Blog: Olly WehringWill the good ship Scotch stay clear of the rocks?

Olly Wehring | 13 July 2007

After announcing a GBP100m ($203.2m) expansion plan for its Scotch whisky operations in February, Diageo this week unveiled further details of its huge investment in the sector.

The company has lodged a planning application with Moray Council for the first major distillery in Scotland for more than 30 years. Situated between Elgin and Forres, the proposed new distillery amounts to a GBP40m (US$81.3m) investment by the UK drinks giant.

The move should act as a ringing endorsement for the Scotch category, but it will also continue to set off alarm bells among older members of the trade who still shudder at the thought of the Scotch lake of the 1980s.

The fact remains at the moment that if you were wanting to build a blended Scotch brand at the premium level there is not currently the stock available for you to be able to do so.  Although no firm would admit to having got their own sales projections wrong, there is an underlying feeling that the tightness now being experienced in aged stock will inevitably have volume implications on brand-building in the short-term.

But, the flip side of this is that overall Scotch sales are still only growing at about 1.5% per annum through to 2010 (see our recently published report on Blended Scotch). And, outsiders to the industry would be forgiven for wondering why so many millions of pounds is being spent on increasing a category that is largely flat.

The question is ‘what if?” Second-guessing markets has been part and parcel of the whisky industry for over a century. After all, this is an industry which has to wait three years before it can even start selling a product. The irony is that at a time of stock shortage there are already questions being asked about the large scale of some of the new investments.

Much of the investment is being made on behalf of the potential of the BRIC economies (Brazil, Russia, India and China) as mature markets such as the UK and France continue their long term decine.

The danger is that the marketing departments have been blinded by the potential rather than the realities of these massive BRIC markets? As our report says - and as we argued at the recent World Whiskies Conference in Glasgow - there is no guarantee that the BRIC economies will perform in the manner the marketing departments wish them to.

Not surprisingly everyone is hoping that the predictions are proved to be correct and the doubters wrong.


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