The DV fall-out: spoons at the ready

Musician James Yorkston runs a series of gigs called ‘Tae Sup Wi’ A Fifer’. The title is taken from the saying ’it takes a lang spoon tae sup wi’ a Fifer,’ meaning that you need to be on your guard when dealing with folks from the Kingdom. It’s always struck me as somewhat harsh as I’ve always found them to be extremely generous folks. 

It popped into my mind when the news of Diageo’s withdrawal from the Distill Ventures (DV) brand accelerator programme was announced as part of ‘a strategic review of [its] approach to early-stage, venture investments.’

The impact on the whisky firms involved is mixed. Some are untouched, others are restructuring, depending on how close the business was to Diageo taking control and how big the investment was. The newer you were and the larger the seed capital, the more precarious your situation would be.

Although the brands only discovered at the same time as the official announcement, it was not wholly unexpected. Diageo’s new CFO, Nik Jhangiani, had arrived from Coca-Cola amid rumours of cuts. The City was already spooked by profit warnings, and there were (false) rumours of the sale of Guinness. The creation of a Diageo ‘breakthrough innovation’ team was another red flag.

All of the firms I spoke to had nothing but praise for the way the relationship with Diageo worked, but DV was always going to be the low-hanging fruit in this latest round of cuts.

‘Everyone at Fielden, from existing investors to the team, understood that the backing from Diageo/DV was always susceptible to what I call, “larger tectonic plate movements”,’ says Fielden’s CEO Dave Smith. ‘That is the nature of today’s world.

‘When we first met Diageo/DV the business was in desperate need of an investment boost. They believed in our purpose – that there is a better way to farm at the front end of a whisky business. Not only did they invest in the brand, they invested in our farming.’

The latest readjustment of those tectonic plates has, as always, resulted in collateral damage: layoffs, bankruptcy proceedings, sudden and significant changes of strategy. 

There have been 13 jobs cut at Stauning’s sales and marketing department, while the distillery’s output has been halved. ‘We won’t have the same growth ambitions without Diageo,’ says the distiller’s CMP Alex Højrup Munch. ‘We had to reduce costs and go for a more sustainable solution. 

‘We have significantly slowed down in terms of time, people and investment in the US until we know more about our future with Diageo and how things generally will evolve in the US. People are of course worried about their jobs.’

In the US, Westward, the Portland OR single malt distillery which was also part of the DV portfolio, has filed for Chapter 11 bankruptcy which will allow it to continue operations during a restructuring process. 

CEO Thomas Mooney is talking of it ‘moving forward as an independent craft distiller’ rather than as a medium-sized American single malt producer under Diageo’s wing.  

It is the only option open, but it won’t be easy for Westward – or any of its DV colleagues. The whisky industry is significantly over capacity and sales are sluggish. 

As one industry insider put it; ‘Many distilleries are for sale, large ones too, quietly shopping themselves off-book via merchant banks and global financial institutions. 

‘The hunt for promising “craft” has also run its course. Over the past couple of years, it’s been a buyers’ market but there has been no appetite from the big league/legacy organisations.’ The opposite is the case with the majors getting rid of assets.

This isn’t an isolated case. You are seeing a similar scenario in Ireland. The potential is considerable, and the quality of the country’s new whiskeys is excellent. However, any number of the new players are now in need of a second injection of capital. They are at the point when an increasing number of new casks are needed every year, more warehousing space is required, while brand development is vital, and markets have to be supported. It all costs money.

Whisky is an expensive business to get into and start-ups will always require outside investment. It is also a bizarre business proposition that requires significant and consistent long-term investment because it’s unlikely that you’ll turn a profit inside a decade. With most investors wanting a quick return, there can be tension from the off.

The Waterford collapse caused many potential investors in other Irish distilleries to turn tail. If a distillery that size could fail, then what hope is there for someone smaller? To the outsider, Waterford suggested that the whole category was in trouble. 

Interestingly, last week’s Irish Business Post reported that several bidders have offered more than €50m to buy the troubled firm, with further bids expected. Notably, the report added that none of them were from the industry. Read what you want into that.

Subsequently, I’ve heard that while there were originally 18 expressions of interest, at the start of the second stage of disclosure only three remained, and when the deadline came no bids were received. The workforce is being laid off.

To try and sift something vaguely positive from this particular mess, maybe the fact that there was some interest is an indication that, despite the gloomy prognoses of most distillers and analysts, there might still be interest in investing in Irish whiskey – and that the Waterford asking price  (the price of the stock alone is estimated at €40m) was simply too high in the current climate. Could they look elsewhere at more stable businesses in need of a cash injection?

Perhaps, although the question remains as to who these potential investors were. Seriou players with whiskey knowledge? Rapacious hedge funders looking to strip assets then flip? Bulk suppliers who’d sell  the 6.9m litres of stock to, say, India and walk away; or naive newbies seduced by promised instant returns (à la cask sales)? Maybe we’ll never know.

Waterford’s size was the problem- something which is also confronting the former DV whiskies. They have established themselves as medium-sized producers of premium brands, with the Diageo backing supplying the investment that’s required to run such an operation. 

Being an independent medium-sized premium brand is significantly different to being one with a multinational sugar daddy. You have the same costs for raw materials and support, but without the same economies of scale. It’s a dangerous position to be in – as Waterford found out. 

‘We are now working with Diageo to cut our cloth accordingly and plot a new way forward.’ says Smith. ‘Will I be going back to the market for new funding? Very likely, yes.’

It’s similar story at Stauning. ‘Our planned growth has been changed a lot,’ says Højrup Munch. ‘We will not be so aggressive in getting into new markets and growing in the markets. All markets need to be cash flow positive as we can’t afford to invest more than we earn in a market to build it. 

‘We still have ambitions to be a major new world whisky player worldwide, though – especially within rye.’

This isn’t just DV. This is any whisky firm seeking investment in these times. Who are your new potential partners? Do they share your vision, do they understand whisky? Do you? What do they what to get out of it – and when? 

Choosing your partner is important, because hard-nosed economics will always come into play. It pays to have that lang spoon at the ready.

[This piece was amended on May 1 when more information regarding Waterford came to light. My thanks to A. Source]