Last year, after Jack Daniel’s owner Brown-Forman lobbied to the state legislature, a law was passed regulating what can and what cannot be called “Tennessee Whiskey”. The requirements are mostly straightforward and standard however, there are two requirements that define this product category from other variations of whiskey. The whiskey must be charcoal-filtered and it must be aged in a new charred oak barrel.
Currently there is a heated debate underway between Diageo and Brown-Forman over the legislation. Diageo is the largest producer of liquor in the world, selling over 126 million cases of alcohol a year. Diageo makes many different spirits, but for the current discussion there are two that are most relevant: George Dickel and Johnnie Walker. George Dickel is the distant second best seller of Tennessee Whiskey to Jack Daniel’s. For every bottle of George Dickel sold, 100 bottles of Jack Daniel’s are sold.
There are two very different arguments being made regarding this matter. Diageo has presented the argument that Jack Daniel’s has regulated the formulaic requirements for Tennessee whiskey so extensively that producers can only create a product identical to Jack Daniel’s. Diageo is framing themselves as being a better company and defending the rights of small distilleries across Tennessee that cannot afford to meet the updated standards. Diageo currently makes all of their Tennessee whiskey up to the standards that Jack Daniel’s imposed earlier this year. Brown-Forman is arguing that their company has spent over a century establishing the good name of the product “Tennessee Whiskey”. They do not intend to see it altered or spoiled by cheaper quality liquors flooding the market.
So what are the motives behind both sides for this debate? Diageo is the maker of the world’s best selling whiskey, a Scotch variation called “Johnnie Walker”. Jack Daniel’s is quickly growing in popularity, and it is currently the best selling American whiskey in the market. Diageo is probably trying to take some business away from Brown-Forman in what is a monopolized Tennessee whiskey category. Based on this, there may be concern in Diageo’s strategic department that Jack Daniel’s could surpass Johnnie Walker in global sales.
Currently, there is no way for other makers of Tennessee whiskey to be competitively priced under the new legislation. While Diageo has outsourced the production of their barrels, a process that is extremely costly when using a new barrel for every batch of whiskey, Jack Daniel’s makes their own barrels in house. This gives them an immeasurable competitive advantage. The situation is compounded by the fact that American whiskey sales have increased rapidly in recent years creating a barrel shortage. The purchase of a new barrel costs around $300 on average.
Here is where it gets confusing; Diageo has stated that all of their whiskey is already being produced with fresh barrels for each batch, and that they meet all of the new regulations. On top of that, they said they have no intention of changing their methods if the regulation is repealed. What could their incentive possibly be to make it so that other distilleries may compete with them more easily? Jack Daniel’s is currently the eighth best selling whiskey in the world and their sales went up 11% in 2013 according to the Brown-Forman press release from June 5th. It is my opinion that Diageo may be willing to sink their own product, George Dickel, if they are able to bring Jack Daniel’s with them. If they are able to repeal the current legislation, it would be much easier for the Tennessee whiskey market to be flooded by cheaper substitutes. These lower quality substitutes would be very appealing compared to the relatively high priced Jack Daniel’s. George Dickel would be a small loss for Diageo if it defends their Johnnie Walker brand from being surpassed in sales by Jack Daniel’s. On a global scale, Johnnie Walker is the current standard for whiskey. If Jack surpasses them in sales, it could change the shape of the whole industry. Diageo is not trying to defend the small distilleries as they claim; they are trying to defend their flagship product.
Putting Diageo aside for a moment, why is Jack Daniel’s trying to defend their legislation so fiercely? Is Jack Daniel’s doing this in an attempt to create barriers to entry? The answer is yes and no. By passing this legislation, they are making it harder for people to compete against them, and I am sure this is no upsetting fact to the businessmen at Brown-Forman. More significantly they have invested an extraordinary amount of time into instilling a sense of consistency in what people expect from Tennessee whiskey.
There are currently regulations on what can be called Bourbon, regulations on what can be called Scotch, regulations on what can be called Canadian whiskey, etc. The standards currently imposed on Tennessee whiskey are not extraordinary. For example, champagne to be called as such, must be produced in a specific town called the Champagne district of France, otherwise it must be labeled sparkling wine. Currently, people associate Tennessee whiskey with a strong corn and oak flavor that can only be produced through the use of a fresh barrel with every batch. Brown-Forman has agreed to allow other variations of the term to be used for other methods of production. For example, the term “Tennessee Style Whiskey” is perfectly acceptable under current law. Distillers may still take pride in their Tennessee roots regardless of their choice of barrel usage technique. Brown-Forman has every right to defend this categories brand equity tooth and nail, and in my opinion, their regulation ideas are not overstepping their rights as a corporation in the liquor industry.
Wilson, Reid. “Fight Over Tennessee Whiskey Spills Over into International Booze Business.” WashingtonPost.com. The Washington Post, 19 Mar. 2014. Web. 20 Mar. 2014.
“Brown-Forman Reports Stellar Results in Fiscal 2013.” Press Release. Brown-Forman, 5 June 2013. Web. 21 Mar. 2014. <http://www.brown-forman.com/news/releases/release.aspx?rid=1560>.
Esterl, Mike. “Jack Daniel’s Faces a Whiskey Rebellion.” The Wall Street Journal. Dow Jones & Company, 19 Mar. 2014. Web. 21 Mar. 2014. <http://online.wsj.com/news/articles/SB10001424052702303287804579443160558822086?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303287804579443160558822086.html>.