Drinking Diageo: Part I

When people ask me for my take on the current state of the boutique spirits industry, I usually give them the Star Wars analogy. If the past few years have been like Star Wars, with rebel craft distilleries popping up all over the place, uniting in their front to take on the Diageo Death Star, we're definitely entering the Empire Strikes Back phase of this story -- the part where Diageo flexes its muscle, regroups, and builds a bigger, badder, smarter version of the same thing. It's no secret that the spirits giant (and other spirits giants, too, like Pernod-Ricard, Campari, etc.) have taken a hit in the sales department as consumers have begun drinking outside the corporate box. However, rather than simply co-opt the movement by buying it out, likely ending up with a bunch of extra weight it can't support, Diageo is simply retooling its lineup, using the size and scale of its production to offer value where the market is lacking it. Whereas two years ago I was using this blog as a pulpit to vent my frustrations about Diageo's price increases and margin-squeezing tactics, today I find myself in a completely different mindset. Today I'm more upset by exploitative pricing and overvalued quality than I am by marketplace adjustments. I've become both older and wiser and I understand a bit more of the story now that it has progressed farther along.

While we all groaned at the $5 price hikes on things like Caol Ila, Lagavulin, or Talisker, these increases were only a tremor compared to the price-shattering earthquake that was to follow. As other companies realized that they could no longer keep up with the demand for their products, prices began to skyrocket. Diageo had simply been one of the first to respond. Laphroaig 10 went from $29.99 to $42.99. The Yamazaki 12 year went from $29.99 to $49.99, while its older brother, the 18 year, went from $99.99 to $154.99. Macallan 18 went from $139.99 to $199.99. Like many of us here at K&L have come to understand: when you're the first person to raise your price on the market, you usually bring most of the anger along with it. As we raised our prices in response to the new costs, customers were livid. People began hoarding, buying cases against other possible increases. The fear was spreading, but it wasn't limited to just single malt whisky.

All of sudden, independent releases of rye whiskey started coming in at the $60 price point, while 10 year Bourbons like Michter's began releasing at $99.99 (and selling out in minutes!). Longtime consumers were incredulous, connoisseurs were incorrigible, and the venom was prolific among internet bloggers and message-boarders. What had happened to old-fashioned, easy-to-find, drinkable whiskey? The market was adjusting itself to the demands of new consumers and no one was quite sure how high the ceiling would go. Many predicted a bubble, but it never seemed to really burst, and prices started to settle into a new normal -- one that has not slowed sales down one bit (we're actually selling more whiskey today at these new prices than we were last year at the old ones). People began to search for a new hope, a company that could harness the force and provide consumers with a new, exciting, affordable, and dependable whiskey that would help deflate the inflated market and bring prices back to where they once were. Could the craft whiskey industry play Luke Skywalker?

After three years of Craft Wars I think consumers are finally understanding just how difficult it is to make good whiskey. Perhaps even more important, however, is how long it takes to make good whiskey. With producers looking to rush their products to the market and capitalize on the momentum, consumers were left with underwhelming, unpolished, and expensive versions that only slightly resembled the products they loved. While they wanted to (and still want to) support the movement, it was difficult for many to get on board because the whiskey was neither cheaper, nor better! That's when a number of people realized that maybe Diageo wasn't as terrible as they once believed. In fact, when the core of Diageo's products are compared to general market pricing today, they're downright affordable. To take it even further, I'd venture to say that Diageo might be in the unique position to offer relief to the inflated market many people blame them for creating!

Now I know what you're thinking -- why would I buy Don Julio tequila when I can buy ArteNOM or Siembra Azul for about the same price? Why would I buy Bulleit 10 year old when I can buy Weller 12 or Eagle Rare 10 for less? There are plenty of Diageo products out there that simply can't compete with certain artisinal producers. We know this. But that analogy can work both ways. Why buy Templeton Rye when you can get the same Bulleit or Dickel whiskey for more than $10 less per bottle? Why buy Hangar One when you can get Ketel One? While it's true that Diageo's size and scale often prevents it from creating the nuance found in small-production spirits, it's larger capacity also provides more affordable options for those who can't always afford to splurge. What other company could afford to sell Dickel #8 for $14.99 a bottle? What other company could keep Lagavulin 16 under $70, while other 15 year olds are clocking in well over $100?

When was the last time you even tasted through Diageo's portfolio? If it's been a while, you might want to revisit some of these selections. Ever since the rebels began chipping away at Diageo's empire, there's been an increased push for increased quality within the consortium. Do these changes offer enough to those consumers skeptical of recent NAS releases? Do they justify giving in to the dark side when perusing the liquor shelf, or could it be that the craft spirits industry is becoming the real Senator Palpatine? This week's theme on the blog will tackle these questions as I begin revisiting some of Diageo's highest profile brands and attempt to put them into context along side some of their craftier competitors. We may find a few surprises along the way. And we may find that, like Vader himself, many of Diageo's producers were once young Jedi knights themselves.

-David Driscoll