Scottish Whisky

As a lover of whiskey in all (well…most) of its forms I diligently follow whiskey related news, stories, books, blogs, and publications of all kinds. That works for and against me. With the growth in the popularity of whiskey there is no shortage of information available. Unfortunately, a lot of its either crap or true enough but just serves to piss me off. I have a lot to be pissed off about these days.

Recently, I saw this article in The Spirits Business and some of the commentary around the web and I had to take another long, deep sigh. When I saw the headline “Diageo Halts Scotch Expansion as Demand Dives” my first thought wasn’t “oh, no the proverbial sky is falling” but rather “It’s about damn time.” I’m not worried about a scotch whiskey bust. I’m not worried about more moth balled distilleries. I’m not really worried at all. I’m actually kind of excited because maybe we are finally at the tipping point.

I’ve been a scotch drinker for about fifteen years now. That doesn’t sound like a long time but for an industry that has had as much change as scotch has in the last decade and a half it feels like a lifetime. More to the point of my excitement, the way scotch prices have soared in the last 15 years is ridiculous to me. When I say “soared” I am not being hyperbolic. In 1999 I could walk into my local liquor store, at the time it was Capital City Liquor and grab Macallan 18 (Gran Reserva at the time) for around $65. Now if you can get it for less than three times as much you’ve found a deal! That kind of price inflation should be left to third world countries with tanking currencies.

Yes, I know times change and prices of consumer consumables go up but scotch as an industry and particularly single malts are an egregious perpetrator of this farce. It does not cost three times more to make a bottle of 18 year old scotch compared to 1999. What has happened is that the companies making scotch have taken advantage of the interest in their products and wrung it for every damn dime they can get. I’m not just picking on Edrington for Macallan. Pernod Ricard, Diageo, and most of the rest are just as guilty. Macallan is just the easiest to pick on. They aren’t making any better whiskey than they used to. They aren’t making less whiskey than they used to. What they are doing is riding a marketing wave that should be the capstone of someone’s marketing MBA course work. That wave tells you that their product is awesome and you should buy it. More of you have bought it. That drives up demand, which drives up price. Also, through advertising and other great public relations work they have convinced you to pay more for their whiskey than anybody else’s. Is it better? Not necessarily. It’s good, sometimes really good but there is a lot of good whiskey out there.

The whole industry participates in the push to drive demand and premium pricing and collectively prices have risen dramatically. Again, I’m not just picking on Macallan/Edrington. Whyte and Mackay tried it a few years ago when they relauched Dalmore. While the regular line prices has fallen more in line with the market their special releases command astronomical prices in the tens of thousands of dollars at retail. The latest to try to rebrand as super premium is Mortlach. Diageo’s pricing for these 500ml bottles is laughable. But somebody is buying it….or at least they were.

Let’s shift back over to Diageo now. They were the focus of the article that started this rant, they are the latest super premium rebranders with Mortlach, and they are the largest spirits company in the world. Of their portfolio of spirits, a significant amount is whiskey. So even though they don’t release enough detail for me to dive deep down into their whiskey portfolios, their corporate numbers tell the story better than most. From 2009 to 2014 their sales have grown by about 10%. However, in Asia it is 48% growth over the same period of time. By contrast, North America grew by less than 5%. However, from 2013 to 2014 sales in Asia dropped twice as fast as North America as a result of the economic factors mentioned in the Spirits Business article. Although, it is also true that the sales numbers have dropped across the board for Diageo over the last year. I find it interesting though that even though sales declined in North America by 7.5% the profit margins went up. In fact, those margins have steadily increased year over year since 2009.

I don’t want to get too into the weeds on this point because even though my day job is in finance, most of you come here to read about whiskey and may not care about the difference between an operating margin and margarine. Bear with me for a minute. What the margin increases mean is that for every dollar of product they sell they are keeping more of that money as profit for the company. How do they do that? Well really in one of two ways. They can lower their costs which include materials (barley, water, barrels, etc.), logistics (delivery, transportation, etc.), marketing dollars, and other expenses or they can charge more for their products. Said another way, if you make 40 cents on the dollar you can make it 45 by either cutting 5 cents of cost or charging $1.05. When looking at Diageo’s cost of goods sold it only went up 3.5% over the five years from 2009 to 2014. That means that they are either charging more (they are) or are shifting to a different mix of products that they make more money on (they also are).

In getting back to my original “It’s about damn time” comment it’s only so long a company or industry can keep doing this before the market’s demand for its products will no longer bear the prices they are trying to charge. So in looking at Diageo’s financial results in light of their halt of further expansion it looks like they got the double whammy. The new markets they are pushing look to be pulling back a bit and their old markets (Western Europe’s numbers look similar to North America) may just be tired of continuing to pay more every time they go buy another bottle.

It’s not just Diageo. Pernod Ricard’s trends are similar. It’s not just scotch. Bourbon has seen large increases and marketing driven price increases too. It’s all got a bit out of whack. In “proselytizing the way of malt” I’m not supposed to root against whiskey but as the international fascination and fad dies down a bit maybe we can come a little closer to a healthy normalized industry. One with good give and take between consumer and suppliers instead of the crazy race to the top we’ve seen in the last few years. Prices have gotten ridiculous and it pisses me off. Hopefully, I’ve vented enough that I don’t start a regular series of “Things About Whiskey That Piss Me Off” on Whisk(e)y Apostle. Now I’m going to go take another deep breath and have a drink.