Diageo Lobs New Grenade in Whiskey Wars

Distiller Diageo (NYSE: DEO  ) is going on the offensive in the escalating whiskey rebellion in Tennessee, lobbing a lawsuit against the state after it tried to enforce a dust-covered 1930s-era statute as to where spirits can be stored. 

Whiskey barrels in the Jack Daniel's distillery in Lynchburg, Tenn. Source: Wikimedia Commons.

In what looks like an attempt by the state to put its thumb on the scale to help local distiller Brown-Forman (NYSE: BF-B  ) press its case for how Tennessee whiskey is made, the state's alcoholic beverage commission sent Diageo a letter charging it with violating a 1937 law that requires distillers store their spirits either in the county where they're manufactured or in an adjacent one. Because Diageo stores its George Dickel whisky (yes, they spell it that way) in a Louisville, Ky., warehouse rather than at the Coffee County, Tenn., facility where it's distilled, the state says it's run afoul of the law.

Diageo counters that the state has never enforced the storage law before and doing so violates its constitutional rights regarding interstate commerce.

Certainly, the timing of the state's letter is curious. It was only a few weeks ago that Brown-Forman railed against Diageo allegedly trying to water down a distinctly American institution like Tennessee whiskey. B-F says the protectionist law it pushed through the legislature proscribing exactly how "Tennessee whiskey" had to be made -- which not so coincidentally is the same way its Jack Daniel's is distilled -- had nothing to do with the state's craft distillers that would be affected by the law but everything to do with a "foreign company" weakening Tennessee's identity. And only a week later, the state's alcohol commissioner chose to enforce the 80-year-old storage law. It can hardly be a coincidence.

Of course, it's spurious to claim in today's global economy that Diageo is "foreign." While the distiller is based in the U.K., its George Dickel brand has a history in Tennessee that goes back almost as far as Jack Daniel's and even comports to the Tennessee whiskey law, using the so-called Lincoln County process that requires straight bourbon whiskey to be filtered through charcoal into single-use, charred-oak barrels. 

In fact, as a result of Brown-Forman pressing the government to implement the standard of identity law for whiskey, craft distillers are running into a shortage of oak barrels. No doubt because of the growing popularity of whiskey and bourbon, whose sales surged 10% to $2.4 billion in 2013 as volumes rose 7% to 18 million cases and international sales topped $1 billion for the first time ever, there is a limited supply of casks available.

Source: SXC.hu.

Brown-Forman accounts for 90% of all whiskey sold in Tennessee, and reported global sales soared 30% in the first nine months of fiscal 2014. Diageo also reported strong growth in whiskey, with net sales of Johnnie Walker growing 16% in the six-month period ending Dec. 31 and its Buchanan's brand of Scotch whisky enjoying a 19% increase in organic sales in North America.

Maybe Brown-Forman is finding all the competition a little too much to fairly and successfully beat back these days, but Diageo points out that if it loses the storage law case, it may have to expand facilities elsewhere and cut jobs in Tennessee.

As the whiskey rebellion enters a new phase, Diageo may be losing a battle or two, but the war is still within its reach -- and that may be worth raising a glass of Dickel to toast.

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