...where distraction is the main attraction.

Monday, April 16, 2012

Diageo, The Whisky Killer (part 1 of 2)

At the World Whiskies Conference, a leading representative from Diageo (owner of 28 out of the 93 active Scotch malt distilleries, and 31% of the entire industry's malt capacity) said the following:
"Diageo is a blended whisky company. Diageo does not make single malts for me to enjoy. We do not make single malts for the aficionado to enjoy. We make single malts for our blending team."
Though first and last sentences are true, the middle statement in bold is false.  And it is a lazy, unimaginative, and cowardly way to conduct a single malt business.  And Diageo IS in the single malt business despite this attempt to separate themselves from it.

To note:

1.)  They release single malts regularly every year from their "Classic Malts" group.  In fact they produce some of the best single malts in Scotland.  Talisker 10, Cragganmore 12, Lagavulin 16, Dalwhinnie 15, Clynelish 14, and Oban 14 to name but a few.

2.)  They have released special Distillers Editions for Oban, Talisker, Dalwhinnie, Lagavulin and others.

3.)  They release highly lauded, anticipated, and priced Special Editions every year for their closed distilleries such as Brora, Port Ellen, and Rosebank.  (More on these silenced distilleries later.)

4.)  They release exorbitantly-priced Managers Selections for many of their distilleries.

5.)  They release "Rare Malts" for their distilleries that aren't allowed normal single malt bottlings.

6.)  Sometimes they sneak out limited editions, such as Talisker 18 and Oban 18.

So they are clearly in the single malt release business.  And these malts are indeed enjoyed, not only by "aficionados" but also most casual malt fans.

What is true is that they do not put much effort into expanding their "Classic Malts" selection.  There's just one normal official bottling for each.  And that is considerably different than how the other 30+ Scotch malt distillery owners operate.

So despite the exceptional means at their disposal (they are the largest beverage company on the planet) they invest very little in their single malts.  Companies like Morrison Bowmore (Auchentoshan and Bowmore), Benriach (Glendronach and Benriach), Edrington Group (Highland Park and Macallan), White & Mackay (Dalmore), Beam (Laphroaig), and Glenmorangie Co. (Ardbeg and Glenmorangie) all have but a fraction of the finances and staff of Diageo but put considerable time and effort into what they distribute each year.  And in turn, these much smaller players drive, develop, evolve, and expand the single malt.

What Diageo has proven better at is closing distilleries: at least 15 as of the last count.  Now, the whisky market went through considerable overhaul in the 1980s after a massive financial collapse.  Thus many distilleries (some almost 200 years old) had to close when they could no longer stay open.

But the stills that Diageo chose to close were very telling, fitting right into their narrative of Blended Whisky Company.  They closed Port Ellen, Brora, and Rosebank (I'll call them The Big Three) -- all considered amongst the highest quality single malts in Islay, The Highlands, and The Lowlands.  But they kept Caol Ila, Linkwood, and Glenkinchie open -- all quality malts, but below the marks set by The Big Three.  So why were those kept open?  They are major ingredients in the Johnnie Walker blends.  The Big Three could be shuttered and dismantled without having to change the big blend recipes.

Ay, but there's a catch.  Despite offers by other (smaller) companies to purchase The Big Three, Diageo chooses to NOT to sell the brands......and continue to release a tiny bit of the old stocks almost every year at a very high price.  Despite the high prices, those brilliant single malts sell out every year.  And who's buying them?  Aficionados, perhaps?

The Diageo defense that I've read is that they don't want sell off those exciting properties to the competition.  Competition?  But I thought that they weren't in the business of making single malts for us to enjoy?

There's a choice being made at Diageo every year not to push or develop their single malt range.  Why?  Because their blends need the malts (usually in low quantity compared to the grain whisky).  With single malts making up about 7% of whisky sales, blends are indeed their moneymaker.  In 2010, the Johnnie Walker blends sold more than twice as many bottles as the entirety of all exported Scotch single malts.

Yet, Diageo continues to release single malts.  And they continue to sell off expensive bottles from the stocks of distilleries they've destroyed rather than selling the brands and letting another company attempt to develop those single malts.

But the regular releases drip out, one per "Classic" distillery.  And no regular releases from 16 of their brands.  So, they're in the single malt business but with a minimum of commitment.  There's no proven interest in developing these brands, no interest in joining the movement embraced by the rest of the single malt market to widen and expand, despite owning at least 31% of the malt.

Diageo has a market cap of more than 60 billion USD, so they have many investors and a lot of interest in going where the profit sits.  So wouldn't it be cheaper and more logistically sound if they could develop the specific blend recipe elements in one centralized location, rather than having to bring in whiskies from over 30 separate sources?

Then they'd be free to close all 28 of their malt distilleries, using their processes and equipment to crank out Highland-style and Lowland-style whiskies at will.

Diageo opened Roseisle, the largest distillery in Scotland, in 2009.  As per the Malt Whisky Yearbook, at the 2011 World Whiskies Conference, there was mention that Diageo "will consider a further Roseisle-style project."

Yes, it was widely reported that these projects were assembled to handle the growing Asian market.  But there's good reason why these new super-distilleries are causing jitters:  Kilmarnock.

Kilmarnock had been the home to Johnnie Walker whisky for 189 years.  In fact, it was even called Walker's Kilmarnock Whisky.  But in 2011, Diageo ignored public outcry and the Scottish Government when it closed their Johnnie Walker bottling facility in Kilmarnock, pummeling the local economy.  Trusting Diageo with the future of Scottish institutions may be a foolish act.

In the end, I wonder why Diageo doesn't take a note from their booze competitor Pernod Ricard?  Pernod has invested in Irish whiskey, taken some considerable risks, and it has paid off extremely well.  They resurrected the Single Pot Still whiskey (Redbreast, Green Spot, Midleton, Powers John's Lane), which became extremely popular and now they're exporting it around the world.  With Jamesons, Powers, and Paddy, Pernod Ricard is primarily a blend company, but they put a little bit of time and money into their whiskey and created a new (higher-quality and higher-priced) international product.

Then there's Diageo.  They tend to their blends first:  Johnnie Walker, Bell's, Black & White, Buchanan's, J&B, Dimple Pinch, Old Parr, VAT 69, White Horse, and Windsor Premier to name a few.  Then they release one regular single malt bottling from a fraction of their distilleries.  They release very high-priced limited batches from the other distilleries.  They dismantle the distilleries that don't fit into the blend recipe structure.  Then they hoard those brands, preferring to kill them off than sell them off.

Diageo makes it increasingly difficult for a whisky fan (closer to nerd than "aficionado") to continue supporting their company with his liquor money.  Tomorrow, in Part 2, I will finish illustrating why this whisky fan will no longer purchase Diageo's products after 2013.