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Scotch Stock Watch

Posted on  | September 23, 2014   Bookmark and Share
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Supply issues? Maybe down the road. For now, demand is the hot button.

Late this past summer, the Edrington Group announced the imminent limited release of a new Macallan called Rare Cask, to retail at about $300. That was quickly followed by word that William Grant and Sons would offer Glenfiddich’s newest permanent marque, Excellence 26 Year Old, aged exclusively in American Oak and priced at $500.  There wasn’t much doubt that retailers and whisky aficionados would swiftly be lining up to get their orders in as soon as they heard, even at prices set so high.

Welcome to the new world of Scotch whisky, where single malts continue to surge, prices keep rising and marketing departments tinker with whiskies to which consumers and retailers have grown accustomed in order to reap fresh benefits.

It’s a tale with a long tail: In 2003, single malt sales accounted for about 10% of the volume of blended Scotch whiskies; they surpassed 20% of blended sales last year. While the U.S. isn’t the top market for Scotch volume (France has that distinction), it is by far the most lucrative. According to figures from the Distilled Spirits Council (DISCUS), the U.S. market bought up nearly $2 billion in Scotch in 2013.

Says Wayne Hartunian, VP Scotch and Cognac for Pernod Ricard, “Single malt Scotch in particular continues to be one of the fastest growing of all spirits categories, driven by an accelerated trade-up dynamic within overall whiskey.”

All Scotch grew about 3.5% last year in the U.S., with blends up for the first time since 2004 (+2%), while malts jumped nearly 12% (on a much smaller base). Leading brands like The Glenlivet, The Macallan, Glenfiddich and Glenmorangie all posted significant gains. And while supplies are stretched thin, and numerous distillers have or are in the process of expanding or building new facilities, most suppliers say that supply is fine; it’s demand that’s driving price increases.

Andy Nash, category marketing director for Scotch and North American whiskies for William Grant and Sons, says any supply issue is a result of international demand: “The key concern for us is basically getting our fair share of allocation from our central business… making sure we have the right product ranges in the U.S.”

Striking While The Iron Is Hot

If nothing else, the snowballing demand for primo Scotch has challenged marketers to make the most of the situation. While they can’t increase their stocks of aged malts, they can and have become adept at creating special bottlings with new evocative names, elaborate packages and enticing backstories.

The Macallan and Glenfiddich examples already mentioned are just among the most recent attention-grabbers. This summer also saw the release of Glen Grant 50 Year Old; with only 150 “decanters” available at SRP $18,999, it’s surely a prestige gesture more than a realistic product to stock. In the same vein, Glenmorangie’s “Pride 1978” (SRP $5,800) was unveiled this past July in an ultra-modern package in tandem with a collaboration with artist Idris Khan, whose aptly titled “Disappearing Casks” artwork was displayed at the launch.

Demonstrating what now appears to be remarkable foresight, the iconic Dalmore distillery released back in 2012 their “Constellation Collection”—a spectrum of Highland vintages created between the years 1964 and 1992. The range encompassed 21 individual releases, bottled at cask strength.

And Jura Whisky, distilled on a small island off Scotland’s west coast, has excelled in creating single malts rich not only in whisky character, but also intriguing tales; witness Superstition, Diurachs’ Own 16 Year Old and Prophecy. Adding a contemporary twist, for the most recent Jura release, Jura Brooklyn, tastemakers from the NYC borough were recruited to help Master Distilller Willie Tait select the most Brooklynesque batch from a range of cask samples. Its SRP of about $60 sets it up as a relative steal for such a unique and novel project.

Simple Economics

The big picture is not very complicated: New consumers discovering Scotch whisky are swelling the ranks of enthusiasts, supporting price increases all along the line. Where once any number of single malts might be found on a retailer’s shelf under $30 or so, now perhaps a handful are available at those prices, widely outnumbered by those priced at $50, $75 and up. In short, the top shelf is on fire. Further evidence of the trend’s depth can be seen in the secondary market: A recent Bloomberg Business report said whisky auction activity internationally was booming by as much as 30% in one year, as collectors continued to treat Scotch as investment grade beverages.

