but neglected under Hennessy’s ownership, like Black Bottle. We plan to nurture that too. CL World brands are in a digestion phase; we have three new brands and need to get them properly organised and trading in a sensible way, then we’ll go and see what else there is. I don’t think we will go into wines—we’ll stick with spirits. To have a rum brand would make sense. Something will come up. LFW: Any gripes? I have been unimpressed by the fad of cask finishing; I think that whole thing is worrying. It opens the door to rum producers making an Islay finish. We could do this with Angostura rum—we could really mix it if we were feeling mischievous. It’s a dangerous territory. As an industry we ignore the blended sector at our peril and there is a danger we are ignoring it. All our attention is on malts—they are providing big margins but our bread-and-butter is the blends, don’t let’s forget that. Single malts in volume terms are still less than 10%—were they to be 50% we couldn’t produce it! A common but very real concern is the turnover of people in our industry. The danger of a high ‘churn’ factor is that very few people act in the long-term interests of the industry. Where are the likes of Turnbull Hutton now? He thought very hard about the capacity and stocking of his distilleries and of the industry. He knew that his decisions would not only have an effect on United Distillers but on the whole of the industry for a very long time. This is not just alarmist for old-fashioned “Scotch”; it’s not a make it today and sell it tomorrow product and the industry always will have surplus capacity. That needs to be managed responsibly. The legal protection that Scotch enjoys is unparalleled and can be damaged by short-term marketing strategies such as the cask finishing fad. LFW: Favourite dram? Bunnahabhain. LFW. That’s it? Yes. LFW: Thank you.