Thursday, December 31, 2009

Diageo Calling

An inevitable side effect of growth in the whisky industry is the acquisition and subsequent merging of many distilleries by large corporations. The number of active distilleries seems to go through repetitive growth and contraction cycles, based on the popularity of whisky as a whole and single malts in particular. As single malts have become more popular (and profitable), companies have purchased and re-opened some previously closed or "silent" distilleries. As part of the purchase, these companies obtain whatever product is aging in the warehouse, so part of the motivation is to gain access to these aged stocks in the hopes of bottling it and selling it quickly. The more shrewd/prescient companies or corporations were able to purchase struggling distilleries in the lean years for a relative song and are now selling bottles of old whisky stock at premium prices.

Even before the single malt boom, large distillers specializing in blended whisky were acquiring smaller distilleries whose products were major contributors to their blends. This served two purposes: 1) Economics, in that they no longer have to purchase the whisky from a third party but can produce it themselves at cost and 2) Stability, keeping production steady in order to maintain the composition of their blend for uniformity of product. It also has the bonus effect of allowing the new owners to limit access of their malts to competitors for use in competing blended whiskies.

Being part of a larger corporation can be a great boon for some small distilleries. If the corporation is interested in promoting their product, injection of capital for marketing and distribution purposes can enhance both the visibility and availability of the whisky. It also allows the distillery managers the opportunity to increase the variety of expressions available to the public, which is demonstrated in the plethora of whiskies available today. So what is the downside? Well, that extra capital comes at a price (literally and figuratively) and that price can be a loss of control at the distillery. Control of production methods and distribution may now rest in the hands of parties that have little interest in tradition or the local influence of a particular brand of whisky.

Diageo PLC is the largest beer, wine and spirits company in the world, formed as a merger of Guinness UDV with the spirits company Grand Metropolitan in 1997. Its brands are highly recognizable in every category of the spirits world: Captain Morgan rum, Smirnoff vodka, Tanqueray gin, Johnnie Walker and Crown Royal whisky, Guinness beer. This is but a small sampling of Diageo's huge brand coverage in the alcoholic beverage industry. The assimilation of Guinness UDV brought with it a collection of Scottish distilleries that used to be known as United Distillers and before that, Distiller's Company, Limited. Six of the more well-known malt whiskies from this collection were selected to become part of a "classic malts" range including representatives from different whisky regions:

Dalwhinnie - Highland

Glenkinchie - Lowland

Cragganmore - Speyside

Oban - Western Highland

Lagavulin - Isle of Islay

Talisker - Isle of Skye

These malts also represent varying styles as well as regions. Dalwhinnie is a very light, honey and heather-like whisky, while Talisker and Lagavulin are very strongly flavoured with smoke and peat, respectively. I've listed them in order of increasing flavour "robustness". These six malts were chosen out of UDV's substantial collection to be their flagship representatives in the burgeoning single malt whisky market. The others continue to exist in relative obscurity, known only to connoisseurs and available almost exclusively in the UK through independent bottlers and Diageo's "flora and fauna" range (so named because they sport relatively unexciting labels which include pictures of local plants and animals). These whiskies continue to be used extensively in blends and there are some real gems in this group.

As the popularity of single malt whisky continues to grow, Diageo has recently added a couple more representatives to its classic malts range. These two were originally dubbed "hidden malts" but after making the latest cut have joined the classics:

Clynelish: Coastal Highland

Caol Ila: Isle of Islay

Before I digress too much, let me explain why I'm outlining Diageo's considerable whisky portfolio. In November of 2008, the following story appeared courtesy of the CBC (Canadian Broadcasting Corporation):

In a nutshell, the story is about Diageo deciding to pull most of its whisky products out of New Brunswick, possibly to sell them in the more lucrative markets of the BRIC countries (specifically Russia, India and China - not sure about Brazil). There was a wide variety of responses, and your blogger posted this comment:

"After all the preaching that customers receive about 'loyalty' to a brand by corporations, here we have an example of a company not being loyal to its customers. I don't blame the individual distilleries, as they would have no say in this decision. This is one of the perils of being part of a conglomerate such as Diageo.
That being said, the power still lies with the consumer. Boycotting Diageo won't hurt them, but we can still transfer our loyalty to local brands (such as Glenora) and smaller companies which would appreciate our patronage. There are plenty of fantastic scotch whiskies out there that are not part of the Diageo empire. Springbank and Bruichladdich are gems that any whisky fan should try, but are not always available in NB. Why not?
If our business isn't good enough for Diageo, then I say let them move to other markets. I strongly urge NBLiquor to support smaller distilleries and companies that want our support and will be loyal to their customers. These don't have to be Scottish brands, as the number of Irish, American and Canadian distilleries making quality product is growing every day.
NB customers aren't good enough for Diageo? I beg to differ."

Let me make a quick point here: I can understand why Diageo is doing this. They can make more money by selling these whiskies for higher prices in some of these developing countries. That makes good business sense, and we're talking about a major multinational corporation - which historically, represent abysmally poor examples of moral judgement concerning individual customers.

Then, after almost a year of living without the classic malts, the following story appeared in the Times-Transcript, a NB newspaper:

So now Diageo products return to the shelves in New Brunswick, and we have sub-prime mortgages, toxic credit default swaps and Lehman Brothers to thank for it. Now if I had to make a guess as to what happened during this whole affair, here's what it would be:

Due to increasing demand in both developed and developing countries, Diageo decides it can make more money by pulling product out of NB and selling it elsewhere. They may have offered NBLiquor the opportunity to purchase stocks of these products at higher prices and perhaps NBLiquor refused. The global economic downturn significantly affects (reduces) demand for many higher priced goods - including single malt Scotch whisky, in many countries. Diageo decides to return some of its products to NB with some slight increases in price.

Am I glad that these products are back? Sure. I like many of the whiskies in the classic malts range, and appreciate the opportunity to buy them even if I feel some are overpriced (Oban). If they want to raise the price due to supply and demand, let them do it and let the customers decide if these whiskies are worth the inflated price. However, I do feel a bit like I've just received a phone call from an ex-girlfriend who thought she could do better, played the field and now realizes she gave up a good thing.

Diageo's prodigious marketing power has done wonders for the single malt and premium whisky markets - providing considerable customer education and attracting enormous interest not only for their brands, but the entire industry. That being said, many customers (including your blogger) will remember how such companies value their patronage and once spurned, may decide not to answer the early morning "booty call".

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