Marji Jackson, liquor buyer at Holiday Wine Cellar in Escondido, CA, which carries more than 150 Scotch SKUs, says it’s hard to ignore the price increases. “Fortunately for us, the majority of our customers understand, because they are educated on what’s driving that market,” she says. “But for the everyday person or someone who hasn’t shopped for Scotch for a while, we have to explain that it isn’t our pricing—it’s all across the board.” She notes even easy-to-source brands continue to raise prices.

David Lind, VP of marketing for Interbev, owner of Speyburn and Old Pulteney single malts, says the pricing on Speyburn, which has been kept low to position it as an everyday value single malt, is heading up. “The category has moved ahead—all our brands are stock-restrained and on allocation, and we’re working hard to keep supplies up.” Speyburn is in the midst of a distillery and warehouse capacity increase, though Lind points out another major issue is the availability of bourbon barrels.

Diageo, owner of more than a dozen single malts as well as Johnnie Walker, Buchanan’s and other blends,  has addressed cask supply by committing to rejuvenating used casks—scraping, recharring and then refilling them. It’s that wood tinkering that gave rise to Talisker Storm, a no-age-statement single malt employing a mix of young and older whiskies. Says Ewan Morgan, Diageo Master of Whisky, “There’s only a finite number of casks each year. Thankfully, we haven’t really seen too much of an issue—we have more than 8 million casks maturing of different styles—though what we have is 90% American oak. We aren’t really seeing much of a pinch but some of our competitors are feeling it.”

Ageless Beauty

Morgan points out that the growth of no-age-statement malts is a natural evolution of the business. Within the industry, flavor profile rather than age statements has always been the hallmark of a brand’s quality. Now that producers can predict more precisely the impact of wood, items like Talisker Storm are more likely.

The latest entry in Highland Park’s core portfolio, called Dark Origins, is  a non-age-statement whisky using twice the usual first-fill Sherry casks in production. “Technology is helping us to be more accurate, and the quality of wood today is far, far better than it was ever in past, when they would just go to Jerez and buy by bulk rather than investigate the quality,” says Morgan.

Nash argues, though, that some producers are talking up non-age-statements because they’ve been caught short by the whisky boom. Grant issued their own non-age Glenfiddich Snow Phoenix in 2011 after warehouse roofs collapsed, exposing many casks to the elements; and Balvenie Tun 1401 is without age statement. In fact, Nash says, the latter disappeared from shelves so fast, they probably underpriced it.

Edrington execs realized years ago that The Macallan’s signature Sherry profile meant the frim’s wood program would need extra attention to keep the supply coming. “We’d already started in 2002 to secure our Sherry oak cask production—we manufacture more than 90% of the Sherry oak casks in Spain,” says company CEO Paul Ross. They even plant trees in Andalucia and “rent” Sherry from some bodegas for three to four years at a clip to season the casks.

Global Pressure

“In two decades there’s been a fundamental shift in demand and consumption,” says Edrington’s Ross. “In 1998, Macallan sold 50 cases in Hong Kong, for example; today it sells well over 25,000 cases.”

He explains: “There’s not enough maturing stock at the high end that can meet the globalization of tastes as places like Mexico and Brazil discover Scotch, so there will continue to be price pressure over the next decade. That’s why were planning to spend a $170M on distillery investment and infrastructure.”

As Nash says, pricing is a natural response to increased demand, and the fact that distillers are less willing to sell cheaply, especially in the face of higher prices for spirits that don’t require careful aging. “You can put out a premium vodka for $30 or $40; but compared to single malt Scotch made in a much smaller batch ten or more years ago, that value seems to be a little off,” he notes. “Prices are primarily rising because those who do have stocks are less willing to give them up for rebottlers or store labels and more likely to create their own brands.”

Whatever happens, it will take an international economic tsunami to make the Scotch producers return to their old discounting ways, and retailers will need to be prepared. “A few years ago when it started becoming more evident, we’d have to explain to customers all the time,” says Holiday Wine Cellars’ Jackson. “Now, maybe they aren’t purchasing their favorite brands as often or buying something else as a back-up. I’m sure there’s a breaking point, but I don’t think we’re seeing the full effect yet.”  


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