Always Wanted To Distill? Why Not Become A Diageo Puppet?

by Oliver Klimek on September 17, 2013

In conjunction with ‘business accelerator’ Independents United, Diageo has launched a new service called Distill Ventures. The company will invest in young spirits businesses to help them grow. Their two programmes are called Seed and Growth, depending an the stage the business currently is in. Investments are said to range from £150k for startups up to £2 million for buisinesses that are already up and running.

So far so good. But anyone interested in this opportunity should also read the fine print, because a deal “will include a right for Diageo to buy your whole business at a defined point in the future“. In addition, participants are required to pay for the benefits they receive by joining one of the programmes which include office space in London (yes, you are required to run your business from London for at least six months) and general support from Diageo like masterclasses and mentoring.

“Why would I agree to give Diageo an option to buy out the whole company?

Many startup drinks brands plan on one day selling to a bigger drinks company who can then take the brand global. Diageo is the world’s biggest premium spirits company, and have successfully acquired and then grown brands like Bulleit Bourbon and Bushmills. The option provides you with an exit, priced to reward you for growing a profitable brand.

Diageo include this option to give them protection over their investment – they wouldn’t want to back your company and then see one of their competitors benefit by acquiring it a few years later. Whether this is the right route for you depends on your own circumstances, and you must take your own professional advice on whether this opportunity is right for you and your company.”

From Diageo’s point of view this is perfectly understandable. But new businesses in search of venture capital should think this over very thorougly. They need to decide now if and when to sell. And even if they really want to, they may not even be considered worthy when the time has come, because Diageo is not required to buy. On the other hand, should the business be doing fine they might prefer to stick with it after all but would be forced to sell anway. And if you are genuinely passionate about your idea, would you really consider to sell it before it has even properly started? 

Doesn’t this remind a bit of Faust’s pact with the devil who offers to serve Faust with his magic until finally Faust’s soul belongs to him? Diageo is honest about their objectives at least and it is good that they do warn you not to take this step easily. The Team page shows that the Diageo people in Distilled Ventures work in the “Futures Team at Diageo – the team tasked with identifying and developing new and discontinuous growth opportunities for the company“. This clearly is an indication that this venture appears to be more about growing Diageo than about helping others. The programmes are named Seed and Growth. Then comes harvest time.

Bushmills and Bulleit Bourbon are cited as examples for brands acquired and grown by Diageo. I beg your pardon? Bushmills was bought from Pernod Ricard for £200 million and was hardly a budding startup venture with its centuries of history. And while Bulleit indeed is a young brand, it had already been part of the Seagram conglomerate for several years before Diageo acquired it. Naming these well-known brands in such a context is nothing more than a lousy trick with the intention to make the programmes look more attractive.

Post Scriptum

What is it with companies like Diageo or also Dalmore that time and time again attract “bad press”? Is it really just because they are big and the public loves to team up with the underdogs? Of course there is a notion among whisky geeks that any company bigger than Benriach is evil by definition. But this is just romantic nonsense. It may be more about corporate …erhem.. culture, actually.

While in some respects Diageo is quite conservative, there is a certain aggressivity that often can be noticed in their business decisions, and this is why people jump at them. Take a look at Pernod Ricard for example who don’t exactly qualify as a “craft distiller” either. Hardly ever you hear news from them worthy of a commentary. At least their whisky business appears to run smoothly and mostly quietly which, honestly, I prefer.

Update:

One further thought picking up a discussion in the comment section: If this project simply was about helping small business to turn their ideas into a profitable brand, I would be all in favour. But the buy-out option also allows “serial entrepreneurs” to cash in on their ideas and then to move on to a new venture. This is definitely not a concept that I am comfortable with.

{ 22 comments… read them below or add one }

Atanas September 17, 2013 at 1:36 pm

I suppose one could say that D are a bit arrogant in this kind of announcements. I can see though their point of view and why they are doing it. It is a whisky boom time and they would like to invest in more whisky production but are lacking out of the box thinking and entrepreneurship of the small craft-minded type. On the other hand, they want to push the risk elsewhere or share it (I have not read the small print but I am sure it is along those lines) on this type of ventures and only pick the creme-de-creme at some point.
Hey, they’ve got the money, why shouldn’t they try? If there are people who like starting up distilleries and sell them over in few years time it is going to be win-win. It is an arrogant attitude – yes, but it is only a bad PR in front of a handful of malt lovers, no more, no less.

