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That’s a Billion With The Letter B, Diageo Takes Big Steps!

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The U.K.’s coalition government is desperately keen to get Britain growing again by “exporting our way to recovery.”
A dram fine business
For inspiration, ministers should look to the global success story that is Scotch whisky. With demand for a wee dram or two surging among the growing middle classes of Asia, Latin America, and Africa, sales of Scotch are soaring.
Indeed, exports of Scotch whisky leapt for the seventh year in a row last year, reaching a record high of 4.2 billion pounds. According to the Scotch Whisky Association, this was 23% ahead of 2010′s sales, so this is a new golden age for the golden liquid.
A 1 billion pound shot
With 108 distilleries licensed to produce Scotch whisky, the U.K. ships 40 bottles overseas every second, boosting U.K. exports by 134 pounds per second. Sales of Scotch generate 1 billion pounds in taxes to HM Treasury, and the industry directly employs 10,300 people and supports another 35,000 U.K. jobs.
As a result, FTSE 100 giant Diageo (NYSE: DEO ) yesterday announced that it is to invest $1.5 billion into boosting Scotch production over the next five years. The world’s largest producer of Scotch whisky — with brands such as Johnnie Walker, J&B,Bell’s, Windsor Premier, and Buchanan’s — is to build a new malt distillery in Scotland, add extra stills, and expand warehouses, creating more than 850 jobs in Scotland’s highlands and islands.
Clearly, Diageo’s directors strongly believe that Scotch is shaking off its old-fashioned image to become the tipple of choice for free-spending professionals in emerging markets. Indeed, some analysts predict that the amber spirit is only at the beginning of a “super-cycle” of sharply rising global demand. Hence, Diageo has ambitious plans to boost its production capacity by between 30% and 40%. If sales — already at 3 billion pounds — continue to rise steeply, then Diageo should commission a second distillery in fiscal 2016.
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Whisky galore
Scotch whisky is sold in 200 markets worldwide, but the U.S. is the biggest single export market, with sales of 655 million pounds in 2011, up 31%. Other key markets include France (535 million pounds), Singapore (318 million pounds), Spain (259 million pounds), South Africa (166 million pounds), and Taiwan (155 million pounds).
What’s more, Scotch whisky accounts for a mere 1% of India’s vast sales of whisky, so there is enormous scope to improve exports to the subcontinent. Scotch whisky is also becoming a high-status drink among the young elites of emerging markets and the BRIC countries (Brazil, Russia, India, and China). Thus, the future looks rosy for Diageo and other leading whisky producers — including its French archrival, Pernod Ricard, maker of Ballantine’s and Chivas Regal.
As for Diageo itself, its shares trade at 1,592 pence. At this price, the group is valued at 40 billion pounds, making it one of the FTSE 100′s leading mega-cap firms. Its shares trade on a forward price-to-earnings ratio of 17.3 and offer a prospective dividend yield of 2.9%, covered 2.1 times. Although these are premium ratings, Diageo also has ambitious growth plans.

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Rising demand for Scotch whisky in emerging markets

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FRENCH drinks giant Pernod Ricard will decide within the next nine months whether it will start building distilleries to cope with the rising demand for Scotch whisky in emerging markets.

Pernod – which owns Chivas Brothers, Scotland’s second-largest distiller behind Johnnie Walker-maker Diageo – will next year bring its final mothballed distillery back into production.

Christian Porta, chairman and chief executive of Chivas Brothers, said the firm is on course to re-open its Glen Keith distillery on Speyside during March or April.

Last week, the spirits heavyweight – which makes whiskies including Ballantine’s, Chivas Regal and the Glenlivet – also unveiled a £40 million plan to increase its output by 25 per cent over the coming financial year by extending four of its sites. Diageo last year opened a £40m plant at Roseisle, in Moray, to meet demand for Scotch in fast-growing markets such as Brazil, China and Russia.

Porta told Scotland on Sunday: “We look at the requirements of our brands over the long term every six to 12 months and, if we see that our brands are continuing to grow, then we will need to think what our next steps are. If we decide to go further, then possibly we would build a new distillery from scratch.

“That’s not a certainty, that’s not a decision we’ve made, but it’s a possibility.”

Porta added: “We have a good team on the manufacturing side in Scotland who are looking at different options, but we haven’t started working up ideas for specific sites. If there is further acceleration in the growth of our Scotch whisky business then we will have to take a decision sooner rather than later. The next review will be in six to nine months’ time and we will take a decision then about what the next steps are.”

As well as extending its distilleries at Glenallachie, Glentauchers, Longmorn and Tormore, Pernod is opening a further bottling line at its site in Paisley this summer to package its high-end whiskies, including Royal Salute.

Chivas Brothers already employs about 1,600 people at 32 sites throughout the UK, the vast majority in Scotland.

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