Trends in prices and production
… or some thoughts about the current situation in the whisky market.
Over the last two years, the whisky market has changed quite dramatically, with an increasing number of new releases, premiumisation (very luxurious positioning of special single malts) and increasing investment in marketing, resulting in new packaging, new product ranges and significantly higher prices for old single malts. In parallel, sales have been increasing thanks to the new emerging markets such as the BRIC (Brazil, Russia, India and China) nations.
By law, Scotch whisky has to be matured for a minimum of 3 years before being called whisky. Most whiskies, in particular the single malts, are generally matured for 10-15 years. The problem for the whisky industry is to anticipate the market volume in 10-15 years time.
According to the forecasts of Euromonitor, the total whisky volume is expected to grow of 22.3% between 2007 and 2012. In order to anticipate this demand, most of the Scotch whisky distilleries have increased their production since 2006-7, with many distilleries now working at full capacity. In addition, expansion of distilleries has recently been executed or is planned (e.g., Balvenie, Glenlivet), mothballed distilleries have been /are brought back to life (e.g., Tamnavulin, Glenglassaugh, Braeval) and new distilleries have been built or currently in planning (e.g., Port Charlotte, Huntly, Roseile). Since the companies are keeping their stock for themselves, independent bottlers have increasing difficulties in purchasing casks and are forced to become also whisky producers (e.g., Gordon & McPhail with Benromach, Signatory with Edradour and now Duncan Taylor with their Huntly distillery).
Since last year, I have questioned a few distillery managers, or whisky men, who have spent most of their lives in the business about a new whisky loch. The whisky loch was the term used for the whisky overproduction in the 1980s. After the Second World War, demand for whisky was high and production increased steadily. Demand was continuously increasing and several new distilleries were built or expanded in the 1970s (e.g., Caol Ila, Clynelish, Braeval) to further increase whisky production. Unfortunately, sales of whisky suffered from the oil crisis in the 1970s, leading to huge stocks of whiskies and overproduction. This resulted in the closure of several distilleries, with Diageo (DCL at the time) closing 11 of their distilleries in 1983, amongst other Port Ellen, Brora and St-Magdalene, and matured whisky was sometimes sold below the filling price.
To come back to the current situation, the men whom I questioned were already working in the industry at the time they do not exclude that this can happen again. When you ask similar questions at whisky-events such as whisky live, everyone is confident, since sales are going up and the demand in the BRIC countries is still up. In whisky fairs, the companies’ representatives are generally from the marketing and have short term objectives. When I asked one representative of LMVH at the whisky-live in Paris about the sales of the new Glenmonrangie products, sales were up. Was this increase in sales due to the new packaging? Difficult to assess, since the market is performing well and going up. However, when you go to some whisky festivals, such as the Feis Ile or the Speyside Whisky Festival, the whisky drinkers are complaining quite heavily about Premiumisation of the whisky and the prices. Many companies (e.g., LVMH, Morrison Bowmore) are stepping out of the mass market (retailers such as Tesco, Asda or Carrefour) to go for more exclusive retailing, where they can sell their products with higher margins and improve their image as producers of luxurious goods. As this results in further increases in whisky prices, this might bring the whiskies out of grasp for the traditional whisky drinkers.
I have the impression that the whisky companies are now more looking for short term profits and are losing their pragmatic long term approach. This might be related to the new owners of some groups with limited experience in the whisky business. The times of the DCL and W. Ross seem to be things of the past….
During the last weeks, the stock market is crashing, resulting in a serious change in consumation. Millions of Americans are fighting to keep their houses and their jobs, thousands of bankers have lost their jobs in the US and in Europe (e.g., London) and hundreds of millions of consumers are cutting down their non-vital expenses while waiting for the crisis to resolve and to identify the impact of this financial crash on their daily life.
Will this have an impact on the whisky companies? Let’s wait and see. If a trend for a reduction in production happens next year, then this would indicate that the forecasts were too optimistic.
My hope is that the companies start to think a bit more about the financial capacities of the traditional whisky drinkers, since they will stay with their brands, as long as the whiskies are affordable. Rushing to the new markets is good for the industry in the whole, but in these new countries, whisky is for the time being a fashion, which might be replaced quickly by other cheaper white spirits.
At least companies are producing huge amounts of whisky and the quality, in general, as improved so there will be plenty of good whiskies in the years to come. In the eventuality of a whisky loch, we might have lots of good whisky at a bargain price.
P.Brossard © 10 Nov 2008