42 Below's shot at the big time

Geoff Ross

It is the most hotly debated company on the Share Trader stockmarket gossip website, ahead of sharemarket giants Telecom, Carter Holt Harvey and Fletcher Building.

It has offended gays, Russians, Brits, even mail-order brides.

It has gained media exposure most other consumer goods companies can only dream of - slots on CNN, MTV, regular coverage in the tabloid New York Post and a feature-length piece on the TVNZ current affairs show Sunday. Its managing director has even featured in the NZX's sharemarket cheerleader Open magazine as a paragon of entrepreneurship.

Yet 42 Below, maker of its namesake super-premium vodka, is among the smaller companies on the NZX.

It is taking on such titans as France's Pernod Ricard, Britain's Diageo and the Netherlands' Maxxium.

Since its inception in 1999, it has racked up losses of about $10 million.

In the six months to September 30, it was spending roughly $750,000 a month to fund the business. To put it another way, every dollar coming in the door in sales in the six months to September 30 was matched by $1.65 flowing out in payments to suppliers and employees.

In June 2004, 42 Below forecast it would advance into the black at the end of its March 2006 financial year. But a few months later - after getting two new investors, Alliance Capital and South Canterbury Finance - it decided to pursue more aggressive growth. It now projects a full-year loss of roughly $3.6 million.

And last year it diverted from a 2003 plan in its prospectus to focus on the premium end of the market when it launched a cheaper vodka called Stil. This shift continued this week with the launch of pre-mixed cocktails - a direct attack on the late multimillionaire Michael Erceg's Independent Distillers.

Founder and chief executive Geoff Ross, who refers to himself as chief vodka bloke, told the Weekend Herald 42 Below would also launch a premium white rum, Seven Tiki, this year and a cheaper dark version.

He sells a story of a company at the start of its life. The global vodka market is worth about US$45 billion and all of it is moving upmarket. In the super premium category (vodkas that sell for US$30 a bottle or more), the market is growing by at least 10 per cent a year.

42 Below, linked in a cheeky and innovative marketing campaign with the pure, fresh and clean image New Zealand enjoys on the world stage, has a story to sell.

Spending around $1 million on marketing a year - a fraction of most spirit-makers' budgets - it takes its message to what it calls the taste influencers. These are the people in the know, the club set and, most importantly, the bartenders - people 42 Below refers to as the mixologists.

The losses are a necessary investment to build a global brand.

It has as many high-profile believers as it does detractors. Fashion designer Karen Walker and professional yachtsman Grant Dalton, the head of the Team New Zealand America's Cup campaign, are investors who also sit on the company board.

Walker's shares are worth almost $50,000 and Dalton's are worth $290,000.

Max Fashions founder David Wright owns 8 per cent of the shares - a parcel worth $6.9 million.

The company also has a following among professional investors.

Andrew Couch, principal of Salvus Asset Management, bought 42 Below just after its less-than-successful float in 2003, when the shares plunged below their 50c float price to as low as 37c.

"It is a company in the early stages. There's a lot riskier situations than this one," Couch says. "I rate the management team highly. They are entrepreneurial, determined and they all have big shareholdings - skin in the game - and that's a situation that we are prepared to back."

But others compare the business - which has a market value of $83.5 million - to internet stocks that first soared then plummeted during the dotcom bubble.

One market observer notes that the company's sharemarket value implies underlying profits approaching its sales forecast this year of more than $15 million.

Even chairman Grant Baker accepts the analogy. "It is difficult to value a company that is not making a profit. The problem is that it's a company that only has sales."

He and Ross say that from now on losses will shrink. Three of the four key markets where the company has invested heavily to build the brand - New Zealand, Britain and the US - are turning a profit. Australia is soon to follow. Sales to other markets such as Asia and Europe, where it sells only through distributors, are already in the black.

It has also stopped burning cash. In November, it said it had $12.2 million in the bank. (Most of this came from a cash raising in October.) Since then it has invested $1.6 million for a near 5 per cent stake in juice-maker Charlie's and it still has $10.6 million.

"We could, in fact, have the whole business in profit. But we want to keep growing. We did not get $10 million in the bank to earn interest," Baker says.

The weakening kiwi dollar will also boost earnings.

Ross and Baker say the diversion into cheaper spirits followed demand from bar owners begging for an affordable house spirit; it is an evolution of the business.

"There is an opportunity of which we have been reminded by our local distributors for what we call volume brands, which will only be unique to Australia and New Zealand," says Ross.

They present a robust case. But after visiting 42 Below's offices in South Auckland, we wonder if we have been captured by their formidable marketing skills.

Ross, the former Saatchi & Saatchi adman, has a gift for delivering the most marketing bang with very little buck. Controversial email promotions, the most recent a viral ad to win a Russian bride, have sparked outrage but at the same time have delivered scads of column centimetres, in essence for nothing.

