Follow-Up to “Diageo: The Ultimate 12- to 18-Year Investment”

Back in June, I mused that Diageo (NYSE:$DEO), the maker of Johnny Walker Scotch whisky and other brands, was “The Ultimate 12- to 18-Year Investment.” It was, of course, a reference to the length of time that Scotch needs to be aged in order to be marketable (or drinkable).  Scotch can be officially be called “Scotch” after just three years of aging, but good luck convincing a discerning gentleman to buy it.

This is what makes Scotch whisky such a fantastic business to be in.  Unlike, say, vodka, which can be produced from anything, has little in the way of start-up costs, and has no aging requirements, Scotch has incredible barriers to entry.   Vodka brands come and go, but the scotch brands you see today are the same ones that were in your grandfather’s liquor cabinet.

On a side note, readers have asked me why I write “whisky” at some times and “whiskey” at others.  “Whiskey” can be bourbon, Irish, or rye whiskies. “Whisky” refers to Scotch or Canadian whisky only.  I do not recommend  getting these spellings confused in the presence of a Scotsman.

Returning to the business at hand, the Financial Times reported that there is something of a Scotch distillery boom underway in Scotland (see “Demand puts whisky industry in high spirits.”)

Over the next four years, £2 billion in new distillery investment is planned.  To give an idea of how big this is, the total value of Scotland’s whisky exports in 2012 was £4.3 billion.

Not surprisingly, the big names like Diageo are far and away the largest investors, but new craft distillers are popping up as well.  These newcomers will have a hard time for the reasons I discussed in the prior article, but the fact that they exist at all is testament to the strength of the whisky boom.

As I’ve written before, the boom in Scotch and other luxury spirits is really an emerging markets boom and, particularly, a China boom.  As China’s new upper-middle class and nouveau riche climb the social ladder, they are developing a taste for premium Western brands.  Much of the new whisky being distilled in Scotland will be shipped across the sea to China.

I’ve grown somewhat cautious towards booze stocks of late (see “A Hangover in Booze Stocks?” though I continue to hold Diageo on the Sizemore Investment Letter’s Drip and Forget portfolio.  I continue to reinvest the dividends on autopilot, but at current prices I am reluctant to make major new purchases.

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