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Oliver Klimek September 17, 2013 at 1:39 pm

Please note that this is not specifically about whisky. It’s about all spirits.

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Atanas September 17, 2013 at 1:49 pm

Thanks Oliver, I hadn’t notices. I guess I am becoming malt-minded or malt-blind :)
Cheers
Atanas

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PR September 17, 2013 at 4:06 pm

My take on this news is that Diageo decided to partner with people that want some seed capital that it will provide in exchange for the option to buy their business down the line. Each entrepreneur then has to decide if that is what they want to do or not.

Diageo will risk its own money, between £150K and £2M that they may well lose if the business is unsuccessful and many will fail. If the business does become profitable, they can incorporate them in their portfolio of products and the entrepreneur presumably pockets the fair value of that venture which is better than not be able to develop their idea at all because of lack of funding.

As much as I’m disgruntled with the big players in the Scotch whisky industry nowadays for a number of other reasons, I fail to see what Diageo is doing here that is nothing but sensible, open and fair. They are quite open to the fact that they want to explore different ideas and innovation and the way they want to do it is by backing other people. This practice is widely used in many other fields, for example scientific research where private companies will sponsor research in certain areas but will own any patents that come out of that work. The scientist get their grant, income and the opportunity to develop something they believe in and the entity providing the money gets to use the fruits of that for their own profit.

Also Diageo has developed Bushmills and Bulleit Bourbon beyond what they were when purchased, regardless of who the previous owner was or how big they were. I don’t see why they shouldn’t use them as case studies for how they can make a brand global. Or do they say that they started and nurtured those brands from the beginning?

How much of the bad press is bad because we enthusiasts choose to put it in that light?

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Oliver Klimek September 17, 2013 at 4:46 pm

Thank you for your thoughts. I think comparing this with industry-funded science is a bit like comparing apples and oranges. Scientists working at a university are not entrepreneurs with products to sell. If the university budget isn’t sufficient, which may well be the standard case, then other income is needed to fund the research. The industry often does not have the capcity to do their own research, unless they are called IBM for example. For me this is a good example of a symbiosis.

Businesses targeted by DV do have products to sell and probably could survive without help (I don’t think Diageo would invest in hopeless cases). On the other hand Diageo certainly has knowledge and capacity to run distilleries themselves.

I already stated that I appreciate that Diageo is open about what they are up to. My gripe here is that Diageo intends to ultimately draw profit from the creativity and passion of others, from ideas that are difficult to conceive at a desk in a London office tower. In essence they want to buy ideas and give the people who had them a golden handshake when they have proven to be profitable, thus eliminating possible competitors from the market. And I am sure they would not do this if they didn’t see a positive return on their overall investments down the road, even if some of it may be lost.

Regarding Bushmills and Bulleit, do you really think those brands are good examples for what these programmes inted to do? No-one doubts that Diageo has the capacity to make a brand grow. If not them, who else? But those were already parts of conglomerates before they came to Diageo. Yet the message of this is “Your startup distillery can become like Bushmills when you join us”. I don’t think so.

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PR September 17, 2013 at 5:44 pm

All good points, but;

The idea of investing in a startup business in the expectation of profiting from their success underpins the whole venture capital industry and although Diageo will certainly scrutinise what ideas they think are viable and only invest in better bets, this is the case with any other market sector that uses the same model. Also, some businesses even though good could fail if starved for capital so this startup money could make the difference between the product being successful or not ever even materialising.

I guess the kind of people this proposal would attract are not the kind of people that build privately own family businesses, but the kind of modern entrepreneur that has an idea, wants to develop it to the point of it making them some money, sell off and move on to the next idea, or the so-called serial entrepreneurs. This deal seems well tailored for that. Also I’m sure that the owner of the business will have a say on the valuation it will be sold at should Diageo exercise their right to buy after a while.

