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2008 was clearly a challenging year for Fortune Brands. As the steep recession in the U.S. accelerated, the U.S. housing correction intensified, and the global credit crisis took hold, consumers pulled back on discretionary purchases in many product categories. Additionally, a tax increase on certain spirits products in Australia also hurt results for our largest spirits brand.
While we recognize that we can't control the economic landscape or the health of our markets, we can control how we compete. In 2008, we took actions to succeed in this challenging environment, to return to strong growth when the economy recovers, and to emerge from the downturn an even stronger company. Specifically, we're focused on these simple priorities:
How We Succeed in Spirits 2008 emerged as a transition year in our spirits business as we made significant progress to better position this business for long-term growth and to more broadly outperform the market. Results in spirits were impacted by three primary factors: costs associated with our initiatives to simplify and gain greater control over our sales and distribution routes to market; a transition to lower distributor inventory levels in the U.S. that will create valuable efficiencies and enhance our competitive position; and in Australia - the world's #2 bourbon market - a significant excise tax hike that increased consumer prices by 25% for high-margin ready-to-drink spirits products that are a big business for our Jim Beam brand. Largely reflecting these factors, our spirits sales were lower by 5% and operating income before charges was down 12%.* Our brands performed better in the marketplace than these numbers indicate. Maker's Mark, Courvoisier, Knob Creek, Teacher's and Laphroaig were among brands that delivered strong sales growth in constant currency, and our brands drove broad-based share gains across several key international markets. Much of our repositioning began when the auction for V&S Group, the Swedish owner of ABSOLUT vodka, ended. Despite our interest in acquiring ABSOLUT, a longtime distribution partner, we maintained financial discipline and ABSOLUT went to a competitor, Pernod Ricard. We were pleased that we efficiently unwound our spirits partnership with V&S Group on very favorable terms: we repurchased at an attractive valuation the minority interest they held in our spirits business, so we now receive the full financial benefit of our highest return business; we received a $230 million pre-tax payment from Pernod Ricard to accelerate the end of our U.S. distribution joint venture with the V&S brands; and we negotiated V&S's early departure from the four-partner Maxxium international distribution joint venture. These moves cleared the way to build our next-generation sales and distribution platform in the U.S. and around the world. The benefits of our initiatives are significant: simpler and more direct routes to market, sales teams that bring us closer to customers and consumers, and greater control over our sales and distribution. In October, we transitioned the U.S. joint venture sales force into a wholly-owned organization focused solely on our portfolio of brands. This gives us more feet on the street in our largest market that are focused on nothing but our brands and the best growth opportunities for us. Internationally, we'll activate our new international sales organization in April 2009, which will reduce our number of international distribution partners from three to just one. To succeed the Maxxium international joint venture, we've established in 24 key international markets an alliance with The Edrington Group, one of our original Maxxium partners. This new venture is a collection of sales organizations that we will 100% own in certain markets, that Edrington will own in certain markets, and that we will co-own in other countries. In large part, these organizations comprise the former Maxxium sales forces that established a strong record of successful brand building for the partners. As a result of our combined U.S. and international route-to-market initiatives, more than 70% of our spirits sales value will be distributed through sales organizations that we entirely own. That's up from less than 10% of sales value when we began our route-to-market initiatives in 2008. We've also concentrated on bringing to life our spirits business's vision of "building brands people want to talk about," which is focused on building brand equity and creating consumer pull to drive profitable growth that outperforms our categories. To support this initiative, we enhanced our consumer insights and marketing teams, implemented new processes to help us develop the most impactful brand-building programs, and revamped our new-product development program to create innovative products targeted at the most attractive market opportunities. We also seized an opportunity to establish a premium position in one of the most attractive spirits categories. The acquisition of the growing Cruzan rum brand gives us an excellent premium position in one of the industry's hottest segments. Taken together, the moves we made in 2008 enable our highly profitable spirits business to look to the future with more clarity, a simpler sales structure, and enhanced prospects for strong long-term growth. How We Succeed in Home Products Despite all this bad news, our objective remains to outperform our markets, no matter how challenged they may be. In this difficult environment, we're encouraged that our home products business has outperformed the market over the course of the downturn, including in 2008. Our home products sales were down 17%, and operating income before charges declined 42%*, reflecting the margin impact of lower volumes spread across our cost base. To win in the home products marketplace, we continued to focus on targeted development of new products in our most attractive categories, delivering superior customer service with industry-leading lead times, extending brands into adjacent product categories, and expanding internationally. For example, Master Lock sales were higher in 2008 due to expansion into adjacent security categories and growth in international markets. And while sales of cabinetry, doors and windows were down at a double-digit rate, Moen limited its sales declines to a single-digit rate with successful new products and growth in international markets. Moen, our largest single brand, has a strong business in China, Canada and Latin America, and also laid the groundwork for expansion into India. As you would expect, in this environment we also aggressively focused on cost reductions, supply-chain initiatives, and exiting low-return product lines. This has included difficult decisions to reduce our home products workforce and close additional facilities to align capacity with challenging marketplace conditions. Over the course of the downturn, we've reduced the number of facilities in our home products business by 35%. We believe the supply-chain actions we're taking do two things: they appropriately align our costs with current conditions, and they also maintain our flexibility to scale up when the home products category begins to improve. How We Succeed in Golf These initiatives helped our golf business deliver its second best sales year on record. While the U.S. and European markets were soft, reflecting fewer rounds of golf played and reduced discretionary spending, markets across Asia continued to provide excellent growth opportunities. Our golf sales were lower by 3%, as sales declines in the U.S. were partly offset by international growth. Impacted by brand-building investments, higher commodities costs and lower volumes, golf operating income was down 24%. Our sustained commitment to product innovation remains central to building our brands in golf. As a result, we developed and launched advanced-technology offerings across product categories, including the next-generation Titleist Pro V1 golf ball, FootJoy's strongest lineup ever, and new clubs from Titleist and Cobra that topped Golf Digest's 2009 "Hot List" with the most Gold ratings of any manufacturer. Sales for our golf brands outside the U.S. reached 42% of our total golf sales in 2008, an all-time high in our golf business. That reflects growing enthusiasm for golf in certain Asian markets, as well as our strategic investments in international markets where our brands have significant upside potential. By seizing growth opportunities in markets such as Korea, China and Japan, our golf sales outside the U.S. grew at a high-single-digit rate. How We'll Succeed in the Future Our confidence in the future is underpinned by the sound long-term fundamentals of the categories in which we compete. The spirits category historically has been relatively stable, the legal-purchase-age population continues to grow, spirits remain an affordable luxury, and the appeal of western-style spirits in emerging markets continues to expand. The prospects for the home products market are supported by favorable long-term demographic trends, including rising household formations and the aging of the housing stock. And golf benefits from the propensity of Baby Boomers to play more golf when they retire, as well as the growing popularity of the game in Asia. Importantly, behind our portfolio of great brands is a team of more than 25,000 best-in-class people who are resilient, passionate, and committed to delivering results. Together, the people of Fortune Brands remain focused on the same measures of success: we aim to outperform, to earn your continued confidence, and to emerge from the downturn an even stronger company. Sincerely,  Bruce Carbonari |
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