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MarketScreener Homepage  >  Equities  >  London Stock Exchange  >  Diageo plc    DGE   GB0002374006


Delayed Quote. Delayed London Stock Exchange - 05/29 11:35:09 am
2790.5 GBX   -5.53%
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If You're a Purist About Scotch Whisky, You Might Find This Hard to Swallow

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01/23/2018 | 12:46pm EDT
By Saabira Chaudhuri 

LONDON -- Here's a neat story.

The documents involved are top secret. They detail a plot by a multinational company to challenge hundreds of years of tradition. Some find the suggestions so hard to swallow they are warning of rebellion.

The making of Scotch whisky has long followed a precise formula enshrined in law and precedent. Scotch must be distilled in Scotland from water and malted barley and aged in the country at least three years in oak casks. It should come out at least 40% alcohol by volume.

Now Diageo PLC, the world's single biggest producer, wants to water down some of those rules, part of its attempt to arrest Scotch's declining market share. Last year, it formed a secret task force to explore ways to change some industry rules about how Scotch must be made.

One idea was to finish aging Scotch in old tequila barrels instead of the sherry, cognac or port casks traditionally used. Another was to create a "Scotch whisky infusion," a new category of flavored or low-alcohol blends sold under existing Scotch brands.

Diageo's efforts to win over the Scotch Whisky Association, which lays down rules for distilling the spirit -- at least on its tequila-barrel idea -- are already on the rocks.

"There is not a single chance of a change of the rules," says Gavin Hewitt, a former British diplomat and one-time chief executive of the SWA. "Whoever is saying that is talking through a complete hole in their head."

The company, which makes Scotch brands such as Johnnie Walker, J&B and Talisker, and controls about 40% of the world's production, triggered an outcry once before in Scotland, which, not surprisingly, takes its Scotch seriously. In 2003, Diageo slapped the name of one of its single-malt Scotches onto a blended Scotch. Diageo called it a "pure malt." The SWA called it deceptive marketing.

A Scottish member of parliament went so far as to ask then-Prime Minister Tony Blair to intervene in the "ongoing crisis." Mr. Blair said he would "look into it." Diageo eventually pulled the product from shelves.

Diageo didn't set out last year to make trouble. It merely wanted to make Scotch tempting to more drinkers.

Ten years ago, Scotch made up about 60% of the world's whiskey market, excluding a category called "other whiskeys" that consists mainly of domestic Indian whiskey, according to according industry tracker IWSR. Since then, the share of U.S. whiskey has grown from 19% to almost 25%.

The mission of the Diageo task force, according to a document labeled "highly confidential" reviewed by The Wall Street Journal, is to explore "whether potential regulatory, technical, legal or other barriers are constraining" Scotch, and "the scope for reform."

Scotch watchers say Diageo will face stiff opposition to any rule changes -- something its task force acknowledges in the documents. One of the biggest obstacles is the SWA, an Edinburgh-based trade body that has long interpreted the rules and policed Scotch making.

The SWA "is a big old business that's funded extensively through all the old whisky producers," says Dan Jago, head of London-based Berry Bros. & Rudd, a 320-year-old wine and spirits merchant. "Anyone trying to change the rules would be fighting against the general view that it's better to protect Scotch than expand it."

Alan Park, the SWA's legal-affairs director, says producers are free to innovate however they like, but "no consumer should be misled into thinking it's Scotch when it's not."

Diageo said in a written statement that it works with the SWA on ideas that "seek to strike a balance between tradition and innovation."

The first written reference to Scotch appeared in 1494, when a Friar John Cor showed up in tax records listing "eight bolls of malt, wherewith to make aqua vitae," the water of life, according to the SWA.

Since its founding in 1912, the SWA has played a big role shaping what the country's roughly 100 Scotch distillers can and can't do.

The association was instrumental in writing what eventually became the Scotch Whisky Regulations of 2009, a British law that lays out parameters for Scotch production. European Union rules regulating spirits also apply.

Some of the rules are murky, and the association publishes guidelines to interpret them. It also gives advice, and approves or declines requests by distillers to try new approaches. It can't levy fines, but does warns distillers if they are breaking the law. It has filed suit against some it said were threatening the industry's reputation.

One of the most contested topics is finishing, which involves moving aged Scotch from its original cask to a second barrel. U.K. and EU laws don't stipulate what kinds of casks can be used for finishing.

During the past two years, Diageo executives approached the SWA's Mr. Park about using its Don Julio tequila casks to finish some of its Scotch, according to a person familiar with the matter. Mr. Park said no, this person says.

"Scotch whisky has a certain reputation attached to it based on traditional practices," says Mr. Park, who declined to comment on specific conversations with companies. "That provides the framework in which we have to operate."

After being rebuffed, Diageo's task force recommended challenging "the SWA's overreach," according to one Diageo document.

Some distillers sympathize with Diageo. Paul Miller, owner of St. Andrews-based Eden Mill Distillery & Brewery, asked the SWA in 2016 to allow him to use chocolate malt to make his Scotch.

Mr. Park offered to come and taste the drink, but voiced ambivalence: "Certain processes can still be prohibited if they lead to the production of a spirit which differs from a traditional Scotch Whisky," he emailed Mr. Miller.

"That's like saying you can't do anything to the spirit to make it taste any different," says Mr. Miller.

Mr. Park didn't stop by for a tasting, and Mr. Miller scaled back his production of chocolate malt. "Most of these rules were created to stop people passing off cheap rubbish as Scotch Whisky," Mr. Miller says. "They weren't set up to protect Scotch from a really exciting, creative, innovative craft whisky development that Scotland should be perfectly placed to take advantage of."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CF INDUSTRIES HOLDINGS, INC. 0.44% 29.37 Delayed Quote.-38.48%
DEERE & COMPANY -0.68% 152.12 Delayed Quote.-12.20%
DIAGEO PLC -5.53% 2790.5 Delayed Quote.-12.81%
NEXT -4.29% 4864 Delayed Quote.-30.69%
THE LEAD CO., INC. -2.37% 412 End-of-day quote.5.64%
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Net income 2020 2 582 M 3 197 M 3 197 M
Net Debt 2020 12 723 M 15 752 M 15 752 M
P/E ratio 2020 25,2x
Yield 2020 2,50%
Capitalization 65 221 M 80 499 M 80 743 M
EV / Sales 2019
EV / Sales 2020 6,49x
Nbr of Employees 28 150
Free-Float 90,8%
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