As for Bushmills and Bulleit, I take your point that they were not small businesses like the ones they are looking to attract here, but arguably they were smaller or even neglected brands under other conglomerates that Diageo bought and developed into bigger, globally available names. Although the scales are different, it would be still an appropriate example of how they can expand a business.

BTW, I’m not a Diageo fan by any means, quite the opposite after the announcement of this year’s Special Releases. I just think that this particular initiative does seem to be well designed and suited for a certain kind of entrepreneur and for the ones that want full control of their business they just needn’t apply.

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Oliver Klimek September 17, 2013 at 5:56 pm

I guess the kind of people this proposal would attract are not the kind of people that build privately own family businesses, but the kind of modern entrepreneur that has an idea, wants to develop it to the point of it making them some money, sell off and move on to the next idea, or the so-called serial entrepreneurs. This deal seems well tailored for that.

Well, I think we may be approaching an agreement here ;) This is a sentiment I share. I only think that this kind of serial entrepreneurship is not a thing to go for, simply because it lacks that passion I connect with building your own brand from scratch. There is the world “brainchild” for an idea you are passionate about. Call me old-fashioned, but selling a brainchild would not feel right to me.

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Florin September 17, 2013 at 8:05 pm

I love the observation about companies attracting bad press! I was also thinking of Pernot Ricard as a counter-example. Probably this has to do with the balance that they are able to find between chasing the dollar (i.e. corporate greed) versus respecting the product and its culture. When Diageo strong-arms a jury to get awarded top prize in a craft beer competition, at the expense of a well-loved underdog (yes, it is called BrewDog), that’s crossing the line. When Dalmore puts out a $39,000 whisky collection, and then raises the bid to a £1 mil collection, for no good reason, that’s disrespectful to the past and present of whisky, and says “I don’t care what you think”. You have this brash aggressiveness going on with Macallan as well. In LMVH/Glenmorangie too, to a certain extent, but less pernicious, since their prices generally stayed decent. I don’t know what keeps Pernot Ricard so decent, but good for them! They are as big as Diageo, but they behave almost as a mom-and-pop shop. And then of course there is Glenfiddich’s W. Grant & Sons, the poster boy for a big company that everybody is rooting for. (You have to wonder, have they *paid* Trump for that whole “you are banned from my golf clubs” scandal?)

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Jeff September 18, 2013 at 11:49 pm

I agree with many of your points and find it quite refreshing, amid all the recent talk of the pressures of supply and demand and the things the industry “now finds itself forced to do”, to have simple greed put forward as the motivation for some of the things we’re seeing. I find it quite bizarre that people will take the industry’s word that current asking prices “have to be this way” when that same industry has been caught in the boldfaced lie that “age doesn’t really matter”.

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Oliver Klimek September 19, 2013 at 6:10 am

Look at the payments for CEO Walsh. Would or could Diageo pay him that much if they operated on a very tight profit margin?

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Jeff September 19, 2013 at 10:29 am

Exactly, and it would be one thing if Paul Walsh were some kind of godsend to scotch, or even if, to him, it weren’t just one segment of a corporation which just happens to make beverages as opposed to widgets. He was paid very well to represent the interests of shareholders, but their interests run counter to those of consumers in an era of falling quality and steeply climbing prices, and crying unavoidable hard times for whisky while posting record profits and compensations simply isn’t convincing.

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portwood September 21, 2013 at 4:00 am

“…their interests run counter to those of consumers in an era of falling quality and steeply climbing prices…”

This statement is highly patronizing of the millions of consumers that buy (and enjoy) the beverages produced by Diageo. If their products were as bad as you suggest they would not be able to post the record profits you speak of and would not be able to pay their executives such high compensation. The evidence suggest that they sell good and well priced products.

Just because a bunch of internet whisky nerds (myself included) think the stuff they produce isn’t on par with the “craft” “independent” mom&pop producers doesn’t mean it isn’t good to the millions of consumers who don’t sit around with their mighty noses stuck in glencairn glasses for hours on end.

