Jenny Ruth: The uplifting history of 42 Below

I'm glad I didn't write about the 42 Below float. I hated it. The prospectus seemed full of marketing fluff and gimmicks and little substance.

And the vodka and gin company was so young it had hardly any track record.

It didn't help that founder and managing director Geoff Ross liked to refer to himself as "chief vodka bloke".

Or that the company had fashion designer Karen Walker and Grant Dalton of Team New Zealand on its board. Both are successful in their fields, but were they suitable company directors? I asked myself.

And executive chairman Grant Baker had been a protege of entrepreneur Eric Watson.

The company didn't have sales people; it had "brand ambassadors".

The prospectus was a cheeky document. Its "brief history of vodka" had only two non-42 Below entries - the invention of vodka in 1500 AD and the escape of a Smirnoff family member from Russia early in the 20th century.

At the time of the float, in September 2003, I decided the company had already had more than its fair share of publicity. Much of it was negative, because I wasn't alone in taking a dim view.

Some said the New Zealand Stock Exchange shouldn't have accepted the company on to its board and that such a speculative offering would undermine the exchange's reputation.

There was much comment that the $15 million float of 25 per cent implied a valuation of $60 million, which was seen as ridiculous.

Someone suggested that anyone seriously considering buying the shares had consumed too much of 42 Below's products.

It looks as if we were all wrong. The company has been answering its critics in the best possible way, consistently exceeding its own forecasts and steadily building sales momentum, turning all that marketing fluff into perfectly respectable cash.

Sales in the December quarter were $4.08 million compared with the $3.3 million forecast. It also compared with quarterly sales of just $614,650 when the company listed.

The number of case sales has grown each quarter from 7328 in the December quarter 2003 to 23,229 in the last December quarter.

It has also picked up some non-monetary kudos, winning a gold medal for its Manuka Honey Vodka at the SIAL international grocery exhibition in Paris, and other international awards. And it has struck distribution agreements with Fosters in New Zealand and Australia.

The company hasn't lost any of its cheekiness. "The water is clear and sweet, the air holds a standard for purity and hardly anyone is French," says one of its ads about its home country.

And it has garnered impressive publicity through public relations stunts way beyond anything the company could afford if it had to pay for such exposure.

Like the Cocktail World Cup it hosted on Coronet Peak. Ross says that was "a cross between a sales incentive programme and a media stunt".

The company flew bar managers who were supporting its brand and including its drinks on their cocktail menus to New Zealand to take part and had them making cocktails while jet boating and bungy-jumping. Needless to say, the media loved it.

And the company scored a half-hour interview on BBC radio while it was running its "vodka university", a three-hour course for barmen in London.

Ross says the interview was meant to be only 15 minutes, but the interviewer took a shine to the company's "vodka professor", former Wellington lawyer Jacob Briars - his field of expertise is known as "mixology", Ross explains.

As for Walker and Dalton's presence on the board, just their being there is a public relations weapon, he says.

He points out that Dalton is a qualified accountant and that he has demonstrated a phenomenal ability to generate sponsorship globally.

And Walker has already succeeded in building a global brand, as 42 Below is trying to do.

The company hasn't quite reached the point of profitability yet, although it started breaking even in October, several months ahead of schedule.

In fact, it now looks as though the point of profitability has been postponed because the company decided in December to boost its sales force to further develop its markets, particularly the US, its largest.

In the six months ended September, sales in the US were $2.7 million of the total $5.8 million.

While the company still had $6.08 million in cash in the bank at the end of September, it raised $3.12 million from a placement to Alliance Capital Management and South Canterbury Finance in December, a sign that the investment community is starting to take it seriously.

(The company had wanted to sell a further $500,000 worth of shares to Salvus Asset Management, which was already a shareholder, but the NZX wouldn't let it without a shareholder vote because Baker is also a Salvus director. 42 Below had argued that it was Salvus' management company, not its board, that had wanted to buy the shares, but NZX wouldn't buy that.)

The company also raised a further $1.44 million last month through allowing an early exercise of its warrants - the two series of warrants had been due to be exercised this September and next.

Shareholders chose to exercise 2.9 million warrants, leaving 45.5 million still trading.

The warrants are well in the money. The company's shares, issued at 50c, were trading at 79c yesterday, the series one warrants were at 31c and the series two warrants at 43c, giving the company a total market capitalisation of $119.5 million. So much for an over-priced float.

Given the company's success at building sales momentum, shareholders shouldn't be concerned that the point of profitability has probably been delayed because the profits look set to be bigger when they are delivered.

"If we wanted to have the business in profit tomorrow, we could do so. But that wouldn't be making it the company we want to create," Ross says.

The company is constantly grappling with how fast it can grow. "The world is a huge place and there's no shortage of opportunities."

But it is focusing its sales efforts on four markets - New Zealand, Australia, Britain and the US - and engaging distributors to look after everything in other countries.

Its products are selling in 13 countries as well as the Pacific Islands of Fiji, Vanuatu and the Cook Islands.

It hasn't yet achieved the coals-to- Newcastle feat of selling vodka to the Russians, but Ross says the company is talking to a distributor.

"We've had tastings in Russia and it has gone down very well. But everybody who does business in Russia tells us to be extremely careful."

The company is also working on widening its product range and is in the throes of launching its kiwifruit-flavoured vodka - it already produces feijoa and manuka honey varieties along with the plain variety of 42 Below vodka and South gin.

42 Below

Headquarters: Level 33, 2 Park St, Sydney.
Profile: The company concentrates on marketing its vodka and gin products, contracting out the manufacturing. It is selling in 13 countries as well as Vanuatu, Fiji and the Cook Islands, but it puts most of its sales efforts into four key markets, New Zealand, Australia, Britain and the United States. In other countries, it leaves the marketing largely to its distributors.
Key financial statistics: The company said in January that its December quarter sales were $4.08 million, up from its $3.3 million forecast. In the six months ended September, sales soared 175 per cent to $5.8 million but the net result was a $2.8 million loss.
Market capitalisation: $119.5 million.
Major shareholders: Geoff Ross 33.54 per cent, Grant Baker 9.35 per cent and Shane McKillan 16.94 per cent.
Key executives: executive chairman Grant Baker, founder and managing director Geoff Ross, company secretary Stephen Sinclair and US sales manager Shane McKillan.