Missing the (Maker’s) Mark

Editor's Note: MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.

For most businesses, gangbusters growth in Emerging Markets is a fount of opportunity—millions of new potential customers and boundless expansion opportunities. For Kentucky bourbon label Maker’s Mark, however, it’s a headache.

In the developing world, shifting tastes come with economic advancement—not just taste in higher class consumer goods, but in higher quality food. When countries are in the early stages of development, the public tends to subsist on rice and other grains—cheap, plentiful, domestically grown grains. But as countries get wealthier, meat becomes the norm—as do a variety of processed foods (the health content of which is often debatable). Beverage tastes change too—with wealth comes a desire for more refined cocktails, and many folks swap the traditional local libation for something more elegant. In China, for example, French and Australian varietals are supplanting traditional Chinese rice wine (shaoxing), and distilled rice liquor (shaojiu) is making way for Scotch, bourbon and other Western spirits.

Earlier this month, the good folks at Maker’s Mark revealed they can’t quite keep up with this burgeoning demand. For most firms the solution would be obvious: Grow the business, increase supply and enjoy many happy returns. But Maker’s chose a different tack. Citing bourbon’s production limits—it canbe produced only in Kentucky, and it must be aged in barrels for seven years before bottling and distribution—and their desire to avoid raising the price, they decided to stretch existing supply. On February 11, COO Rob Samuels said Maker’s Mark would water down its product, reducing alcohol content from 45% by volume to 42%. Permanently.

The bourbon-buying public was not amused. Though the company swore taste testers noticed no flavor differences, consumers were none too pleased about getting a little less bang for their buck—a tacit price increase for an inferior product. So six days later, with customers raging—and, no doubt, with visions of New Coke and Crystal Pepsi dancing through their heads—Maker’s Mark U-turned. No harm done, but a colossal PR blunder.

Why was Maker’s so willing to risk its reputation just to boost supply abroad? Likely, because they knew that if they didn’t, someone else would. Not just fellow American labels like Knob Creek and Woodford, but also counterfeiters—bootlegged spirits are as much of a problem as bootlegged clothing and electronics in China, and enforcement of intellectual property laws against this is weak at best. One Chinese wholesaler of counterfeit Scotch was fined and jailed for four years in January, but convictions remain few and far between. That puts the real producers at a heavy disadvantage—and gives them incentive to cut corners.

Even with that in mind though, there were and are plenty other solutions at Maker’s disposal. For one, they could have watered down bourbon sold in Emerging Markets but kept the home brew as-is, satisfying discerning tastes at home and demand abroad. Most other beverage makers go this route—if you buy a Coke or Pepsi in China, chances are it’s in a smaller can than you’d find here and uses cane sugar instead of corn syrup. (Funnily enough, while most Americans are willing to pay a premium for Mexico-produced Coke with cane sugar, Chinese will pay extra for the “privilege” of drinking the high-fructose US blend.) Or they could have raised prices in China to earn some additional luxury prestige while holding steady at home—not unlike the common American processed foods that fetch high prices at Western grocery stores in China.

And even these need only be temporary solutions to bridge the gap while they bring more production online. Bourbon production may have a seven-year lead time, but that shouldn’t prevent producers from building new distilleries and bottling facilities to increase supply in the long run—the best way to meet rising demand. And given the amazing growth potential remaining in the developing world, expanding now in anticipation of greater demand tomorrow is a perfectly sensible move. In a way, Maker’s is in its present predicament because it got caught with its britches down—the letter announcing the decision to water it down cited “unforeseen demand.” But savvy business owners often have a way of identifying new trends globally and positioning themselves at the fore. Running a globally successful business requires being proactive, not reactive.

The good news is plenty of other American businesses realize this, which is why strong Emerging Markets growth continues to foster economic opportunities in the US. When firms expand here to boost supply and meet demand abroad, they invest and hire here—with that comes economic growth and jobs. But if firms simply see higher demand abroad as a problem, chances are their chosen solution won’t do anyone much good. So here’s hoping businesses throughout the US learn from Maker’s mistake and seek out and embrace opportunities in Emerging Markets.

(Hat Tip: John Hulcher)