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Scotch Weathers The Storm: Primed for Expansion, Scotch Producers Tap Subtle Variations for Significant Growth

Posted on  | October 7, 2011   Bookmark and Share
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 It would be reasonable to assume that as the economy continues to stagnate, a spirit category dependent on low price resistance would be in trouble. But that’s not the case with Scotch whisky in the U.S. Driven by continuing innovation, more expensive line extensions and an international demand for high-quality products, Scotland’s distillers are weathering the storm and resisting the age-old pattern of cutting prices—and quality—in the wake of economic turbulence.

In fact, Scotland is on a growth spurt that promises a steady supply of the fabled amber drams.

While blended Scotch whiskies were down slightly overall (-1.4%) in 2010, according to results supplied by the Distilled Spirits Council of the United States (Discus), the most expensive super-premium blended brands skyrocketed (+26.3%) and high-end premiums grew by a healthy 5.5%. Single malts showed better overall—up 11.7%, and at the super-premium level they grew 16.8%. Except for Irish whisky, single malts showed the best gross revenue growth among all spirits in the U.S. last year. (Discus defines super-premium Scotches as those priced in line with The Macallan 10-Year-Old, Chivas Regal 18 and Johnnie Walker Blue, while high-end premiums include Johnnie Walker Black, Chivas Regal, Dewar’s 12 and Glenlivet 12.)

Not only U.S. results have buoyed producers, who are currently increasing production capacity as the category expects healthy growth, particularly in emerging Asian markets, for years to come. Capacity jumped more than 25 percent from 2005 to 2010, according to UK research group Euromonitor, as key players optimistically ramped up.

Foresight Required for Growth
The three- to eight-plus years needed to develop a substantial supply of market-worthy whisky means producers must think decades in advance, and these days, the thought is continued expansion. Diageo, for example, last October opened their largest malt distillery yet, Roseisle. Pernod Ricard and William Grant & Sons, two major producers, also increased capacity in 2010 by significant volumes: Pernod Ricard by more than 10%, while William Grant raised capacity 30%.

Five other small distilleries have been built since 2005, including Kilchoman on Islay and William Grant’s Ailsa Bay at Girvan. Distilling capacity has also been increased at Glenlivet and The Macallan, and Glenmorangie has recently finished efforts to increase output by 50%.

With all that capacity, changes can be expected at every level. While producers had focused in the last two decades on developing a market for expensive brand extensions and limited releases, more attention is now being paid to improving the middle tier, says William Grant & Sons USA Category Director Caspar MacRae: “In the past there has been a lot of innovation in this top-end area as many brands competed to establish their premium credentials, with some very conspicuous offerings. Today the consumer and trade are still prepared to purchase expensive items, but the value proposition has to be much more considered. Meanwhile, we are seeing more innovation at more accessible price points.”

Grant’s malts, Glenfiddich and Balvenie, have both continued releasing new expressions: Glenfiddich with a limited edition Snow Phoenix and Balvenie with a 14-Year-Old Caribbean Cask. The latter is an example of the direction many whisky makers have taken: employing a variety of barrels used to age wines and other spirits to add a twist to a brand’s central flavor profile. Wood and wood finishes aside, distillers have only a few areas of exploration open to them, with extended aging, cask-strength and vintage bottlings being the main options.

Options Limited But Creativity Encouraged
While limited by strict laws about what can be done to tweak their whiskies, the Scotch rulemakers have made things somewhat easier, says Dr. Bill Lumsden, head of distilling and whisky creation for Glenmorangie. “The Scotch Whisky Association has made a big effort to work with member companies such that a level of innovation is possible,” he notes, “but without contravening any of the strict definitions for Scotch whisky, and most importantly, maintaining the wonderful image that Scotch whisky has earned globally.”

Glenmorangie has been at the forefront of the wood-finish revolution, and Lumsden, who frequently visits Missouri forests to select stands of interesting oaks, says they intend to continue to explore “some tried and trusted aspects of innovation (such as extra maturation, a.k.a. wood finishing), along with some rather more alternative aspects of whisky production. There are still some exciting taste experiences to be discovered, both in terms of the previous liquid which the casks have held, and also the pedigree of the oak wood the casks are constructed with.”

