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Alex Short, finance director, William Grant & Sons

There aren’t many family businesses that survive intact through five
generations, but William Grant & Sons is one of them. In fact, forget about
surviving: the business behind the best-selling Glenfiddich single-malt whisky
is positively thriving, throwing off so much cash that it recently paid a
special dividend worth £200m to the few dozen descendents of the founding Grant
and Gordon families.

Perhaps it helps that it takes 12 years to make Glenfiddich – look at it like
that and the company has been through barely ten product cycles, end-to-end,
since William Grant, an accountant, first poured whisky from his newly acquired
distillery on Christmas Day 1887.

But despite being a Scottish, family-owned whisky business founded by a
Victorian beancounter, the company’s success is probably much more due to the
ambitions of the family and the risks they have taken. Whether buying land to
secure water rights, acquiring property to create a new distillery, or defying
the industry logic of the day by expanding the company’s range of activities
into wholesaling, blending and exporting, William Grant & Sons has spent the
past 120 years turning Glenfiddich into, by far, the world’s best-selling single
malt and Grant’s the fourth-best selling blended whisky (after Ballantine’s
(owned by Pernod Ricard), J&B and Johnny Walker (both Diageo)).

Three brands – Glenfiddich, Grant’s and The Balvenie – make up around 85% to
90% of the company’s revenues. But there is now a long, thin, but growing tail
of new brands and – steady yourself – some of them aren’t even whiskies.
Hendrick’s Gin was launched about four years ago and Reyka vodka is not only
barely 18 months old, it comes out of the first and only distillery in Iceland.
Other brands have been bought rather than launched, such as Sailor Jerry rum and
Three Barrels brandy.

Drams and brands
Alex Short, finance director of William Grant & Sons, makes clear that,
despite its market position, the company isn’t like the big drinks
multinationals. “We’re trying to reduce our dependence on scotch and come out
with new product developments of rums, brandies and vodkas. But it’s all about
‘super-premium’,” he says. “The Diageos and the Pernods [which bought Allied
Domecq in 2005] occupy this space, but where we can actually get away with
having premium products, there’s a market niche there. [The big players] manage
a portfolio of products. We need to manage a similar portfolio, but have
something different about us. The point is, why would somebody do business with
William Grant? The only reason is because we have great brands – so we’ve got to
continually invent, having fantastic brands on the shelf.”

The apparent problem, though, is that having a clutch of brands that are tiny
compared with the core of the business seems like adding distractions for
management without actually doing much to diversify the group. “We still have a
very disciplined portfolio,” insists Short. “Each brand has its own use.” He
explains that some of the new products give William Grant a better
route-to-market because they come with ownership of key distributors.

There’s a more immediate financial benefit, too, Short adds. Not
surprisingly, it takes 12 years to make a 12-year-old Glenfiddich: by law,
single malt has to be at least 10 years old, blended whisky three. “There’s a
working capital requirement to fund all that, which is one of the reasons for
getting into the white spirits,” he says. “It means you can distil it, bottle it
and sell it straight away.”

Each brand is managed in a way that suits its own characteristics.
Hendrick’s, for example, which is an unusual gin that the marketing folk suggest
should be served with a slice of cucumber, is now coming into profit, even
though supplies of the small-batch, Scottish-distilled gin were restricted to
the off-trade and a few select bars. “Only now are we getting it into the
supermarkets, but we’re doing that being able to retain the premium price
position. What normally happens is you put it in the supermarket, and it’s
discounted. You grow the volume, but you don’t have much equity in the brand. So
we’re taking a much longer term view on it,” says Short.

And that, insists Short, is one of the big advantages of being a private
company rather than a public company. Yes, the company does in excess of £350m
turnover, and with a pre-tax profit of just over £75m. Based on the multiple
when Glenmorangie was bought by Moët Hennessy two years ago, William Grant could
easily be valued at £1.5bn, which would put it firmly in the FTSE-250. “But
we’re not focused on that at all,” Short adds. “In terms of our focus, it’s very
much long-term, sustainable profit growth and doing the right things, not always
chasing short-term profitability. We’re trying to sort out our route-to-market,
we’re trying to grow our existing products [the aim is to get Grant’s from
number four to number three in the whisky league tables], and also growth by
acquisition. Our acquisition strategy is along the lines of securing our
independence through having our own route to market.

“But with all the consolidation that’s going on in the industry, the squeeze
is quite immense. So part of our challenge is to remain relevant by growing our
brands, keeping our brands contemporary, making sure that they’re fantastic
quality and well priced.”

Clan chief executive
He adds that, having acquired all these businesses, one of his key challenges
“is to integrate the businesses into the structure. When you buy a French brandy
company, you have cultural issues, systems issues, language issues, different
working practices that you have to integrate”.

