Diageo’s Puzzling Strategy

By Richard Thomas

Until word that Jim Murray had swept Scotch off the top of his rankings for Whisky Bible 2015 broke, two news stories last week had whiskey circles abuzz, and it is those two stories that will prove to have further reaching implications than anything Jim Murray could ever say or do: Diageo is going to scale back its planned Scotch whisky expansions and is trading Bushmills to Jose Cuervo.

Both separately and combined, the moves have left many industry observers scratching their heads, and some wondering if the choice to cancel the Scotch investments in particular doesn’t signal an end to the world whiskey boom. Yet in reality the two moves fit in nicely with a larger current of Diageo’s actions regarding its whiskey holdings, one consisting largely of blunders and divestments. Collectively, they paint a picture of what, outwardly anyway, appears to be a very strange and incoherent business strategy for this year.

1. Bulleit’s Long Neglect Came To An End By Accident: Diageo announced in May that they were finally building a $115 million distillery for their successful brand, Bulleit. The bottler’s brand recognition and sales have grown rapidly over the last several years, making such a move long overdue. However, the investment in Bulleit was prompted at least in part by the news that their principal supplier of bourbon stock, Four Roses, would cut them off in the near future, rather than Bulleit’s success.
2. Starting The Great Tennessee Whiskey War: The attempt by Diageo to scupper the 2013 Tennessee Whiskey law this past March was an ill-conceived effort that resulted in catastrophe. The move was widely perceived as trying to knock a peg out from the brand identity of Jack Daniel’s, the world’s #2 whiskey, so as to prevent it from overtaking Diageo’s Johnnie Walker, the world’s top-selling whiskey brand.Diageo’s first mistake was not opposing the law when it was originally debated in the Tennessee state house, since it is often easier to block a law’s passage than to get it overturned later. The British drinks giant then compounded their failure to act when doing so would have been easier and quieter a year later with a ham-fisted push to replace and override the law in the statehouse and overturn it in the courts.

   Before Diageo attacked the 2013 Tennessee Whiskey law, a majority of American whiskey bloggers and writers were either ambivalent or hostile towards defining Tennessee Whiskey as a distinct sub-class of bourbon based on the Lincoln County Process, or drip-filtration through maple charcoal. The specter of a British company throwing its weight around and attacking an American whiskey sector provoked a predictably jingoist response, bringing all of the critics of the Tennessee Whiskey definition onto the bandwagon supporting it. As if the fact that Jack Daniel’s is a major primary and secondary employer in Tennessee didn’t promise Diageo’s failure, the Anglophobic backlash against their actions guaranteed it. Diageo is set to repeat their blunder next year with a renewed effort to replace the 2013 law.

3. Scrapping The Scotch Expansion Plans: The slump in Scotch sales during the last year and a half clearly prompted Diageo’s backpedaling on their scheme to invest £1 billion in distillery expansions and new construction. The pinch past demand spikes and aggressive market expansion put on Diageo’s whisky supply was a real one: it compelled the abandonment of Johnnie Walker Green Label; the reformulation of Johnnie Walker Gold Label; and nearly compelled the turning of Cardhu from a single malt into a blend.Yet the slump will likely prove temporary in at least some of the soured markets, such as the much-hyped Chinese market, leaving the status of Diageo’s middle term whisky supply open to question. Furthermore, it was only two years ago that Diageo committed to the huge expansion project in the first place, so either the ambitious investment plan was in error or the abandonment of it is.
4. Dropping Bushmills: Unlike Scotch, Irish whiskey is booming. By trading Bushmills away, Diageo is not just abandoning a major Irish distillery after considerably expanding its production capacity, but abandoning its stake in the growth Irish whiskey market entirely.

In fairness, Diageo has a lot more in its portfolio than just the whiskey trade. The company owns Guinness, Smirnoff, Captain Morgan, Tanqueray, Gordon’s and numerous other drinks brands. Obviously some of the company’s choices are meant to favor other aspects of its business. The Bushmills trade was designed to accomplish the company’s goals of having a firm stake in the premium tequila sector, for example.

Yet taken together, almost everything Diageo has done this year has had a decidedly anti-whiskey color to it. Even their acquisition of India’s United Spirits forced them to sell off Whyte & Mackay so as to avoid anti-trust complications in Britain. All Diageo would need to do is cancel their plan to build the Bulleit distillery before the end of the year, and the picture of the company running away from whiskey as fast as the legs of Ivan Menezes, its CEO, could carry it would be complete.