Other companies continue to explore the possibilities inherent in wood quality. Morrison Bowmore Distillers, owners of the repackaged and repositioned Glengarioch, Auchentoshen and Bowmore, continue to invest much time and money into selection of the right casks, says Hannah Fisher, brand manager for Auchentoshan, with a dedicated team that selects casks an investigates other maturation possibilities, including different finishes.

According to Jim Brennan—whose VP role at Remy Cointreau includes overseeing single malts The Macallan and Highland Park and the blend Famous Grouse—innovation is now built into the Scotch whisky mentality. “The economic difficulties have not changed the Scotch or single malt categories significantly,” he says. “Innovation continues to play a role. That said, most of the growth is coming from core products and especially so for The Macallan.”

Distillers with large stores of older spirit continue to supply new iterations to keep customers engaged. “Interest for new products is very prevalent in Scotch,” says Adam Rosen, Director of Scotch, Diageo NA. Diageo’s range—the various Johnnie Walkers, plus single malts Caol Ila, Lagavulin, Talisker, Oban, Cardhu and many others—gives them credibility among consumers to offer new extensions using rare expressions or different casking methods, he says.

Diageo will soon be shipping the annual Classic Malts Distiller’s Editions, half a dozen or so older single malts and a limited number of natural cask-strength single malt whiskies dubbed Special Releases. This year the company also intends to introduce a special expression of the blend Buchanan’s.

In a fairly unorthodox move, Balblair, one of the oldest distilleries in Scotland, decided to switch over exclusively to vintage bottlings. Instead of age statements, all of Balblair’s single malts are vintage-dated. Distillery Manager John MacDonald tastes each cask as it develops; they are bottled and released when he believes the character of the whisky is just right, not in any chronological order. For example, the first to hit the U.S. market two years ago were the 1991 and 1997; the 2000 and 1989 debuted last year and the 1969 will hit shelves in limited quantities
in January.

Blends Get Better
Buchanan’s is a good example of a once popular blend resurrected by demographic changes without much attention from brand owners. Tremendously popular in Mexico, it’s developing “explosive growth” among Mexican-Americans, Rosen says. Pernod Ricard’s Ballantine’s is another blended brand that has developed popularity organically, not only among Latins but significantly with the Asian-American market.

The growth of both brands shows there’s still life in blended Scotch. Keeping that interest alive recently led market leader Dewar’s to redesign packaging along their whole range—White Label, Dewar’s 12, Dewar’s 18 and Signature. “Consumers may be drinking less but they are trading up to more quality expressions and we have that portfolio for anyone at any budget,” says Gabe Cardarella, Dewar’s national brand ambassador.

Dewar’s is one of the few Scotch makers promoting cocktails—in their case the Dewar’s Smash, served during hosted “Dewar’s Discovery” tasting events held around the country, where the focus is showing newcomers how mixable the blend is. At these tastings, guests get the opportunity to taste the blend side by side with a version before it’s barreled a final time, a process Dewar’s calls “double aging.”

Diageo’s main focus in blends continues to be on the various Johnnie Walkers—Red, Black, Gold, Green and Blue—with current emphasis on recruiting new users into the blended whisky franchise through mentorship programs. Their House of Walker continues to tour the country with events and tasting sessions to introduce new whisky drinkers to the range. “Scotch is a sophisticated spirit. It’s one that is traditionally introduced to consumers through mentor relationships often through a friend, a boss, or a family member,” Rosen says. 

In addition to wood finishes, distillers have found favor among customers with powerful cask strength iterations and non-chill-filtered expressions, which are usually hazier in appearance but are admired by some for their depth of flavor. (Chill-filtering reduces the temperature of the whisky to around freezing and filters out some of the oils that will otherwise cloud the liquid when served cold.) Pernod Ricard will soon be releasing a non-chill-filtered Aberlour expression as part of a limited campaign to increase awareness of the brand through PR and social media.