Brand strategist Mike Pepper, of agency Brave New World, gives kudos to the recent slideshow-style promotion for Auckland's gay and lesbian Hero Festival, of which 42 Below was a sponsor.

"This ad probably cost 10 grand at most and got as much viewership as a 30-second TV spot. The viral ads cost only $3000 each.

When advertising watchdogs come knocking, which they often do, Pepper says the company responds in an honest way and handles the controversy as if the "brand was speaking".

"What consumers want is companies that have an opinion, a personality and a point of difference and are not scared to say it. If you are all things and nice to everyone, you're just another bland corporate."

Pepper said the company was still small enough to make it unlikely it would cross the line with customers and pull a marketing stunt that permanently alienated drinkers.

Allan Botica, senior counsel for PR firm Botica Butler Raudon Partners, agrees that this "fearless" attitude has put the company in good stead with its clientele. But he said there was another audience who had little or no connection to the company - investors.

"The investor brand, that's the one they haven't got to grips with in any sense whatsoever. Look at their [stock exchange] announcements. They show signs of carelessness, thoughtlessness and hasty preparation."

Botica pointed to this week's company announcement that it would launch its first rum and two ready-to-drink or pre-mixed cocktails, which was peppered with grammatical errors.

"I love the attitude, reach and connection you make with consumers but, at some point, fundamentally to be a successful investment proposition you have to tell me how you're going to convert that into profit," he said.

Liquor industry lobbyists we spoke to say that while 42 Below is no doubt a publicity powerhouse, its irreverent advertising stunts have come at the worst time for the rest of the sector. The Government is reviewing alcohol promotion regulation and sports sponsorship, and the result could be a crackdown if the Clark Administration buckles under pressure from anti-drinking advocates who link liquor sponsorship to underage drinking.

Ross and Baker display visible surprise and even appear shamed by the spelling mistakes.

Ross says there are limits to the public appetite for controversy. He will not say what they are, however the company tries always to be attentive to its target market. Even what some would deem bad press or articles giving voice to condemnation by advertising watchdogs are good press to Ross. All press translates into liquor sales.

"If you ask a 25-year-old guy in SoHo, New York, what it [our marketing] is like for him as opposed to my Nana in Papakura, you'll get different thoughts. We have had some criticism that it's been too edgy, but that's probably coming from my Nana as opposed to the guy on the street," says Ross.

He argues that the marketing has always been within the bounds of corporate and social responsibility. Underage and binge drinking have little to do with well-endowed pool boys in posters and more to do with the Government's decision to lower the drinking age to 18.

Ross and Baker admit failures in communication with investors but, at the same time, they are fearful of talking the business' prospects up. They simply want 42 Below to be known as a company that achieves what it says it plans to do, and believe they are doing just that.


The case for a globally recognised brand

Is 42 Below trying to do a Grey Goose - the super premium vodka sold to Bacardi last year for more than US$2 billion ($3 billion)? That is the question on many investors' minds.

Grey Goose was created by Sidney Frank, who died in January from heart failure at 86. He is largely credited with launching the super-premium vodka craze in the United States when he billed the French-made Grey Goose as the world's best-tasting vodka.

The brand was so popular its volume sales were hovering at 1.4 million cases a year when Frank sold it.

That's a far cry from 42 Below's production levels. The company expects to reach the 100,000 cases mark annually this year.

Chief executive Geoff Ross and chairman Grant Baker say they have already been approached by competitors interested in the company but add they are not ready to sell.

"Our ambition is to be a globally recognised New Zealand brand and, the fastest way to get there, is under our present model," said Ross.

"If we saw a large liquor group that could add a lot of value and grow as fast if not faster then we would consider doing something with them. But if it was selling the farm - no. It would be far too early."

But, when the time is right, which drinks giant would be in the market for a New Zealand-derived vodka?

The No 1 global liquor company Diageo already owns affordable and premium vodka brands such as Smirnoff and Ciroc. Pernod Ricard, No 2, owns the popular Stolichnaya vodka, with another big vodka player Maxxium owning Absolut. International players may not be interested, but one cannot rule out an operator such as transtasman brewer Lion Nathan, who recently expressed an interest in acquiring a dark spirit and already has a bottling relationship with 42 Below. The same can be said for Australian brewer Foster's, the company's New Zealand and Australian distributor.

Partner, new parent or not, Ross' ambitions for the main brand are unbridled.

"People say Ferrari and Italy in the same breath and France and Chanel in the same breath. I do not see any reason why they do not say 42 Below and New Zealand in the same breath," he said. "When it is the indisputable super premium brand, that's when I will be able to think about taking it a little easier."