Planning for the future

Today Bloomberg.com posted an interesting story about investments and expectations in the Scotch Whisky trade. You can read it in situ here. Or read it below:

Whisky Makers Spend $800 Million to Age Scotch for China, India Share Business By Rodney Jefferson

Dec. 2 (Bloomberg) -- Ninety years after Johnnie Walker stopped making Scotch in Annandale, David Thomson wants to put the distillery back on the whisky map of the world.

The plant, 12 miles from where he grew up in southern Scotland, closed in 1921. With 5 million pounds ($8.3 million) in cash, Thomson plans to open it up again in 2011.

“We can make so much more of malt whisky as an industry,” said Thomson, 54, who submitted plans for local government approval on Nov. 12. “We haven’t even begun to tap into the potential interest.”

More money is being invested in whisky than at any time since the late 1960s, according to the Scotch Whisky Association in Edinburgh. The reason, producers like Diageo Plc say, is to make sure they have enough of it to serve China and India, as well as to cater to the growing demand among malt buffs.

“The Chinese have bought into Scotch whisky,” Gavin Hewitt, chief executive officer of the association, said at his office in the Scottish capital. “There’s a huge new middle class and they want to make a statement about themselves.”

Companies announced expansion plans during the past two years costing more than 500 million pounds, according to the industry group. Whisky is Scotland’s biggest export, excluding oil and gas, it said.

Ageing Process

The liquor being distilled today can’t be called Scotch whisky until it’s three years old and then often has to age for at least another seven before it’s bottled as a single malt. It also has to be made in Scotland.

The largest single investment during the past two years was by London-based Diageo, the world’s largest liquor maker and biggest producer of Scotch. Its net revenue from whisky, including top brand Johnnie Walker, rose 7 percent to 2.42 billion pounds for the 12 months to June 30, the company said.

Diageo, whose best-selling malt is Talisker, spent 40 million pounds on a plant at Roseisle in northern Scotland, part of 100 million pounds of investment.

“It’s about growth over the next two or three decades,” said Ken Robertson, Diageo’s head of corporate relations for whisky. “You have to lay products down well in advance.”

Glenmorangie, which Paris-based LVMH Moet Hennessy Louis Vuitton SA bought in 2005 for 300 million pounds, is increasing capacity at its plant at Tain in the Highlands by 50 percent. Along with new bottling and warehousing, the investment over two years amounts to 45 million pounds, Glenmorangie said.

Pagoda Turret

Thomson said he first had the idea to go into the whisky business in the late 1980s and early 1990s when 25 distilleries closed as more liquor was produced than the world could drink. He didn’t have the money at the time to snap one up, he said.

There are currently seven new distilleries being planned, including Thomson’s, the association said. Since 1995, 18 plants that were dormant have been brought back to production.

At Annandale, the buildings from the 19th century remain intact, complete with a pagoda-style ventilation turret and a beige brick chimney next to a small stream, or burn.

Glasgow University archaeologists are digging out the foundations of where the whisky stills once stood so Thomson can restore the plant to how it was originally.

Exports totaled a record 3.1 billion pounds last year. Total sales this year in volume terms are up about 2 percent, while the value of bottles sold declined about 4 percent, Hewitt said. The biggest markets are France and the U.S., though sellers are counting on Brazil, Russia and Asia for growth.

“The decisions companies make now are for 10 or 15 years ahead,” Hewitt said.

‘Keeping Alive’

Most malt whiskies, typically drunk in Scotland with a few splashes of water, are made in the Highlands, with a cluster of producers in Speyside near Inverness. Should it come to fruition, the Annandale plant would be one of only half a dozen in what are known as the Lowlands.

The risk for new producers is how they fund themselves before their whisky makes it into the bottle and how they differentiate themselves from existing malts, Robertson said.

“Keeping alive for the first few years is the tricky thing,” Robertson said at Diageo’s Edinburgh offices. “The threat to the mainstream is: can it continue to expand into the markets it’s earmarked for itself?”

A professor of consumer psychology based near Oxford in England, Thomson bought Annandale for 1 million pounds from a local farmer in April 2007 and is spending 2.8 million pounds on refurbishment, installing the plant and groundwork. He then reckons it will cost another 500,000 pounds a year until he bottles whisky in 2013 or 2014.

Annandale will include a visitors’ center and store to cater to tourists whose revenue Thomson hopes will help fund the plant. Thomson’s planning application will be heard in January amid potential problems with the access road, he said. The Scottish government granted aid for the project in April 2008.

“If you ask me what I’d like my legacy to be, it would be to bring back a distillery to life,” Thomson said. “And leave it as economically viable.”

To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net