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Diageo And The Pitfalls Of Boom And Bust — Dramming
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Diageo And The Pitfalls Of Boom And Bust

by Oliver Klimek on October 29, 2014

Some rather shocking whisky news came out today: Diageo has put their plans for certain distillery expansions on hold, including Teaninich, Mortlach and Clynelish. (The linked article is subscription based, but the primary information is visible). This came only weeks after Diageo published yet another round of sobering quarter results earlier this month.

Despite Diageo’s continually displayed optimisim regarding the further development of the whisky market this move is an obvious sign that the global demand for Scotch whisky may not grow as explosively as envisioned when they first presented their £1bn investment plan in June 2012.

I am not an economist, of course. But I do know that markets are usually cyclic with periods of boom and bust. A well-researched example is the pork cycle:

“Nicholas Kaldor proposed a model of fluctuations in agricultural markets called the cobweb model, based on production lags and adaptive expectations. In his model, when prices are high more investments are made. Their effect, however, is delayed due to the breeding time. Then the market becomes saturated which leads to a decline in prices. As a result of this, production is reduced but the effects take a long time to be noticed but then lead to increased demand and again increased prices. This procedure repeats itself cyclically. The resulting supply-demand graph resembles a cobweb.” [Wikipedia]

Replace pigs with whisky and breeding with maturation, and you can clearly see the similarities to the whisky market. Of course the whisky market is more complicated than this simple model, especially with regard to the many political and economic uncertainties in emerging markets. But the fundamental mechanism is the same.

And it’s this imponderable nature of the emerging markets in particular that makes Diageo’s big investments in boom times so risky. They have put virtually all their money on this card, a move fuelled by hopes that the recent growth in those markets – and especially in China – would somehow perpetuate.

In the past decades Diageo’s decisions for their whisky distilleries have been extremely cyclical. Demand is high? Build distilleries (late 1960s/early 1970s, and now Roseisle and the other expansions). Demand is low? Close distilleries (1982/83). All of these were very big moves, major expansions and a devastating round of distillery closures.

I wonder if expansion in smaller steps could have prevented such huge oscillations of the whisky business. In physics, if you push a heavy pendulum (a heavy weight dangling from a string) with too much force, it can become virtually unstoppable and every try to change its direction can lead to chaotic movement. But with gentle corrections in the first place there is no need for drastic measures.

We can only hope that the frozen investments will prevent cutbacks in the existing distilleries. But the fact that also the Mortlach expansion was put on hold which has already been worked on hints to a certain nervousness on Diageo’s part.

Diageo is a company with an experience in whisky making that can be measured in centuries. Many very well paid managers work at the headquarters. And still they have not been able to find a way of running their business that can cope with fluctuating markets without resorting to emergency measures.

{ 6 comments… read them below or add one }

Horst Lüning October 29, 2014 at 4:11 pm

Pulling back from investments is a first indicator for an upcoming crisis. The dip of the DAX in Germany in Mid-Oct 2014 showed the world, that the force of Europe is concentrated in Germany. If Germany has a cough, Europe will have feaver. Augurs tell us, that the crisis will arrive in spring 2015. Wy invest money an increase debt, when the chances for a big crisis clearly show up?

Unfortunately money rules the world and also the whisky business. Nobody cares about maturation cycles, when his bonus is paid on quarterly figures.


Gareth October 29, 2014 at 5:25 pm

I caught this on the BBC website if you don’t have access through the paywall:



two-bit cowboy October 29, 2014 at 10:52 pm

Diageo, along with several other BIG drinks companies, have raised prices disproportionately since Diageo’s investment announcement. I wonder if part of the reason demand has decreased relates as much to their price increases as it does to changes in world economic figures. Fan loyalty to certain marques has elasticity, and it’s only logical to assume that at a certain price the rubber band breaks.


Gal Granov October 30, 2014 at 7:05 am

Sad news indeed, but I think this was bound to happen at some time, if not now then next year or the years later. The cycle is indeed something we anticipate, and with soaring prices, and demand something has to give…


kallaskander October 30, 2014 at 10:18 am

Hi there,

’tis a strange land we are living in….

A mere fortnight ago the CEO of Chivas Brothers was in full “faith and confidence” mode when the new Dalmunach distillery was opened. Two weeks later Diageo puts 50 Million Pounds on hold because of slowing demand for whisky.
At the same time Diageo and the SWA hurry to confirm that their confidence is high and that all decisions of the past will have been right in a bright future.

If they have been why do 50 Million Pounds that are put on hold make a difference? And to whom? What capacity in distilling will now be put on hold as well with the three stopped expansion schemes? And why would this cancelled capacity make a difference if all decisions have been the right ones?
The distilling capacity spared today will mean less whisky in about 4-5 years in the blended Scotch sector and 10-12 years in the single malt sector. In a long term view it means less overall whisky for many purposes in 15-20 years. Why would three distilleries matter?
So is this decision as harmless as Diageo wants us to believe? Or have the data of the whisky decline shown more informations about the correctness of strategic decisions of the past than the whisky industry would be ready to accept or to believe?

Sometimes the question of boom or bust is all about confidence.

When you read the BBC news item the message is all about confidence. The course is right it is merely a pause to evaluate the current situation and tomorrow we will be ploughing on again… no need for a confidence crisis dear shareholders. Please do not lose your confidence in us!
The question has been asked if it is about ever raising prices and the slowdown of demand not in emerging markets but in established markets such as Europe or the US.

For Europe it is save to say I think that the whisky industry has done much to undermine another but very important kind of confidence – consumer confidence.

With ever new nebulous fancy and expensive NAS bottlings for ever increasing prices and the general price hike in Scotch single malt they are driving away consumers from the whisky these consumers crave and love. Compared to that development the blended Scotch has been a stronghold of stability until recently.
I would say it is a case of misjudging what the established markets will bear and tolerate on a grand scale that will accelerate the decline in the growth of the established markets. Figures for the last year have not been bad for established markets overall, though. Some have gained others have lost sales volumes but one year is not enough to judge general developments.
In the emerging markets on the other hand one year of newly found Chinese austerity has been enough to shake the Drinks giants. Figures of up to 40% less sales and profits have been reported for the first quarter of 2014 in some cases.
So let’s see if and when the Diageo expansion plans will be carried on.



Bill Ricker October 30, 2014 at 10:51 pm

Also around the Paywall, Independent IE has picked Times copy off the wire service.


“scotch (distillery) put on ice” deserves a prize for puns in headline …


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