News Analysis: Whisky faces up to UK woes

that would sit down with a whisky after dinner, are also abandoning the
spirit.

Yet, perversely, while domestic sales are flagging, the export Scotch
market is booming, with sales hitting a record high of £2.8bn in
2007, up 14% on the previous year, while volume sales increased by 8%,
according to the Scotch Whisky Association.

The problem of how to arrest the decline in the spirit's popularity in
the UK has taxed the brains of some of the best drinks marketers and
proved a vexed issue.

Diageo's answer for its Bell's brand, which despite being the
top-selling Scotch in the UK is losing share to The Famous Grouse, is to
axe its core eight-year-old product, replacing it with a new blend,
Bell's Original, in a launch backed by a £4m marketing spend
(Marketing, 21 May). Diageo claims it made the decision because it
believes that the category's future growth can be driven by shifting
consumer perceptions of Scotch.

James Pennefather, whisky brand director at Diageo GB, says that five
years ago 5% of Bell's was consumed after dinner; the equivalent figure
today is 30%. He adds that Bell's Original's 'nutty, spicy' character is
designed to play into this and will prove a success among new and
existing consumers. 'The age is merely one of the indicators of quality
when it comes to Scotch,' he insists.

Pennefather admits that the domestic Scotch market has been a 'tough'
category in which to operate. 'It has seen reduced marketing investment
and a lack of new news,' he says. However, Pennefather is convinced the
combination of a new blend, supported by TV ads, created by Adam & Eve,
and fresh packaging, which will attempt to establish the brand's
founder, Arthur Bell, as its icon, will create a buzz around the
brand.

Nonetheless, a closer look suggests that rising costs may have driven
Diageo's decision to axe the aged blend. Despite being cheaper to
produce, Bell's Original will have the same recommended retail price as
its predecessor.

'It could be a way to combat increased tax, glass shortages and the
increased price of grains and freight,' says Tim Simmons, an analyst at
the International Wine and Spirit Record. He adds that recent IWSR
research shows that people are moving toward lighter aperitifs such as
sparkling wines and rose rather than whisky.

Defending the pricing issue, a Diageo spokeswoman says that in the face
of the rise in input costs that has taken place over the past 18 months,
the company needs to 'ensure we manage our business responsibly so that
we can continue to offer customers and consumers brands of the highest
quality which also represent good value'.

Premium prospects

More than ever, Scotch brands are targeting consumers in markets
enjoying new-found wealth, such as China, as well as European
territories such as France, where sales are soaring. Diageo has
increased its global marketing investment by 60%, while other firms are
also gearing up for major assaults. Pernod Ricard has hired Euro RSCG to
run campaigns primarily in Asia and the US for its Chivas Regal brand,
while William Grant & Sons is investing £35m this year globally,
with just £3.8m earmarked for the UK.

'It may be that individual distillers take a decision on where they are
going to market their products based on where there is the biggest
demand,' says a spokesman for the Scotch Whisky Association. But he
expresses optimism that the industry would be able to cope with global
demand without distilleries having to cut back on investment in the
domestic market.

While drinks companies continue to plot ways to turn UK consumers back
to the home-grown spirit, they will also be keeping a close eye on the
international scene. After all, sales of Scotch, widely perceived as an
affordable luxury, are said to be an excellent bellwether of economic
prospects as they tend to rise and fall in parallel with the global
economic curve.