Despite a global decline in alcohol sales, the Middle East is still supporting a healthy appetite for Scotch whiskey, according to the 2009 preliminary sales results of Diageo, the global alcoholic drinks provider. Diageo, which owns and produces Smirnoff, Guinness, Johnnie Walker, Captain Morgan and Jose Cuervo, managed to turn a profit in this year of economic turmoil, according to their figures released on August 31. As Western markets continue to suffer from the effects of the downturn, the Middle East and other emerging markets are taking the lead in terms of growth in the industry.
“Johnnie Walker is the biggest Scotch whiskey in this part of the world,” said Gilbert Ghostine, Diageo’s Asia Pacific president. Ghostine also stated that the Middle East is just one of the emerging markets that Diageo will be concentrating on in the future.
“The Middle East is like other emerging markets and that is where the growth will come from in the overall global economy and also in terms of demographics,” he said in an interview with Executive.
With airline passenger numbers down globally, the Middle East is the only region maintaining its duty-free sales levels, according to Swedish independent research firm, Generation Research. Ghostine says this is the key to Diageo’s success in a region where alcohol is often restricted or banned. “The region is growing in terms of traffic through airports where you have duty-free and consumers that are not necessarily regional consumers but international consumers,” he said.
Despite the $4.3 billion in profits Diageo posted for the 2009 fiscal year, the company has been engaging in what it calls “restructuring” in recent months.
“We have a global footprint and our global presence will allow us to calibrate our approach. We are still gaining share in the United States and at the same time driving our business further in emerging economies. We can do both,” said Ghostine.
Part of this “calibration” has drawn criticism, as Diageo announced last month plans to close part of its facilities in Scotland. The company plans to pull down the shutters once and for all at a bottling plant in Kilmarnock and its distillery in Glasgow, despite a Scottish government offer to subsidize the two sites in order to save up to 900 jobs. The company rejected the government plan as “unworkable,” claiming it failed to understand “the basic economics of our business.”
“These plans — for implementation over the next two years — will be an important part of securing the long-term competitiveness of Diageo’s Scottish business and, by retaining all existing production activities in Scotland, underpin the company’s continuing commitment to Scotland,” said Diageo in a July 1 press release.
Ghostine described the cuts as a natural progression of the company in the pursuit of efficiency.
“As part of reviewing our footprint we figured out a more efficient way to run the business to make sure that the Scottish whiskey industry will stay competitive and keep growing in the future,” he said.
And despite the company’s cost-cutting moves, Ghostine also said that the Scotch whiskey industry in Scotland is safe for the future.
“These are not decisions that we take lightly. We spent almost a year reviewing our facilities and distilleries to make sure that we are comfortable with the decision that we are making. What we are doing is saying that we are still committed in Scotland.”
Diageo has also been subject to further scrutiny for its decision to close down its Captain Morgan rum distillery in Puerto Rico, cutting 300 jobs, in order to move the facilities to the US Virgin Islands after being offered huge tax incentives from the US government. The British company will receive $2.7 billion in tax incentives over 30 years, which will include the entire $165 million cost of relocating the plant to the island of Saint Croix.
The deal is still being fought by Puerto Rico’s non-voting representative to the US Congress and Congressmen with large Puerto Rican constituencies.
Remarking on these controversies, Ghostine said: “Change is a way of life in global organizations. We look at it in the context of evolution; in the way we want our companies to keep evolving. You will look for organic growth, you will look for non-organic growth, and at the same time you are looking at ways to become more efficient and effective as a company. It’s not like downsizing.”
