Liquor Giants Savor Rising Scotch Demand

Diageo and Pernod Ricard Add Capacity Amid Growth in Emerging Markets; Singapore Becomes a Top Export Destination

By SIMON ZEKARIA March 12, 2012
Dow Jones
Europe's liquor giants are jostling to tap into a growing thirst around the world for Scotch whisky.

As sales growth slows in traditional Western markets, whiskey producers such as Diageo PLC and Pernod Ricard SA are ramping up capacity across Scotland to meet surging demand from Asia, Africa, Latin America, Eastern Europe and the Middle East.

Scotch whisky has long been the drink of the aspirational and with emerging markets producing ever more upwardly mobile consumers, whiskey consumption is on the rise. Dow Jones's Simon Zekaria explains why demand is rising. Photo: Getty "The [scotch] industry is enjoying a tremendous period of growth around the world, making it one of the most important manufactured exports the U.K. produces," Diageo Chief Executive Paul Walsh told the Scotch Whisky Association in December.

The value of scotch exports over the first nine months of 2011 totaled close to £3 billion ($4.7 billion), up 23% year-to-year, according to the latest figures from the Scotch Whisky Association.

Diageo is the world's largest whiskey producer, with some 29 distilleries and warehouses storing as many as seven million casks of maturing spirit. The company owns Johnnie Walker, the globe's best-selling brand, with 17.8 million nine-liter cases sold in fiscal 2011, the vast majority purchased overseas.

Andy Fennell, Diageo's chief marketing officer, says scotch sales are a good indicator of rising socioeconomic status in Asia.

Diageo saw 14% growth in scotch sales. Here, a man tries Johnnie Walker 1910 limited at a Shanghai store.

"The scotch story is extraordinary. If you look at the data in the 1990s, scotch was globally flat," Mr. Fennell said. "The correlation between [gross domestic product] per capita and scotch growth in emerging markets is pretty tight."

Diageo posted 14% growth in fiscal first-half sales of scotch to the end of December 2011, amid an 8% rise in volumes, led by top-of the-range brands such as Johnnie Walker Double Black, whose sales rose 169% in the duty-free market alone.

In Greater China, a key growth market that includes Taiwan and Hong Kong, the group's total spirits sales rose 20%.

"We have invested behind super-deluxe [scotch] in China over the last two years and it's yielding very good results," Diageo Asia-Pacific President Gilbert Ghostine said.

While the U.S. and France remain the largest markets for scotch, tiny Singapore recently became the third-largest-with export values climbing 51% over the first nine months of 2011 to £221.8 million. Taiwan, South Korea and Brazil are also additions to the top 10, according to SWA data.

This fast expansion, driven by population growth and rising incomes, isn't expected to stop any day soon. Volumes of blended scotch, which is cheaper to make than single-malt varieties, and which account for about 90% of sales, are projected to rise a modest 1.6% overall in the five years to 2015, with 1% growth forecast for single malt, according to Euromonitor International, a market-research group.

But this supply is forecast to accelerate over time, with double-digit growth in developing markets. Single-malt volume growth is forecast at 16% in China and 19% in India over the same period, Euromonitor says.

With long-term future demand likely, Diageo has invested about £600 million across its network of distilleries over the past six years. David Gates, Diageo's global category director for whiskeys, said the U.K.-based company is ensuring that it is "well-placed to seize the opportunity" from rising demand.

At France-based Pernod Ricard, the world's No. 2 whiskey competitor, scotch makes up 18% of its volumes. Chivas Regal, one of its key blends, posted a 13% rise in first-half sales on a comparable basis. The company's Royal Salute brand said its sales rose 34%.

Christian Porta, chairman and chief executive of the company's scotch business, Chivas Brothers, said he expects fast-growing developing markets to continue driving demand.

Mr. Porta named Mexico, Brazil, Russia, Poland and Turkey as particularly dynamic. "The volume we have lost in Greece we have gained in Turkey on Chivas Regal alone," he said. "They move away from their local drinks [such as] kashasha, tequila and brandy," he said. "Those are the trends which we have seen now for the past few years and we believe those trends are here to last."

Mr. Porta said Chivas has a record of "consistent" investment in scotch to boost capacity at around £40 million a year.

"[We have] almost doubled capacity of the Glenlivet. This is needed. We are very confident that Scotch whisky demand will continue to increase," he said.

A long aging process, key to scotch production, means manufacturers need to have a long-term vision on growth potential.

Scotch "operates on a completely different time scale to most other alcoholic drinks-measured in decades rather than years," Euromonitor International analyst Spiros Malandrakis said. "The consistent-and, to an extent, accelerating-drive to expand production capacity highlights the optimism over the category's long-term prospects."