Is Brown-Forman Pursuing a 'Failing Strategy,' Rewarding Failure 'Lavishly?

The accusations were about as serious as any could be. Brown-Forman's management had enriched itself despite a failing strategy and the board "is rewarding failure, and doing so lavishly and publicly."

So said a letter written by two members of the family that controls Brown-Forman Corp. to 130 members of the family just before the annual family picnic, The Wall Street Journal reported three weeks ago.

But were charges by W. Lyons Brown III and Stuart R. Brown, who signed the letter, true? We took a look, starting with the five largest publicly traded spirits-focused spirits producers with major U.S. sales. We kept things in the company's native currency, so Diageo was measured in British pounds, Pernod Ricard, Davide Campari-Milano, and Remy Cointreau were all measured in Euros, and Brown-Forman of course was measured in dollars.

On that basis, Brown-Forman's results look pretty anemic. Only Remy Cointreau reported worse results over the five years from 2021 to 2025. Remy's sales actually declined 2.5% over the period. At least Brown-Forman recorded higher sales – up 14.9% over the five years, far hehind Diageo (22.4%) and Pernod Ricard (24.2%), both of whom were left eating Davide Campari Milano's dust (40.4%).

But the quality and capability of a company's management in any industry can be measured by its profits, not by its sales. And on that basis, Brown-Forman looks reasonably good.

To be sure, not as good as Pernod Ricard, whose profits jumped 24.6% in the five years, or Campari, which posted a 17.7% profit advance. Brown-Forman had a five-year loss of 3.8%, significantly better than Diageo (-31.8%) or Remy (-16.1%).

The More Sales in U.S., the Worse the Performance

The cousins mentioned strategy. Brown-Forman historically has been focused on the United States, so of all the producers, it has more of its sales – 44.4% – in the U.S. than the other producers. The other producers generally report their sales based on the "Americas" or "North America," not simply the U.S. North America accounts for 39.4% of Diageo's sales. The Americas represent 28.8% of Pernod Ricard's sales, 27.5% of Campari's sales, and 37% of Remy's sales.

Looking at sales vs. net income, it appears the more sales a company has in the U.S., the worse its profitability. That should not be a surprise because only in the U.S. and China are Western producers having serious difficulties.

It is ironic that the two cousins criticize the company's strategy. Not until Owlsley Brown II took over the reins as CEO from their father,W. L. Lyons Brown Jr., did the company reorganize itself to aggressively pursue foreign markets.

Failing Strategy

Was Brown-Forman's business strategy a "failing strategy" as Lyons and his brother Stuart Brown charged in their letter? Based on the numbers, we don't think so. The difference between Diageo, Pernod Ricard and Campari and Brown-Forman and Remy is simply that B-F and Remy were much more focused on the U.S. market – and later to enter foreign markets.

If that was a mistake, it was not a one-year or two-year or even five-year mistake. Rather, it arose from the company's culture which historically has been reasonably cautious. That's not unusual for a family business, but it may be for publicly held companies without family influence or control.

One way to see just how conservative Brown-Forman is is to look at debt levels as a percentage of sales and profits. Here is the debt-sales ratio for five major bev/al companies:

• Brown-Forman 55.9%
• Pernod Ricard 113.4%
• Constellation Brands 114.5%
• Anheuser-Busch InBev 102.7%
• MGP Ingredient 43.6%

Three of the companies – Constellation, Pernod and AB-InBev – owe more than they sell in one year.

Another way to see just how conservative Brown-Forman is is to look at the five companies' Net Debt/EBITDA ratio:

• Brown-Forman 1.79x
• Pernod Ricard 3.70x
• Constellation 3.29x
• AB-InBev 2.87x
• MGP Ingredients 2.00x

Yet another to measure a business's health is to look at its operating margin. Here Brown-Forman is on par with its spirits counterpart but a bit behind those in the beer business:

• Brown-Forman 25.5%
• Pernod Ricard 25.8%
• Constellation 29.8%
• AB-InBev 26.0%
• MGP Ingredients (17.6%)

So, it would seem that the charge that the company has a losing strategy is clearly a bit of a stretch, to say the least.

But Is Management Enriching Itself?

In their letter to other family members, the cousins said "the board is rewarding failure and doing so lavishly."

As demonstrated above, the company's operations seem to have been at least as good as any other bev/al company. If the comment refers to the rejection of the Pernod Ricard and Sazerac approaches, the short answer to that is the Latin phrase, "Vox populi, vox Dei." (The Voice of the People is the Voice of God."

According to the proxy statement for the recent annual meeting, "In connection with the contemplated (Pernod Ricard) transaction, management retained Pearl Meyer, an independent external compensation consultant with deep expertise in transaction-related practiees ... to advise on executive compensation matters specific to the contemplated transaction."

Needless to say, Pearl Meyer did what it was expected to do. It said management deserved a bonus because "executives leading complex transactions assuming a materially expanded scope of responsibility."

Here's what the proxy statement did not disclose, but The Wall Street Journal did: Brown-Forman's CEO, Lawson Whiting, and George Garvin Brown IV, a former Brown-Forman chairman, "explored a potential merger with Pernod Ricard."

It's not clear whether Whiting and Garvin Brown, who was acting on behalf of Wolf Penn Branch, a Brown family entity that controls a majority of the Brown family's stock in the company, approached Pernod, or whether they were responding to a feeler from Pernod.

At any rate, the merger did not go through, but the board awarded Whiting a special cash bonus of $2,712,765. Other executive officers also received bonuses totaling $3,539,963.

In addition, on July 3, Whiting was awarded a special one-time performance-based restricted stock units which Brown-Forman valued at $5,638,958. The units mature over three years and could ultimately could result in Whiting receiving as few as 102,155 or as many as 306,485 units. The other "named executive officers" also received similar units which Brown-Forman generally valued at about $1 million.

Brown-Forman didn't describe the July 3 award as being in relation to the Pernod Ricard merger talks. Instead, it said it was "in response t a specific and extraordinary set of circumstances: the Company's ongoing strategic transformation demands sustained cohesive executive leadership at a time when the macroeconomic environment has created significant uncertainty and an intensely competitive market for senior talent."

On July 24, the day after the annual meeting, Brown-Forman also awarded Whiting additional performance-based restricted stock units valued at $5,133,747 and stock-settled appreciation rights valued at $2,366,434.

But What About the Stock Market?

Yes, Brown-Forman's stock is down significantly. Three years ago, it Brown-Forman Corp Class A (BF.A) was $26.78. Exactly three years prior (September 8, 2023), the stock closed at $65.59.

But so are most other bev/al stocks. It's a miserable time to be in the business. Management can't control that. It should only be responsible for what it can control, and on that basis, Brown-Forman looks pretty good.

We gave Brown-Forman several opportunities to comment on various portions of this article, but the company declined.