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Oliver Klimek September 21, 2013 at 7:09 am

I quite agree. Yes, the quality has fallen over the decades. But 99.x% of consumers wouldn’t now. Only a very small fraction had the chance to compare today’s Johnnie Walker with that of the 1960s, for example. I have always stated that Diageo price their products in a way they make maximum profit while still selling everything (The Manager’s Choice series was a miscalculation though). Their bread and butter products are cheap and will likely remain cheap: JWR, JWB, Gordon’s, Smirnoff etc. The single malts are irrelevant to their business and they price them according to demand. I don’t blame Diageo for excesses like this year’s Special Releases, I blame the buyers that are still willing to buy them.

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Jeff September 21, 2013 at 10:11 am

I personally don’t see how it’s “patronizing”; either quality is falling (and I don’t see this refuted by the offended) or it’s not. And the question was one of quality, not enjoyment, and it amazes me how the metrics have to be confused so that Diageo can be defended. Also, in looking at falling quality, I’m not comparing Diageo’s stable and its quality to “craft” “independent” mom & pop producers (not sure where that idea came from), – because that WOULD be irrelevant – but to its own past performance.

What I find patronizing is the idea that, while we ARE in an era of falling quality and steeply climbing prices, this situation is somehow “good enough” for “the millions of consumers who don’t sit around with their mighty noses stuck in glencairn glasses for hours on end”, an insult both to the average drinker (who doesn’t deserve better?)AND to the anorak, whose apparent main offense (and, again, to whose interests?) is having the experience and context to see the situation for what it is. Meanwhile, of course, Diageo is doing a great job and how dare anyone say otherwise.

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Jeff September 21, 2013 at 11:42 am

Sorry to have stuck the above post below Oliver’s rather than portwood’s.

Anyway, to Oliver:

“Yes, the quality has fallen over the decades. But 99.x% of consumers wouldn’t (k)now.” – now THERE’S a patronizing statement. Anyone who can read the trending in the Malt Monitor doesn’t need personal dram-by-dram experience dating from the 60’s to see what’s happening, a trend which you don’t refute, yet, incredibly, try to come to Diageo’s aid by letting on that, if a consumer isn’t aware of it, the trend either isn’t happening or is irrelevant. Once again, the overall message is that the current situation is somehow “good enough” for those who really aren’t “in the know”.

Given that you already acknowledge that Diageo’s profit margin is large (as per the comment on Paul Walsh), I find it strange that you now ride to their rescue with a model of their pricing which is slightly self-contradicting (they sell out everything except what they don’t) and places their pricing decisions at the door of everyone but the company itself – once again, the mantra of “economic pressures and forces” instead of just plain old greed backed by industry propaganda. By the way, if you’re right, and if it’s somehow true that consumer demand determines the price and it is that consumer choice which makes that price proper and fair, who are you to say that Diageo’s Special Releases are “excesses” or to call it the ‘Diageo “Whisky For Fools” Collection’?

portwood September 21, 2013 at 3:57 pm

Couple of simple questions to you Jeff:
Are you self-employed or do you work for someone else (i.e. a corporation)?
If self-employed, do you try to make as little money as possible or try to maximize your income?
If you work for a corporation, does your job not require you do everything (legally) possible to maximize the corp’s profits? And if the corp doesn’t make enough money do you not worry about your job being eliminated?

Its funny to me how people bash corporations (they don’t work for) for being greedy profit maximizers yet depend on income from said corps to pay their bills.

Jeff September 18, 2013 at 11:03 pm

I have to wonder if, as Atanas notes, given its “big whisky” corporate image (and reality), Diageo isn’t really now looking outside itself for innovation – looking for someone to grow a Bruichladdich for them to scoop up later while keeping their fingers in some promising pies (and seeing a lot of interesting business and products plans it can glean from in the meantime). It’s a funnel for ideas, and a way, if of not controlling all the future start-up competition, of getting to see what some segment of it might have in mind down the road. Nothing of any promise or real value, by definition, will be left in entrepreneurial hands through this program – Diageo reserves the right to buy anything which could be of benefit, or could represent a future threat to its interests.

