E-Malt.com News article: UK: Diageo to build its first major malt distillery in Scotland

Diageo is to build Scotland's first major malt distillery in more than 30 years as it expands its whisky operations after a huge surge in demand from emerging markets, The Independent published February 16.

The world's largest drinks company said it is investing £100m to open a malt distillery at Roseisle on Speyside, and to expand its Cameronbridge grain distillery, in Fife, as consumers in China, Russia, India and Brazil discover the pleasure of a fine Scotch Whisky.

This signals a remarkable turnaround for the drink which suffered from over-capacity and underinvestment during the 1970s and 1980s, when a number of distilleries were mothballed or sold off to private firms.

Slow economic growth and changes in consumer taste contributed to a "whisky loch", where there was so much around the value of the spirit dropped.

However, thanks to the growing wealth of Asian and Latin American nations, Scotch is enjoying a global renaissance and Diageo is preparing to tap into this. According to the Scotch Whisky Association (SWA), China spent £1m on Scotch in 2000 but by 2005 this had grown to £46m.

Campbell Evans, from the SWA, said the dismantling of China's import tariffs had played a key role in bringing the drink to the Chinese market. "China is now allowing foreign companies to invest there, the economy is growing, people have more money in their pockets which ties in with the aspirational quality of the product," Mr Evans said.

India, where whisky is already popular, is expected to be the next growth story once its crippling import tariffs, which currently peak at 550 per cent, are reduced.

It is the premium and super- premium brands that are proving most popular in emerging markets, which are creating a wealthy elite keen for the kudos an international brand brings.

Diageo said the whisky produced at its new distillery will go into premium and luxury versions across all its brands including its most popular whiskies Johnnie Walker and J&B, along with high-end brands Buchanan's and Windsor. It will increase the company's capacity for Scotch production by 10 to 12 per cent.

In its international division, Diageo said Scotch sales volumes grew by 20 per cent during the first half of this year. In Latin America, sales volumes in all drinks categories rose by 26 per cent and Diageo said it now sells seven out of ten bottles of premium Scotch in the region.

However, in the UK, Diageo has been having a more difficult time. Sales of the ready-to-drink version of its Smirnoff vodka, Smirnoff Ice, have been hit as consumers increasingly use the pub as a place to eat and choose wine and beer to accompany their meals, Diageo said. Smir-noff has also suffered from competition from cheaper brands.

Meanwhile, sales of Guinness, which is enjoying a boom in Africa after price cuts and an increase in capacity, continue to fall in Ireland and the UK.

To combat this slide, Diageo is trialling a new variant called Guinness Red across 142 Mitchells & Butlers pubs, from this month. This uses lighter roasted barley, is less bitter than the original and should appeal to those who normally don't drink Guinness, Diageo said. Its alcohol content at 4.1 per cent is the same as Guinness Draught.

Paul Walsh, the chief executive, said the decline of Guinness in its home country was inevitable as drinking habits change. Drinkers in their 50s will drink five or six pints of Guinness a night, while the younger Irish go out less and may drink only three pints in a night, he said.

But he denied the brand would suffer globally. "It's still seen as an iconic product," he said. "It is adored in Ireland and seen for its naturalness and goodness."

Mr Walsh also indicated that Diageo was interested in buying Absolut Vodka from its Swedish owners Vin & Sprit AB.

Diageo posted profits of £1.3bn on sales of £4bn, an underlying rise of 6 per cent. It also announced a £1.22bn return to shareholders yesterday through £524m in dividends and £700m in a share buy-back. It raised its full-year profit forecast to operating profit growth of 8 per cent, up from 7 per cent after strong growth in the US and Asia.

This "reflects an increased confidence in the group's ability to gain share," Michael Bleakley, an analyst at Credit Suisse said. Shares jumped 4.5 per cent in early trading, before closing up 2 per cent at 1045p.



16 February, 2007