By Scott Wright
SCOTCH whisky giant Diageo has urged UK and Scottish Government ministers to secure a “swift” agreement with President Joe Biden to end damaging export tariffs on single malt in the key US market.
The call came as the Johnnie Walker maker beat analysts’ forecasts with a one per cent rise in underlying sales in the six months to December 31, with a strong performance in North America offsetting the impact of Covid-19 in the travel retail and hospitality sectors. Unfavourable currency movements meant reported net sales were down 4.5% at £6.9 billion.
Distillers have seen sales hammered in the US, the Scotch whisky industry’s biggest export market by value, in the wake of a 25 per cent import tariff on single malts introduced by the Trump administration in October 2019.
The cost to distillers from the tariff, which stems from a trade dispute between the US and European Union over aircraft subsidies, is fast-approaching £500 million in lost exports.
Ewan Andrew, Diageo’s president of global supply and procurement, said the tariff was having a “big impact” across the industry.
He told The : “There is a continued push to try to get the de-escalation and an agreement with the new administration as soon as possible.”
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Asked when talks were next likely to take place on tariffs, Mr Andrew said he understands that Liz Truss, the Secretary of State for International Trade, intends to meet the US trade representative soon. He added: “We hope that the whole of the UK Government and the Scottish Government gets behind that attempt to reach a really a swift outcome.”
Shares in Diageo rose three per cent after the spirits giant reported a forecast-beating first half, returning to top line sales growth as it shifted into the home drinking market amid the continuing pandemic.
The results were driven by a “resilient” 12.3% increase in sales in North America, where there was growth in Tequila, gin, US whiskey and Scotch whisky.
However, although Scotch whisky overall was up by 6% overall in North America, sales of single malt fell in the market.
The bulk of Diageo’s malt sales in the US tends to be in pubs and bars, where trading activity has been restricted as a result of restrictions.
Mr Andrew said: “There is no hiding that, when you look at the results, malts were down in the US, but we’d apportion that definitely to the on-trade being closed.
“We have been pivoting to move that for malts. We have done it for blends, but on malts they have not quite gone to the home trade quickly.”
Diageo boss Ivan Menezes
Mulling the outlook for Scotch whisky, Mr Andrew said the prospects for the industry were “strong in the long term”.
“There is no doubt it has had the impact of the travel retail side and the on-trade [being restricted]. But if you the impact on travel out of it, Scotch is back to flat.”
He also pointed that the rate of decline in Scotch whisky sales had slowed from 40% in the immediate aftermath of the pandemic taking hold, to 8%. Mr Andrew added: “We see that markets are more open, like North America, China, Australia – it is growing very strongly.”
Observing that Diageo’s whisky brands Johnnie Walker, Bell’s and Haig Club had all grown in the UK in the first half, he added: “The signs are still great.”
Diageo has so far not been affected by the new red tape introduced as a consequence of Brexit, which has caused serious disruption to seafood exports to the EU.
The company had prepared for Brexit by placing increased inventories within the European continent ahead of December 31, Mr Andrew said, adding that its flows of trade to Europe have been proceeding smoothly. Its supply chain is not as complicated as those in other industries, he added, although he noted that some smaller producers that do not have the same level of resources as Diageo have faced “some challenges”.
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Mr Andrew said: “We’d urge all sides, the Government and HMRC teams, to work very closely for the small businesses to help them through.”
Diageo chief executive Ivan Menezes warned conditions will continue to be “volatile” in the coming months.
He said: “We expect ongoing volatility and disruption in the second half of the year, particularly in the on-trade channel, which will make performance more challenging. The medium and long-term growth drivers and opportunities for our business remain intact and I am confident in our strategy, the resilience of our business and Diageo’s ability to emerge stronger.”
Shares closed up 90p at 2,943p.