Diageo to Launch New Irish Whiskey Brand as Sales of the Spirit Soar -- Update

LONDON--Two years after abandoning the Irish whiskey business, Diageo PLC is getting back into it amid sharply growing demand for the drink.

The world's largest spirits maker in 2014 sold its Irish whiskey brand Bushmills to Jose Cuervo in exchange for Don Julio tequila.

Now Diageo plans to invest EUR25 million ($26.77 million) in a new distillery to create a new Irish whiskey brand called Roe & Co. at St. James's Gate in Dublin, where it makes Guinness.

Irish whiskey has been on a tear, growing 131% by volume globally during the past decade, easily trumping rises of 13% for Scotch whisky and 56% for bourbon during the same period, according to industry tracker IWSR. Rising demand, especially from the U.S., has turned Irish whiskey into the world's fastest-growing major spirit.

Diageo Chief Executive Ivan Menezes last year defended the company's decision to sell Bushmills, saying, "It's not the Irish whiskey sector that's hot, it's certain brands that are hot."

The Irish whiskey sector is dominated by Pernod Ricard SA's Jameson brand, which makes up 67% of all global volume and is responsible for much of the category's growth.

Mr. Menezes said Diageo had "put in a lot of investment and a lot of marketing, but we could not get Bushmills to accelerate."

Roe & Co. will retail for about GBP30 in the U.K., which is about GBP11 more than the current price of a standard Bushmills bottle. The upscale brand will compete with Pernod Ricard's roster of brands like Redbreast and Midleton, as well as brands from scrappy young distillers like Teeling Whiskey Co., which opened in 2015.

Diageo said the first blend of Roe & Co. will be available in European cities such as Dublin, London, Stockholm and Berlin starting in March. The company didn't detail plans to launch it in the U.S. As is common practice, Diageo will start out by sourcing Irish whiskeys from other distillers and seasoning them in casks. Its new distillery--with an annual capacity of 500,000 liters--is expected to begin production in 2019.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com