Benriach vs. Diageo Or Malts vs. Blends From A Business Perspective

It’s the season for annual company results and so far we have seen some interesting developments in the whisky business. I have picked two rather different whisky producers because their results highlight an aspect of the global whisly market that appears to be a bit below the radar.

To begin with let me state that I am not a business analyst. I won’t do any number crunching here but rather apply my common sense to the data that has been published.

Benriach’s last sales figures were outstanding. Pre-tax profits more than doubled to £8.9 million with total revenues growing 39.4% to £34.5 million.

Diageo did not do too well in its last fiscal year. Net sales dropped 10% from £11.3 billion £10.2 billion, gross profits fell from £6.9 billion to £6.2 billion. Main factors were weak sales in ermeging markets, China in particular. These numbers are for the entire conglomerate, but the fact that Scotch whisky had the biggest sales drop of Diageo’s international portfolio in China shows that whisky sales have been affected by this weakness to a great extent.

Benriach is only tiny compared to Diageo’s Scotch whisky branch which makes up about 30% of their total business. So comparing the two is a bit like comparing watermelons to blueberries. But there still is an interesting observation to be made. Along with the annual results, the Spirits Buisness website published a list of Diageo’s 10 fastest growing brands. Among them are four whisky brands: Bushmills, The Singleton, Lagavulin and Bulleit.

Diageo has dozens of blended Scotch whisky brands, from huge Johnnie Walker to fairly obscure ones like John Begg, blends make up more than 90% of their Scotch whisky business. But the only two Scotch brands among the top performers are single malts. The marketing push for the Singleton has been very noticeable, and with quite a few new bottlings on the market it is no wonder that sales have been increasing. And if there is enough supply, Lagavulin as one of the key Diageo single malts is a safe bet for good sales.

Diageo – usually personified by the increasingly omnipresent Dr. Nick Morgan – tirelessly emphasizes the importance that blended whisky has for them, that single malts are more ore less regarded as a bye-product of blending and that they are not really relevant for their business.

But the sales results make it more than obvious that Diageo has a problem in the blended whisky buisness. The “developed” western markets are fairly saturated, and the only real potential for further growth is seen in the so-called emerging markets which have performed so disappointingly last year. Doing business in emerging markets can give you big chances but also big risks. So far only the chances were under the spotlight, the huge Diageo investment plan has been largely fueled by high hopes for the development of these markets. But now the risks make themselves noticed as well.

There is a key problem with the emerging markets, it is their lack of predictability. Nobody would ever have expected the crackdown on luxury expenses in China that is a major contributing factor for the bad performance there, for example. And while China indeed has shown a remarkable rise in economic strength, the outlook is overshadowed by many question marks, ranging from enviromental concerns to rising unhappiness amoung the poorer parts of the population. And in some other markets one could ask if they are really emerging or if the water is up to their necks.

It is probably because of these concerns that Diageo has been trying to push their single malt brands forward despite of their “blends first” mantra. Many new expressions have been launched – several Singeltons, several Taliskers, a new Cardhu – and also the new Haig Club single grain can be seen as an attempt to get away from the dominance of blends and to open up a new clientele. The ongoing pro NAS campaign is designed to support this offensive because the lack of an age statement has become the norm for new Diageo releases.

But in a straddle that risks to hurt their credibility about the importance of age statements, Diageo has at the same time been transforming their annual Special Releases into a range of mostly luxury bottlings with special emphasis on the age and rarity of the most expensive single malts. Also the new Mortlach range is a model for their new luxury approach at the top end of the single malt portfolio.

And Benriach? They have been doing almost exactly the opposite as Diageo, and they have made themselves very comfortable in that niche. A focus on single malts, a broad product range with generally a very good value for the money and only few NAS bottlings. Glendronach distillery has managed to become a stronghold of sherry cask whisky, not the least because of their extensive and affordable bottlings of high quality single cask malts. Somehow they seem to be doing everything right at the moment by focussing on things Diageo has been dismissing.

While we are at it, there is another thing that sets Benriach apart from Diageo: social media competence. All their distilleries have official Facebook groups that allow fans of their products to interact with them. Diageo’s Friends of the Classic Malts page looks more like an avertising showcase in this respect. Diageo has made it more than clear that malt whisky geeks are largely irrelevant to them from the business perspective, so a true interaction is not worth the while for them. Select bloggers and writers are invited to product launches or other events, but overall Diageo’s approach to customer relations feels more like a one way street.