What Does Diageo's $115 Million Investment in Bourbon Mean for Investors?

Diageo plans to spend $115 million to build a 1.8 million proof gallon distillery in Kentucky to meet rising demand for American whiskey. Find out what it means for investors.

Jun 11, 2014 at 11:04AM

Diageo (NYSE:DEO) is huge and it knows how to move distilled spirits all around the globe. Bourbon is growing at a record pace and is just barely tapping its global market potential. Diageo knows this and understands that its best opportunities for growth are in emerging spirits (Bourbon) and emerging markets (India). That's why it recently bought more of the Diageo of India, United Spirits, and why it plans to plunk down around $115 million to construct a 1.8 million proof gallon distillery and six barrel storage warehouses in Kentucky over the next three years


One of Diageo's chief competitors, particularly in the world of American whiskies, is Brown-Forman (NYSE:BF-A) (NYSE:BF-B). At the end of 2013, it also announced plans to invest $100 million to expand its operations in Lynchburg, TN -- adding whiskey production and storage capabilities to meet the rising global demand for its flagship Jack Daniel's Tennessee Whiskey. The expansion will increase its capacity by 15 to 20%.  Brown-Forman moved about 11 million cases of Jack Daniel's in 2013, while Diageo's top bourbon, Bulleit, only sold about 600,000 cases.

Diageo hopes to reach the one million case mark this year. Only a few bourbons or Tennessee whiskies reach this level each year, including Jack Daniel's and Jim Beam (6 million plus) at the multimillion mark. Only Evan Williams (Heaven Hill), Wild Turkey (Campari) and Maker's Mark (Suntory/Beam) sell between 1 to 1.4 million cases per year.  

Investing for growth
Larry Schwarz, President, Diageo North America, stated that the "proposed investment in Shelby County, in the heart of Kentucky bourbon country, will cement our commitment to expanding our share of the American whiskey category." Basically, the American Whiskey category includes two kinds of whiskey, Bourbon and Tennessee Whiskey, which almost qualifies as bourbon except it's made in Tennessee (not Kentucky) and charcoal-mellowed. 

In the press release, Diageo pointed to two trends that drove its investment decision. First, bourbon is growing faster than any other spirits category in the U.S. Its value climbed 14% over the last 52 weeks. Secondly, global demand for bourbon in the super-premium price segment increased by a compound annual growth rate of 24% over the last three years.

What's driving the growth
Diageo also pinpointed two areas that were creating momentum for bourbon -- "flavor innovations" and "consumer demand for premium brands with authenticity." Diageo has long positioned its best-selling bourbon, Bulleit, as an authentic craft bourbon. However, its marketing strategy -- detailed in a previous article -- has walked a fine line between its huge size and its positioning in the bourbon market as "authentic." Authenticity is usually a quality associated with smaller distilleries and breweries -- not the market leader.

Rankling bourbon enthusiasts
Days before Diageo's announcement, one of the most popular voices in the bourbon industry, Chuck Cowdery, started a scathing blog about Diageo with these words: "The way Diageo presents its 'Orphan Barrel' whiskeys is an insult to American whiskeys and the people who drink them."

Cowdery went on to lament the fact that Diageo isn't emphasizing the "interesting true histories" of some of its newer premium bourbons, but instead "made up a front company to sell them, coined some jokey names, and designed some retro-style packaging, all of which is silly and belittling to the ostensibly fine bourbon inside."

The he said something that made most bourbon enthusiasts cringe. He played the "flavored vodka" card, accusing Diageo of being a "scotch company treating American whiskey like flavored vodka." Ouch.

Diageo cares about growth, not bourbon
Could these remarks by bourbon enthusiasts derail Diageo's efforts to make greater inroads into the bourbon market? Possibly. Will they stop the company from growing its overall revenue and profit? It's very unlikely.

The truth is that Cowdery is right. Diageo is a scotch (Johnny Walker) and vodka (Smirnoff) company first and foremost, and a bourbon company (Bulleit) way on down the line. Johnny Walker is the top-selling Scotch in the world and Smirnoff is the best-selling premium vodka across the globe.

Scotch also represented 29% of Diageo's net sales in 2013 and vodka made up 12%. By comparison, the whiskey category, which also includes Canadian, Irish, and American whiskies, made up only 7%. Diageo does not include any American whiskeys in its "strategic brands," which it defines as "having broad consumer appeal across geographies" and comprise around two-thirds of Diageo's net sales.

It does include Canadian and Irish whiskies, so that tells you that American whiskies, like Bourbon, are way down the totem pole when it comes to Diageo's overall strategies. So while bourbon enthusiasts might be a little put off by Diageo's inauthenticity, this should not really affect its bottom line. In the end, Diageo's successful foray into North American whiskies will result from domination of new markets across the globe. That doesn't mean that it shouldn't be smarter about how it is perceived by bourbon enthusiasts, but this is not where Diageo generates most of its revenue or profit.

Bourbon fool or foolish investor
So all things considered, the new distillery is a small piece of the pie for Diageo and one that will not make or break the company. Diageo's goal is likely to sell enough Bulleit over time to bring it to the level of a "strategic brand," but that is a long-term concern -- maybe five to 10 years out.  Bourbon is glaringly absent from its current vast portfolio and once you get past Jack Daniel's and Jim Beam, the global American whiskey market is wide open.

Also, the new distillery, at 1.8 million gallons, will be the smallest major producer distillery in Kentucky. So Diageo is not trying to hit a home run, it's simply trying to get on base with this move and position itself for the future if the boom in bourbon keeps building across the globe.

Will this stock be your next multi-bagger?
Diageo is trying to tap into Bourbon's growth, but we have a much better growth stock for your watchlist. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers