Scotch whisky giant far from the headless chickens

You do not have to look too far to see examples of such destruction. In some cases, it might involve a highly leveraged acquisition of a long-established business by a private equity player. In others, it might follow another kind of change of ownership. And, on occasion, it might merely be the result of the arrival of flash new top brass without the vision or attention span that has enabled the value to be created in the business in the first place.

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Scotland’s family business sector has plenty of great examples of enterprises which continue to prosper from a long-term vision. The same is true of many other privately owned companies north of the Border, and elsewhere of course. And, while a much smaller proportion of stock market listed businesses seem to manage to achieve such a feat amid short-termism often fuelled by investors, some thankfully do.

In these days in which there appear to be far too many professional managers who make their money by pushing change strategies whether or not these are required, not to mention the plethora of management consultants who peddle the same type of plans, a long-term approach is all too often lacking.

That makes it all the more encouraging when you come across it. That is not to say that major change is not sometimes required in the face of market developments or technological advancements, or whatever it might be. However, even in these cases, there seems to be a propensity to throw the baby out with the bathwater. And, oftentimes, things would have been better left alone.

Earlier this week, and not for the first time, Glasgow-based distiller Edrington demonstrated beyond doubt the benefits of a long-term approach.

Edrington, which has famous brands including The Macallan and Highland Park single malt Scotch whiskies, is a global business of real scale. And it is absolutely run from Scotland.

What is more, it is controlled by a charitable trust. Its ownership by The Robertson Trust gives it the great advantage of being able to take a long-term approach.

And Edrington has created huge value over the years and decades by being able to avoid the sort of short-termism that is forced on some companies by financial markets or certain private investors.

A few things stood out in Edrington’s latest annual results this week.

One was the sheer scale of the business that has been built.

Edrington unveiled a 6% rise in underlying pre-tax profits to £411 million for the year to March 31, as core revenues jumped 11% to £1.165 billion.

The group employs about 3,300 people, with slightly more than half of its workforce based outside the UK. The UK workforce is predominantly in Scotland.

Edrington chief executive Scott McCroskie said: “Edrington has navigated a challenging year to deliver financial results that are among the best in the spirits industry. Our strategy of focusing on ultra-premium spirits continues to deliver healthy brands and a strong underlying performance.”

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There is no doubting the strength of the performance, and this was achieved even though economic pressures made themselves evident in the second half of the financial year to the end of March.

In his chief executive’s review in the annual report, Mr McCroskie writes: “I am pleased to present another set of strong annual results for Edrington, which have been achieved despite the post-Covid spirits boom coming to an abrupt end during this reporting period. The year was one of two halves - an exceptionally strong first six months followed by a much slower second half.

“The changing dynamic was driven primarily by weaker demand as consumer confidence and spending power declined in response to rising prices and interest rates in many countries, as well as uncertainty about the future caused by a range of issues including conflict in Ukraine and the Middle East. The impact was exacerbated by trade destocking to meet the lower level of demand and to mitigate the higher cost of financing inventories.”

It is clearly not all plain sailing.

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However, Mr McCroskie highlights the success of Edrington’s clear strategy of ultra-premium positioning. This has been a long-term strategy, pursued patiently, and it is clearly one that has paid off. It is a refreshing change from some of the headless chicken, chopping and changing that you see in some companies in which there is almost a reaction of panic to whatever challenge comes along.

Mr McCroskie writes: “This year’s results continue a trend of strong growth, with Edrington increasing its core contribution by 87% over four years from 2019/20, despite doubling our brand investment in the same period. This achievement reflects the success of our ultra-premium strategy, and especially of The Macallan.”

Core contribution, defined by Edrington as profits from its branded sales and distribution after the deduction of overheads on a constant-currency basis, rose by 16% to £454.8m in the year to March 31.

The doubling of investment by Edrington in its brands over the four-year period is eye-catching.

All too often companies fail utterly to achieve their potential by refusing to invest, in brands, people, fixed assets, technology, or all of the above.

Proper investment often goes completely hand in hand with a long-term approach.

And all too often, company management teams or owners with a short-term approach starve businesses of crucial investment. They might get away with this for a short period, but usually the chickens come home to roost.

Mr McCroskie and Edrington were entirely forthright about the tougher backdrop in which the business is now operating.

The chief executive said: “We consider that the economic pressures that we saw in the second half of last year will adversely affect demand. While we will continue to invest in our brands, in our operations and in sustainability, the business is planning for the coming year on the basis of lower levels of growth than we have experienced since the end of the pandemic.”

It seems telling that Mr McCroskie, while highlighting the more difficult times, simultaneously emphasised Edrington’s intention to continue to invest.

However, we should not be surprised. This cool-headed approach of planning for long-term growth, and not being blown off course by short-term turbulence, looks to have played a key part in Edrington’s success over the decades.

Of course, not every company has the type of ownership structure that enables such freedom to do so, given many are pressured by investors or other players with damagingly short-time horizons.

However, there are plenty of company executives who, seemingly often for reasons of bonuses and incentive plans but also sometimes because of a lack of vision or a failure to appreciate heritage or an inability to see the big picture or short attention spans, make their decisions on entirely the wrong timeframes and thus destroy value.

Returning to Edrington, its leaders over the decades have shown admirable patience and vision to build the business into what it is today and also demonstrated the courage to eschew the terrible short-termism that is so pervasive in the corporate sector. They have made some very big calls astutely at the right times, including the acquisition of Highland Distillers. Many business leaders, instead of embracing whatever the latest management fad might be, would do very well to take a leaf out of Edrington’s book.