A major new malt distillery will be built as part of the investment, alongside a programme of major expansion at a number of Diageo's existing distilleries. Detailed plans will also be developed for a second new distillery which will be built if global demand for Scotch is sustained at expected levels.
The company also plans to invest in substantial new warehousing capacity to house the millions of additional litres of Scotch whisky which the distillation investment will produce.
Announcing the investment Diageo Chief Executive, Paul Walsh said: "This is a pivotal moment in the development of the Scotch whisky category for Diageo. Over recent years our brands have achieved remarkable, sustained global growth. Scotch whisky is Scotland's most celebrated manufactured export, led by brands like Johnnie Walker, resonating with consumers from Boston to Beijing.
"We expect that success to continue, particularly in the high growth markets around the world, which is why we are announcing this major investment in Scotch whisky production, committing over £ billion in the next five years, to seize that opportunity for global growth. This builds on the foundations we have already laid down over recent years through sustained investment in both production assets and in maturing Scotch inventories.
"Scotch whisky is a significant manufacturing export industry in the United Kingdom, driving domestic investment and job creation through our success in exporting to high growth markets around the world. We look forward to working with both the UK and Scottish Governments to realise the full potential of our investment plan, and to continue growing global Scotch exports."
Across Scotland the investment will create over a hundred new Diageo jobs, largely high value jobs in rural areas of Scotland. It is also expected the investment will create an average of 250 construction jobs for each year of the investment period and in wider Scottish economy there will be a knock on effect which will generate around 500 further jobs. Diageo also intends to make its contribution to efforts to tackle youth unemployment by taking on around one hundred apprentices and graduate trainees over the term of the investment, and the company will also encourage its suppliers and construction contractors to focus on youth job creation and apprenticeships.
The investment programme will be underpinned by Diageo's commitment to reduce its environmental impact, with a programme of bio energy solutions planned to be implemented over the same timescale as the distillery expansion projects.
Mr Walsh added: "I'm particularly pleased our investment will generate significant numbers of new Diageo jobs, as well as boosting the local construction sector and stimulating job creation throughout the Scottish economy. We are determined to use this investment to make a contribution towards helping people into training and work through our apprentice and graduate placement scheme and by using the opportunity to encourage suppliers to take on apprentices to work on the investment projects."
In the last five years Diageo has reported 50% growth in net sales of its Scotch brands with total net sales approaching £3billion this financial year. Scotch represented 23% of Diageo's volume, 27% of net sales and a third of gross profit in the financial year 2011. In the first half of financial year 2012, Diageo's Scotch category saw 8% volume growth and 14% net sales growth.
Over the five year period Diageo plans to invest over £500 million in the construction of the distillation and warehousing capacity. This increased production capacity also requires Diageo to commit £500million in working capital for the maturing spirit which will be laid down over the next five years. The exact total investment figures may vary over time depending on the progress of specific projects, but the overall commitment is expected to total over £1billion over the five years.
Supporting this investment, Diageo also plans to commit £5 million over five years towards community initiatives as part of its sustainability and responsibility programme in Scotland. Priority areas for the community investment programme will be: leadership in the environment; responsible drinking - improving the night economy and safety at local level; and socio-economic development, including youth employment and entrepreneurship. This will involve an integrated approach across Diageo's production, commercial and brands heritage businesses, including The Gleneagles Hotel, host to the Ryder Cup 2014.
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