After more than a decade of investing in emerging spirits and adult non-alc brands, Diageo confirmed earlier this month that its venture arm Distill Ventures will cease bringing new brands into its portfolio. What does the wind-down signal for the spirits group and does it say something about the larger spirits industry?
The official line from Diageo is that it has “undertaken a strategic review” of its approach to early stage venture investments and a smaller team will manage a reduced portfolio. The confirmation came after Brewbound’s sibling publication BevNET received two tips that the group had ceased investments for some time – the last additions to its pre-accelerator were announced in February 2024.
The closure certainly means a change of focus at Diageo, but shifts in investment priorities come and go with market trends. On a larger scale, the demise of one of the most visible spirits industry accelerators illustrates the challenges facing emerging brands in a saturated market.
“From the other side of the fence and for the independents, it shows just how hard it is to go from craft operation to major name, no matter how much money you throw at it and who is backing you or their expertise,” said UK-based Olivier Ward, distillery consultant and founder of platform Everglow Spirits. “It’s a brutal industry to go from zero to 100,000 9-liter cases.”
Diageo May Shift To Core Products, ‘Transformational M&A’
It’s not the first time an accelerator attached to a strategic has folded, but Distill Ventures has been one of the most visible. Since its founding in 2013, the group has invested more than $300 million in 39 founder-led brands. Companies in the Distill Ventures program have included trailblazers such as non-alc spirits Seedlip and Ritual Zero Proof, as well as coffee liqueur Mr Black, all of which have been acquired by Diageo.
With a total of six Distill Ventures’ investments leading to acquisitions, the accelerator may have served its purpose as a pipeline for innovation. Accelerators often go through cycles, said Nick Papanicolaou, CEO of No Sleep Beverage, who headed the mergers and acquisitions team for Pernod Ricard USA before launching its former incubation division, New Brand Ventures.
When smaller incubators within larger multinationals fold, it’s often because the larger company may plan to “focus on core brands, divest tail brands, and pursue larger and more transformational M&A opportunities,” versus spending time and energy on smaller brands, added Papanicolaou.
The thesis behind corporate-owned incubators and accelerators is to cultivate greater thinking about innovation, new categories and new consumer touch points that “a more rigid corporate architecture had lost touch with,” said marketing and sales consultant Arthur Gallego.
But just as we’ve seen major spirit groups offload non-core brands, priorities are shifting to milk more out of flagship products for future growth, with new products likely to come out of core extensions.
The wind-down may also illustrate concerns for Diageo over the scotch and bourbon glut, considering Distill Ventures’ whiskey-heavy portfolio. A significant excess supply of U.S. whiskey is likely over the next five years and if demand remains consistent, supply will outstrip demand by 1.29 million barrels by 2028, according to Bernstein analysts.
“It will involve huge investment to significantly develop markets like India and China to take the volume,” said Ward.
The closure also underscores Diageo’s challenges with integration, said Ward. Examples include challenges with Chase Distillery (now closed), Feilden Whisky, and Belsazar Vermouth.
“While it’s something they will never publicly acknowledge, it signals an acceptance that further strategic work needs to be done around how to on-board a brand and continue its trajectory before trying to acquire more, let alone keep accelerating that process,” he said.
‘Pressure Is On’ For Emerging Brands
As for emerging brands, with the demise of some of these incubators and accelerators, pressure is on to raise capital, possibly at less favorable terms, without the benefits of consolidated operational, distribution or marketing expertise, added Gallego. The loss of the pre-accelerator also means less of a runway for diverse founder owned brands, with Diageo-backed Pronghorn now holding down the fort.
“These incubators and accelerators were there to help brands scale and were a critical tool– they had the investors, they had the network, they had the production, everything,” Gallego said. “Their scarcity means that young brands have to find another way to scale.”
But Papanicolaou argues that despite strategics offering significant resources to their accelerator programs, they are not always well-suited to the needs of smaller brands.
“It’s a very different brand-building model to build a small brand versus to maintain share or even grow share with a much larger brand,” he said. “The resources can be a blessing and a curse, depending on what resources are needed by the company and what resources are already available.”
While brands within the Distill Ventures portfolio will likely now need to trim costs, Gallego argues emerging brands across the board may also need to think about simplifying. As young brands aim to compete, the tightening of capital and resources may put pressure on those who have been aiming to differentiate themselves to pare back and become “more mainstream and understandable,” he said. Non-alc beer’s growth trajectory over non-alc spirits is one example, he added.
The change at Diageo may only impact a small number of brands directly, but it still serves as a reminder of what it takes to succeed in the current spirits landscape.
“The combination of factors you need to get right is vast, ever-changing, and entirely unique to the situation, brand and the timing of it all,” said Ward.