Over the years, William Grant has adapted and evolved – and the 21st century
is no exception. In recent years, the family firm has switched from having a
family chief executive with an outsider chairman to having a family chairman –
Charles Grant Gordon, fourth generation, age 79 but still going strong and
passionate about the business – and an outsider chief exec, Javier Ferrán, an
ex-head of Bacardi. Why the switch? “The family weren’t happy with the way the
business was being run,” Short says, so there was a restructuring of the board
about four years ago.

So links with the family are still very strong, obviously. The shareholders
register lists just a few score names, all of whom are members of the founding
Grant and Gordon families as the articles of association impose restrictions on
the transfer of shares. There is a family council attended by the chairman,
which sets out its views as to the direction of the business. A supervisory
board comprises a number of family members representing in aggregate around
two-thirds of the shareholders, a few non-executive directors, the chief exec
and Short as FD. Then there is an executive board, with a more typical structure
that includes various business unit MDs, HR and so on.

Communication lines
“You have very short lines of communication, which can bring its challenges on a
day-to-day issue because you’re sometimes not shielded from the shareholders
directly,” Short says, acknowledging, too, that sometimes different parts of the
family want different things. “But other times it eases what we’re looking to do
in terms of it doesn’t take long to get a decision made around here. We make
sure we have the professional rigours in place to make sure it’s the right
decision – but then when the decision is made, it’s implemented very quickly.”

William Grant works to a three-year planning cycle – “There’s an argument it
should be longer,” Short admits. After all, it takes four times that to actually
make a bottle of Glenfiddich. But as the focus of the business shifts with the
development of new products, the planning horizon suits in terms of discussions
about investment in infrastructure, acquisitions, launches – and dividends.

The business is terrifically cash-generative and so, following a discussion
with the family, it was decided to return £200m to shareholders by way of a
special dividend two years ago. The company geared up the balance sheet then put
the cash into an in-house investment company that, in effect, was spun off to
investors. It was a way of returning cash to shareholders without them having to
pay tax on the proceeds straight away. It was also a way of enabling
shareholders to diversify their risk by giving them separate investments – one
in the operating business, another in the investment vehicle.

At the same time as the board has been keeping the shareholders happy, it was
also working out how to fill a £42m hole in the UK4 pension scheme. The solution
has included a special dividend to the scheme, a better investment outlook, the
introduction of employee contributions and the closure of the scheme to new
entrants. Add in higher company contributions and some changes to the actuarial
assumptions and Short says it now looks as though the deficit has nearly halved,
to £23m. “It’s felt to be very manageable, but we have done some work to fix
it,” Short says. “We have a ten-year plan. It will take longer to make some
whisky than it will to sort out the pension scheme.”

Conservative accounting
As a family business founded by a Scottish accountant, William Grant still takes
a conservative approach to its accounts. “We try as a private company to expense
as much as we can rather than capitalise it, so that our stock costs in future
are as competitive as they can be,” Short says. The biggest item in the balance
sheet is the £200m-worth of work in progress and finished stock – chunky
compared with turnover of around £350m, but not as much as one might have
thought, given the maturation process. “In plcs, it’s ‘capitalise as much as you
can’, whereas here it’s ‘let’s only capitalise what we really have to’.”

Short explains that, for internal purposes, a 6% financing charge is added
onto the cost of the spirit in stock which “gives us an economic profit so that
in 12 years’ time, we’re not selling Glenfiddich with a stock cost of £1.50 a
litre, it’s actually accumulated up to a charge every year.” Short conducts
valuations of the various brands, though the main reason appears to be for the
calculation of the senior management long-term incentive plan (LTip). It doesn’t
have much point in terms of valuing the business for sale – “we’d probably want
much more” – nor does Short think that brand values belong on the company’s
balance sheet. Nor, for that matter, do international financial reporting
standard numbers: “The decision was we don’t have to, so don’t.”

As for Short himself, he hadn’t originally sought a career as a spirits
company accountant. While at Napier University he did a sandwich course and
applied for a marketing position at Coca-Cola Schweppes. But so did everyone
else. Offered an opportunity in their finance team, Short took it – and soon
found it to his liking. “I was invited to join them after I graduated, so it was
superb,” he recalls.

At Coopers & Lybrand, Short did some consultancy on supply chain
management, which came in useful when he moved to William Grant as financial
controller. After two years he took a line role as supply chain director to help
sort out the company’s customer satisfaction problems. Then he became managing
director of the production business – that is to say, pretty much everything
from distilling the whisky to getting it into bottles and boxes.

This experience shines through as Short takes us on a tour of the bottling
plant located on the same Lanarkshire site as the head office. Bottles of
Grant’s whisky clatter past at the rate of 500 per minute. Short points out
what’s happening on the line. “Rinse, fill, cap and then a label supplied here.
It’s quite amazing, isn’t it! Fascinating! I love it!”

Another Scottish accountant with the whisky business running through his

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