Is Diageo Being Blinded by the Stars in Its Eyes?

Spirits distributor Diageo (NYSE: DEO  ) has stars in its eyes, and investors should hope it's not blinded by the brightness. 

Although premium and super-premium spirits have lit a fire under distillers, and though many are partnering with celebrities to get their beverages to stand out, Diageo's latest announcement that it will team up with soccer phenom David Beckham for a new single grain whisky suggests it's smitten by stardom more than its rivals. 

Haig Club Single Grain Scotch Whisky.
Source: Diageo.

Premium and super-premium spirits grew 10% in 2013, far outpacing the 3% rate of increase experienced by the overall spirits market. Similar to the trend in the craft beer industry, which has also enjoyed sales above and beyond the broader brewing industry, premium spirits drinkers are seeking out better taste, greater quality, and finer craftsmanship. Because Diageo keeps going to the well of fame to promote new spirits, however, it gives the appearance of not believing they can stand on their own taste profile to win over drinkers.

Diageo recently acquired super-premium tequila brand DeLeon, but did so in partnership with rap impresario Sean Combs, with whom it had a prior relationship for its Ciroc vodka, admittedly a successful pairing where it is the No. 2 ultra premium vodka and enjoyed a 4% increase in organic net sales movement in North America in fiscal 2013. Now it's launching the single grain scotch whisky Haig Club from the 400-year-old House of Haig distillery in tandem with footballer Becks and British entrepreneur Simon Fuller, who's brought to America fine television fare like American Idol.

Whiskey, in particular, is in the midst of a global renaissance, with the Distilled Spirits Council pointing to international sales breaking through the $1 billion level for the first time ever last year, up 5% from 2012 as Japan, Germany, and France knocked backed increased volumes of these distinctly American spirits. Yet Americans were no slouches either when it came to boosting the "browns," as sales surged 10% higher to $2.4 billion on 7% higher volumes, hitting 18 million cases.

Single grain whisky is scotch whisky made in a single distillery, from unmalted grains, typically barley, corn, or wheat. When made with malted grains, it's called a single malt whiskey. The "single" in its name doesn't refer to the number of grains used, but rather the number of distilleries it's made in. And to make things slightly more confusing, if unmalted and malted grains are used, then it's called a blended scotch, which is not to be confused with blended malt scotches, which are a mix of single malts.

Celebrity spirits, though, have been something of a recent phenomenon, including Slovenia vodka from actor Bill Murray and ballet dancer Mikhail Baryshnikov, Dan Aykroyd's Crystal Head vodka, rocker Sammy Hagar's Cabo Wabo tequila, and Justin Timberlake's Sauza 901 tequila, which was relaunched earlier this year (and named after his hometown area code in Memphis, Tenn.).

Yet the most popular whiskies like Jack Daniel's and George Dickel didn't need celebrity backers to get recognized as a quality drink; they preferred to rely upon taste to build a legacy. Using stars as a crutch to boost a spirit may be the current fad, but it also risks diluting the brand, and Diageo's reliance upon the gimmick means its leadership position could flame out fast.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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