Owner of Crown Royal whisky faces shortages resulting from high demand during the pandemic
THE WALL STREET JOURNAL // JAN. 27, 2022
The world’s largest spirits maker is running low on some of its products.
Diageo PLC said soaring pandemic demand is depleting stocks of Crown Royal whisky, Lagavulin Scotch and Don Julio tequila. These bestselling brands can take months or years to age before hitting liquor-store shelves, making it hard to quickly increase production.
Diageo said it also hasn’t had enough bottles to package up Bulleit bourbon to meet demand. It is separately grappling with higher costs for aluminum and cereals that go into the booze-making process. Shipping and energy bills have climbed.
To make up, Diageo is raising prices in some markets, including the U.S., and boosting ad spending for lines that are still in plentiful supply, like Johnnie Walker.
“The constraint is simply on being able to meet very high demand,” said Chief Financial Officer Lavanya Chandrashekar, on a call with reporters after releasing half-year results that showed higher sales and profits. Amid the windfall, the company—whose brands also include Tanqueray gin, Smirnoff vodka and Guinness stout—said Thursday it was accelerating a share buyback program of £4.5 billion, equivalent to around $6 billion.
Diageo shares gained more than 2% in London, despite the supply-line hurdles. Manufacturers across industries and regions have faced similar constraints. Pandemic-induced shortages and price jumps have occurred at times for basic commodities like toilet paper and lumber and for bigger ticket items like hot tubs and used cars.
Liquor companies like Diageo are in a particularly difficult bind since many of their brands rely on barrel aging—a process used to mature spirits like whiskey and some types of tequila before they can be sold. That makes it hard to meet sudden surges in demand, like the ones that liquor makers have faced amid the pandemic. While bars and restaurants have been closed off and on for the last two years, in the U.S. spirit sales at groceries, liquor stores and online have ballooned.
The pandemic has whipsawed the drinks industry in other ways, triggering changes in drinkers’ behavior and regulations over how alcohol is sold. Home drinking increased, driving consumers to buy their booze at groceries and liquor stores, which were deemed essential services in many locales. Some states loosened laws on takeout booze orders from restaurants and online alcohol sales.
Many drinkers also started splurging on more expensive brands. Executives have said consumers who couldn’t spend on concerts, travel or watching live sports instead bought upscale spirits to drink at home. Tequila has been a big seller—with Americans experimenting drinking it at home in more ways, including on the rocks, with soda and in cocktails apart from margaritas.
Despite the supply-chain constraints, U.S. sales of Crown Royal rose 12% in the second half of last year, compared with a year earlier, Diageo said, while its tequila sales jumped 61%. Overall, Diageo’s net spirits sales in the U.S. grew 15% on an organic basis, which strips out currency movements.
In its tequila lineup, the Don Julio 1942 line is aged for a minimum of 2½ years, while the Anejo line is barrel-aged for 18 months. The Anejo line of Diageo’s Casamigos-branded tequila takes 14 months.
Diageo makes Crown Royal whisky by blending various whiskies aged in new or reused charred oak barrels. The shortage of aged Crown Royal has eaten into Diageo’s leading market-share position in the Canadian whisky category over the last six months.
Diageo, the world’s biggest distiller of scotch, said U.S. single-malt scotch sales fell 5% in the half, compared with a year earlier, because of a lack of enough aged Lagavulin, a bestselling brand. Overall U.S. scotch sales rose 11%.
Diageo Chief Executive Ivan Menezes said the company has increased its inventory of maturing alcohol to meet forecasts for future demand.
“We continuously evaluate what level of liquid to be laying down across the portfolio on scotch, on Canadian whisky, on American whiskey and now on the aged variant of tequila,” he said.
Meanwhile, Diageo is allocating more of its marketing dollars to brands that aren’t suffering from similar constraints, like Johnnie Walker blended scotch. The ad spending is an attempt to “shape demand and move consumers to where we have less or no constraints on aged liquid,” Ms. Chandrashekar said. Diageo recently launched a new TV and online “Keep Walking” ad campaign for its biggest scotch brand.
The shortage of bespoke glass bottles to package Bulleit bourbon hit Diageo’s market share of the U.S. whiskey category. Bulleit’s U.S. organic net sales dropped 19% in the period. Ms. Chandrashekar said she thinks the issue is temporary and that Diageo has already brought on board new suppliers in North America, to secure supply for other brands, increasing glass capacity by almost 25%.
Diageo said net profit rose to £1.97 billion for the six months to Dec. 31 from £1.58 billion a year earlier. Net sales rose 20% on an organic basis to £7.96 billion.
The aging requirements for many of its products aren’t all bad in the current climate, Ms. Chandrashekar said. It can provide a “natural hedge” in times of high inflation. A barrel of liquor ready today might have aged for years, which means Diageo already absorbed or passed on much of the cost over several years and doesn’t have to pass on current higher costs to customers right away.
“A large percentage of what we’re selling today, we actually laid down the liquid seven years ago, more than a decade ago, in many cases,” said Ms. Chandrashekar, citing Johnnie Walker as an example.
Diageo said it has also been mitigating the impact of inflation by raising prices on some brands in the U.S., Nigeria and Turkey.
Write to Saabira Chaudhuri at email@example.com