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Diageo Scotch expansion plans still on ice

As Diageo reveals sales of its Scotch portfolio plummeted 9% in 2014/15, the group has confirmed its £1bn Scotch whisky investment plans continue to be “rephased”.

Teaninich
Diageo’s £1bn Scotch whisky investment plans, including the build of Teaninich Distillery, continue to be “rephased”

Yesterday, the world’s largest drinks group reported the Scotch decline as part of its annual results, which showed Diageo’s organic sales flatlined in the year due to currency volatility, political instability and an “uneven recovery” in the US.

In particular, Johnnie Walker struggled in its key US, Europe and Asia Pacific markets where it experienced double-digit declines. Overall, the brand reported a net sales decline of 12%.

In light of the challenges Diageo faces in the Scotch sector, Menezes confirmed the group is continuing to delay its expansion plans, which were first revealed in 2012. He added that despite this, Johnnie Walker remains “healthy”.

“By 2016 I expect to get both Scotch and Johnnie Walker back into growth,” he said. “It’s not a case of stop and start as much as getting the pace right.”

Diageo claimed that Johnnie Walker’s difficulties were compounded by currency weakness and inventory reductions in the emerging markets, where the brand reports 70% of its sales.

Meanwhile, the brand – last year overtaken by Officer’s Choice as the world’s best-selling whisky brand – experienced reduced promotional activities for its Red and Black label.

Menezes said Diageo will target growth for the brand with a new marketing campaign that will launch in September this year.

Faltering demand

Diageo first revealed that it had postponed its £1bn Scotch whisky investment plans in October last year as global demand for the spirit faltered and exports fell 30%.

Deirdre Mahlan, CFO of the group, added: “We have slowed the rate of our expansion but our underlying optimism in the category and our brands is not diminished.

“It’s true we slowed down the distillery expansions due to interruption in the category, so we do not have excess capacity. But the plans have not been cancelled, they have been rephased.”

Sites affected by the delay are thought to include Mortlach, Clynelish and the new Teaninich Distillery.

Countering weakness in its Scotch portfolio, Diageo celebrated a return to profitability of its Chinese white spirits portfolio, specifically Shui Jing Fang baijiu. The brand was hit by a value write down in 2013/14 following a 78% downturn in sales.

On a reported basis, net sales of Shui Jing Fang soared 241% in 2014/15.

Menezes said the brand managed to claw back into growth with the launch of a new cheaper bottling and by “shifting the focus away from institutional sales to create a private consumption franchise”.

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