Bringing In New Customers
Though there are many options for Scotch whisky buyers, not all innovations have addressed customer interests, according to JC Iglesias, marketing director of Scotch and Cognac for Pernod Ricard USA. “A lot of what passes for innovation is a distiller or blender trying something new and we then present it to the consumer,” he notes. “Going forward, we are going to try to understand what the consumer needs a little more.” New types of packaging, especially those that address different, perhaps more casual, drinking occasions, are among the ideas PRUSA is researching with consumers.

Most of all, he says, it’s important for leaders like top-selling U.S. single malt Glenlivet, which underwent a packaging makeover recently, to get more people into the category, and one of the PRUSA approaches is to try to demystify Scotch. “The industry has overcomplicated things a bit, giving people tasting notes that can scare them off, as they once were scared off by wine. We want to unlock the mystery and not be precious about it,” he explains.

For Glenlivet, they’ll continue their popular mentoring programs, with a simpler approach for malt-ready novices not active in the category. The biggest, The Glenlivet Guardians, is a global program designed to engage the novice, mid-level and connoisseur at their levels of comfort. The company will focus on four other brands—Chivas Regal, Royal Salute, Ballantine’s and Aberlour—in the near future. For Chivas, the company this fall launches The 1801 House, a series of invitation pop-up bars in different cities that Iglesias compares to a trendy hotel bar, with entertainment and guided tastings.

Some distillers find that the road to innovation continues to mean pricier products. “We have seen a significant shift towards high end, special release, limited edition releases,” says David Robertson, director of rare whisky for Dalmore. “Our success has been with rare releases ranging in price from $150 to $150,000. Clients continue to demand the rarest, the best, the most interesting, attractive and evocative releases. Small boutique releases are selling out incredibly quickly.”

With the continuing wave of interest among U.S. drinkers for rare whiskies, even smaller brands like Glenrothes have an advantage these days, says Nathalie Phillips, senior brand manager: “The Glenrothes positions itself as the preeminent vintage single malt Scotch whisky. We are one of the only single malts that release whisky based on maturity, not age.” The difference from vintage to vintage is based on cask selection and the length of time matured, and like the other limited editions, generally gets allocated and disappears soon.

It’s the popularity of whiskies like these, once used almost entirely in blends, that has inspired producers to expand and build new facilities. Some whiskies disappear from the U.S. as their popularity grows elsewhere, and there’s only so much old stuff for both blends and small bottlings. But that’s a luxury problem—one both producers and retailers can look forward to continue enjoying.

New Whiskies on the Horizon
Scotch producers seem constantly poised to issue new brand extensions and one-offs, widely awaited by fans. Some limited selections only reach a few retail shelves they are so tightly allocated. But some of the priciest iterations are rolled out for the long haul: Pernod Ricard USA has returned attention to the once popular Royal Salute with the intro of a $200K jewel-encrusted bottling called Tribute to Honor. For the slightly less well-heeled collector, October of this year brings their latest intro to the U.S. market, 62 Gun Salute, a 40-year-old blended to retail at $4,000. PRUSA will also try to ramp up interest in single malt Aberlour with a non-chill-filtered 12-year-old soon.

William Grant & Sons has seen some success among younger consumers new to the whisky world in the UK and Europe with their Monkey Shoulder blend; Grant’s Caspar MacRae says the company looks forward to introducing the brand in the U.S. soon.
One of Grant’s recent promotions promises another new whisky, involving the Glenfiddich Cask of Dreams. “We rolled 11 casks through key US cities, allowing consumers to inscribe their aspirations and dreams on the barrels, in memory of our founder achieving his dream—creating Glenfiddich. Those new oak casks have now returned to Scotland, where they are finishing a special whisky for 2012,” says MacRae.

Similarly, The Balvenie will roll out later this year a whisky—Tun 1401—made from six different barrels of varying ages, named after the marrying tun into which the barrels were emptied and aged for a few months, before being returned to barrels and then bottled. Next year, says MacRae, Balvenie is set “to unleash a treasure trove of exceptional new whiskies at a range of price points.”

Blend producers have been focusing on brand extensions, but Cutty Sark owners have plans for the near future to reinvigorate the brand, which continues to decline in the US.

Glenrothes is currently shipping for the fall two Vintage bottlings, 1995 and 1988, as the popular 1994 and 1985 become extinct.


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