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Oliver Klimek September 21, 2013 at 12:58 pm

Jeff, do you really believe that a significant percentage of consumers of Diageo whisky are even aware of the Malt Monitor? This is a toy for geeks, and you see this from a geek perspective only. I have met many casual whisky drinkers (even such who prefer single malts) who have never heard of the Malt Maniacs. I don’t believe the average bar-goer in Tokyo or Madrid would be aware that JWR was so much better 50 years ago. And this is where Diageo make their money. They drink the stuff anyway, and they are happy to pay the prices (which are not very expensive in that segment). The downward quality trend is not affecting their sales. I do not “come to Diageo’s aid”, I too think this trend is sad, but it is real. Global Diageo sales show that, as you say, it is “good enough” for the average consumer.

Diageo’s profits are high because people pay the prices asked, it’s as simple as that. This is why I call the buyers of the overpriced special releases fools. If the 2012 releases had sold badly, the 2013 ones would not have been as expensive as they are now. I do not come to their rescue, I try to explain. Ever heard the term “advocatus diaboli”?

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portwood September 21, 2013 at 4:03 pm

All good points Oliver.

“better” is in the eye of the beholder. To malt geeks perhaps Diageo’s offerings are indeed worse today than they were in the past. HOWEVER, to the majority of their customers – for whom the main concern may be alcohol delivery and not taste per se – the difference between today’s and yesterday’s products is irrelevant. Obviously today’s product is delivering what today’s consumer wants otherwise Diageo sales wouldn’t be on the rise.

Taste changes, geeks tend to discount the fact that perhaps the reason Diageo’s products are different today is because they have designed them to be that way – in response to the tastes of their intended customers?

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Jeff September 22, 2013 at 3:40 am

I would argue that the downward quality trend itself, if not reversed, will prove far more significant to whisky than who is currently aware of it, how they came into that knowledge, or what label they acquire as a result. Once you realize quality’s slipping, does that make you a “geek” or are you just awake? If reviewers can currently find slippages in quality of expressions over the course of just a few years, not decades, why not at least some of the great unwashed? If the trend is indeed real and continues, perception of it will inevitably spread. QPR cannot fall indefinitely before just whatever’s offered is no longer “good enough” for the average consumer and the industry shouldn’t assume otherwise and take whisky into the dirt just to prove that it can and to give its media departments more miracles to perform. Strangely enough, my concern in this matter is about the future quality of whisky, not Diageo’s bottom line.

I’m afraid your attempts at “diabolical” cleverness continue to elude me on the 2013 Special Releases. If, as you suggest, consumers make the market and its prices, so as to leave Diageo’s hands clean in the matter, then that IS the market they make. If Diageo can’t be blamed for overcharging them, customers can’t be accused of being fools for overpaying because, evidently, that’s the market price. That’s not to say the above is a theory I agree with, as it makes everyone BUT Diageo responsible for its pricing, but I still find your vindication of Diageo but condemnation of its high-end customers a contradiction.

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Jeff September 22, 2013 at 4:06 am

Portwood: My personal details, much like your attempt to change to focus of the discussion from quality to enjoyment, are quite beside the point. On the subject of greed, however, I seem to be one of the few willing to acknowledge it as a prime industry motivator. Whereas others want to characterize overpricing as something the consumer asks producers to do to them, I see it merely as something which the industry periodically attempts, and yes, out of greed, and then tries to justify to the customer using all the media resources its owns, can rent, or recruit. But, if I’m wrong, I have to wonder, if people are indeed willing to spontaneously “elect” to overpay anyway, why needless millions are spent on promotion and advertising to convince them to do so, particularly if producers are all about profit maximization?

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Oliver Klimek September 22, 2013 at 7:14 am

Then we will just have to agree to disagree here. No company can constantly ignore the laws of supply and demand unless it is a monopoly and prices can be dictated because there is no alternative. And the greedier a compmany is, the more it will test the limits how far they can go. This is what Diageo is doing now. If enough buyers are foolish enough to pay any price for a bottle of limited edition whisky, this will continue. If the bottles sit on the shelves instead, they will think twice about pricing them so expensively again.

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