The Investment Column: Highland spirits low

THE SCOTCH whisky market continues to go from bad to worse in the UK. Young drinkers are turning their noses up at a wee dram, choosing instead to guzzle the array of new, trendier spirits cocktails. Highland Distilleries, which makes Famous Grouse and Macallan, is doing better than most but UK sales are unlikely to improve for some time and the group's future success hinges on its plans to expand overseas.

Highland rightly recognises that these days selling whisky is all about marketing and building brand names. To this end it has pumped millions into a new advertising campaign. The jury is still out on whether this will pay off. At the moment all it has done is depress profits, although there are signs that the initiative is having a beneficial effect on sales.

The economic crisis in Asia raises another question mark over Highland's international ambitions. The direct impact on sales has so far been small. But the slump in spirit sales in the region has thrown Remy Cointreau, which distributes almost two-thirds of the group's whisky, into turmoil. Throw in the huge competitive threat of Diageo, formed by the merger of Guinness and GrandMet, and it will not be plain sailing for Highland.

These worries have been reflected in its poor share price performance recently and the shares slipped another 4p to 267.5p yesterday after the group announced virtually flat profits of pounds 25.1m for the six months to February. Analysts forecast full-year profits of around pounds 45m, putting the shares on a prospective p/e ratio of 12. The shares remain a long- term hold, although investors may have to be patient to see the fruits of Highland's investment programme.