On the Street -- Diageo Consolidating Facilities

July 27/Business Monitor International Ltd. (BMI) -- Drinks giant Diageo has announced plans to cut more than 10% of its workforce in Scotland as part of a restructuring programme designed to 'ensure the long-term sustainability of its operations in Scotland in the current economic conditions. The plans include the closure of a packaging plant in Ayrshire with the loss of 700 jobs and the closure of a distillery and cooperage in Glasgow resulting in the loss of 140 jobs. To offset the reduced capacity a packaging plant in Leven will be expanded, which the firm has suggested could create up to 400 jobs.

Scotch whiskey was one of the fastest-growing spirits sectors globally prior to the onset of the economic downturn. This growth was driven by soaring demand in emerging markets, including China, India and Russia, where Scotch's strong European heritage makes it popular among the newly affluent middle classes. This was accompanied by continued growth in core markets, such as the U.S., with the increased marketing and recognition of major brands a key factor behind this rise in demand. However, this growth was curtailed by the economic downturn, and in 2008, volume sales fell by 5%. Over the year, value sales continued to climb, but this can be almost entirely attributed to the rapid decline in the value of sterling.

Whiskey is one of Scotland's most important exports and the Scotch Whiskey Association estimates that 2% of all jobs in the country depend upon whiskey production. The move therefore has political implications and the finance secretary for the ruling SNP party has urged Diageo to reconsider its plans. Harry Donaldson, Scotland secretary for the GMB trade union has suggested that "strike action cannot be ruled out," but that at the moment the union was "working with politicians to put together a plan to make Diageo change their minds."

While the distillation and maturing of Scotch whiskey can only be legally done in Scotland, there is now requirement for Diageo to carry out the bottling process in Scotland. Donaldson commented that "the threat that Diageo could move their bottling and packaging elsewhere has been hanging over us for years," and although Diageo has committed to expanding its Leven bottling plant, the possibility of moving the process so that it takes place closer to its export markets must surely also be under consideration.

While the reduced global demand for Scotch will have had some bearing on Diageo's decision, the sustained growth in Scotch exports between 1998 and 2007 and the enthusiasm for the product in emerging markets would suggest that demand is likely to pick up once global economic conditions improve. The move to consolidate its Scotch facilities is therefore likely to be driven by a desire to cut costs rather than a belief that the current slump in demand will be sustained over the long term. This view is supported by the fact that Diageo has not announced any modifications of its plans to open a major new distillery in Northeast Scotland later this year, which will be the first of its kind to open in almost 30 years.  

From the August 3, 2009, Prepared Foods E-dition