Diageo CEO ‘hopeful’ for tariff de-escalation

5th August, 2020 by Nicola Carruthers

Johnnie Walker owner Diageo is “working very hard” with the UK, EU and the US to de-escalate the tariff threat on spirits, CEO Ivan Menezes has said.

Scotch is Diageo’s largest category and represents 23% of net sales for the group

In October 2019, the US slapped a 25% tariff on imports of single malt Scotch whisky to the US over an ongoing dispute regarding EU and US subsidies to airplane manufacturers Airbus and Boeing.

Speaking at a press briefing online for Diageo’s fiscal 2020 financial results yesterday (4 August), the firm’s chief executive, Ivan Menezes, said: “This is an aerospace dispute – we got dragged in.”

Menezes continued: “At a time like this… penalising the alcohol industry is only going to hurt small businesses right across the world.

“I’m confident, I’m hopeful that we will get to a de-escalation. The SWA [Scotch Whisky Association], the companies here, and in America, the wholesalers, retailers, everyone is getting to the point of view that this is not the time to be hurting what is a huge job creator that is under a lot of pressure. Let’s wait and see. We’re giving it our very best shot as a broad industry.”

Since the tariff was imposed, exports of Scotch whisky to the US have declined by more than 30%, according to figures from trade body the Scotch Whisky Association (SWA). Exports to the US fell 47% in April and 65% in May, compared to exports in the same months in 2019.

During the briefing, Dan Mobley, Diageo’s corporate relations director, said: “The SWA speaks on behalf of the entire industry. Those that are hurting the most tend to be the smaller or medium-sized companies that predominantly only produce single malts. They are the most disproportionately affected – they are really hurting from this.

“SWA figures estimate £200 million [US$251m] of lost exports year-on-year as a result of the tariff hit. Every month that passes with the tariffs in place, that number will grow.”

Like many drinks firms, Diageo was impacted by the coronavirus pandemic, particularly during the second half of its fiscal year. The group’s operating profit declined 47.1% during fiscal 2020.

Scotch, which represented 23% of Diageo’s net sales, declined by 17% as a “soft” performance in the first half was hit by “ongoing commercial challenges along with political and economic disruption” throughout the year. Blended Scotch brand Johnnie Walker declined organically by 22%.

On the Scotch category, Menezes said: “The Scotch trends around the world have been very positive, both in developed and emerging markets. We see whisky as one of the attractive growth markets. Premium whisky is doing even better.”

He said the group’s focus is on “bringing back vibrancy in Scotch whisky as the recovery happens”.

Menezes added: “Johnnie Walker is the lead brand. The emerging markets and global travel is where more than two thirds of our Scotch whisky business lies. Global travel is going to be difficult until international travel picks up. In the emerging markets, we want to keep Scotch highly aspirational and relevant, and ensure that we recruit the next generation of consumers to it.”

Last month, Johnnie Walker unveiled four new limited edition whiskies to mark its 200th anniversary this year. Diageo will also debut a paper bottle for Johnnie Walker in early 2021.

Delayed Johnnie Walker experience

As the world’s biggest Scotch distiller, Diageo has invested hugely in the Scotch whisky sector. The producer is constructing a new visitor experience for its Johnnie Walker brand in Edinburgh, the key focus of Diageo’s £150m (US$215m) investment in Scotch whisky tourism, thought to be the single biggest investment in the sector to date.

The seven-floor visitor centre on Princes Street, Edinburgh, had been due to open to open at the end of 2020 but was delayed because of the pandemic.

Menezes said: “We are committed to opening up the Johnnie Walker experience on Princes Street, we’re very excited about it opening in the later half of next year. We did have to take a pause when construction had to stop when we were in lockdown. Clearly it has been delayed but we’re spending behind it and in our distilleries where we’re committed to creating world-class visitor centres.”

The £150m investment will also be used to upgrade 12 existing distillery visitor attractions in Scotland. Diageo is also investing £35m (US$43m) to restore the silent Port Ellen and Brora Scotch whisky distilleries.

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