The Global Whisky Industry

A preliminary remark before we dive into the difficult topic: Whisky is a contemplative drink and was intended for enjoyment. But the Whisky producers are competing on a local and global scale. (The) retailers are standing between the industry and the customer.

To fully understand the matter, we must see the situation from the eyes of the executive boards and CEOs of the big companies, which are more likely to drink Beer and Wine instead of Whisky. Further imagine that those companies not only produce high-quality Whisky but mostly Wine and low-priced spirits. In contrast to us more ‘finer spirits’, most people in the world are preferring alcohol like Gin and Vodka or Brandy and Rum.

So, imagine you are the CEO of a million dollar or pounds company. Which goals do you have in mind in your daily business? What keeps you awake at night? At first you must make sure your bosses are happy with you. Because even a CEO answers to an executive board. In the case of a private company like William Grant & Sons (Glenfiddich, Balvenie), it is the Grant family. Big corporations in the form of stock companies like Diageo or Allied Domecq are controlled by the shareholders from all over the world, who bought the stock at the stock exchange in New York or London.

Now you are probably asking: What does it matter to me? The big shareholders up there have nothing to do with me. They have enough money! Why do they want even more?

In Germany it is not as popular to invest money in stocks or fonds like in other countries. For us Germans, life insurance and the state pension are our retirement provisions. But now imagine you are in the shoes of an American or British citizen, who invested his/her hard-earned savings in stock or fonds. He/she would do everything to secure and increase the pension. That is why shareholders founded associations that monitor the executive boards and corporations. The Pension Fund of General Motors (GM – global automotive corporation) is a stern example for this overwatching unions.

  • 1st goal of this association is a sufficient return each year, which is calculated by the earnings of the company
  • 2nd goal is to increase the stock price, which can only be achieved sustainably with the growth of the company. Another factor is the general worth of the company (fixed assets and equity)

Those two goals are shared by the executive boards of the spirit corporations. They seek out profit when and wherever they can and try to maximize it by buying other companies (does not matter if small or big ones) and their growth. Normal business in the economy.

The only difference between the companies is the existence of major shareholders, which have shares over 25%. Those have a greater influence on the leadership of the company and can even push through unpopular strategic decisions which are working against the two main goals for a short-term.

The market of spirits is saturated in the big economical states. Actually, it is slightly declining. The profits are under pressure of the competition. Nobody has unique features or advantages, which would justify higher prices. Growth in the local market can only be achieved if the economy of the region (1 – 3% a year) is rising or if other alcoholic beverages on the market can be pushed aside. Where can a big spirit company grow, except with the usual acquisitions or in Asia and South America?

The shareholders demand growth and expansion and the needed capital is available on the market. It was the beginning of a diversification to other business branches. But this supposed ‘easy’ growth through acquisition also has drawbacks. The Canadian business ‘Seagram’s’ exaggerated the diversification in 2001 and became a media company. It was then completely bought by the competing French media company Vivendi. The biggest music corporation of the world ‘Universal’ was kept and the in comparison small spirit branch was sold to the big players ‘Diageo’ and ‘Pernod-Ricard’.

Buy a company, pick some needed parts and sell the rest in parts to the highest bidder. Who has seen the movie ‘Pretty Woman’ with Julia Roberts and Richard Gere, maybe already knows how it goes. While it can end badly for a single employee, the small savers who wants to build their pension with stocks and fonds only gains advantages. The free economy does not forgive mistakes in this global game of Monopoly.

But also in the operative beverage branch, the big players try to maximize their share of the market. Within the Whisky as well as the Wine segment. In the field of Wine, they successfully set up exclusive long term supply agreements with privately owned wineries. In the young Wine countries (Chile, Australia, South Africa) there are more and more purchases of wineries, which are then further developed with the available capital.

In the Scottish Whisky branch, the big take over competition among the big companies is long over, after some huge deals.

But not every distillery is fit for overtaking. The big players only selected the well-known, bigger names and sold the smaller ones. The second row of companies from ‘middle class’ are ready to increase their product portfolio with the ‘leftovers’. Smaller companies are built up in the shadow of the big ones and they are already starting to diversify their portfolio with Gin, Vodka and Rum on top of Whisky.

But at first, the smallest ones were helping themselves. Several independent bottlers realized their dream and bought their own distilleries (Benromach, Bruichladdich, Edradour, Glengoyne).

In May 2003 there were four big distilleries left within the ‘Seagram’s’ breaking. But to successfully sell them seemed to be difficult. Through the years of over production, the warehouses were filled to the ceiling and the selling price was too high. Who would pay those high prices? The warehouses must first empty out over the years, before a buyer would be found.

And the competition goes on…

Glengoyne Distillery
Glengoyne Distillery

Where Is It All Going? How Will the Products Develop?

If the current trend is not disturbed by big political or social changes, they will continue and further develop.

The big spirit corporations almost finished their transformation of concentration process from Food and Delicacies to the production of Alcohol beverages. The first place is held very tightly by Diageo, which makes it almost impossible to overtake them with normal, organic growth. Diageo owns the most brands within the top 15 spirits of the world.

There is a rule in the world market: In advanced markets there is always only space for two big players in a segment. In the case of the US automobile branch its General Motors and Ford, in fast-food it is McDonald’s and Burger King, in cola sodas it is Coca Cola and Pepsi, and it is Caterpillar and Komatsu within construction machinery.

The market strategist advice, that if you cannot be one of the two top companies, it is best to create an alternative, smaller market in which you can be one of the top two again. This also applies to the big Whisky brands: Jack Daniel’s and Johnnie Walker Red are head-to-head. Diageo tried to change the market and counted its Red and Black sales together since 2002 to stay ahead of Jack Daniel’s while the sales of Johnnie Walker Red were decreasing. At the same time J&B was pushed forward in order to create a third competitor in the race.

The competition about the second biggest spirit corporation was tough with all its battles of takeovers. Pernod Ricard tried with the purchase of Seagram’s and Allied to fusion with other big houses like Bacardi or Brown-Forman.

But what happens on our beloved Malt Whisky market? The big ones, especially Diageo, have realized the lucrativeness and the potential of Malt Whiskies. Even if it is less than five percent of all sales. Diageo is tending to the connoisseurs with wonderful series like The Classic Malts of Scotland or the Flora & Fauna and of course the Rare Malts Selection. Any other producers are a long way away from such successful series.

The following trends can be recognized:

  • Expansion of the top Malt Whisky brands with new premium Single Malts (Example: Glenmorangie 18 years, Glenfiddich 18 years, Highland Park 18 years)
  • Regular bottlings of individual casks from the distilleries (Example: Glenfarclas annual, Ardbeg annual, but also Bowmore Claret and Glenmorangie Tain L’Hermitage)
  • Bottlings of high-end Whiskies (Example: Bowmore 1964, Balvenie 1966, Dalwhinnie 36 years)
  • A problem remains in the branch. The recession of the British economy from 1980 to 1990 led to low stocks of older Malt Whiskies. And those are additionally stressed due to the Malt Whisky boom. Today the warehouses are in better shape, but the prices are increasing as well.
  • The strategy of the big companies to focus on high-quality and expensive Malts led to the fact that only a few Single Malt Whisky casks are still sold to independent bottlers. The selling of casks from well-known distilleries has already stopped. This will cause a shortage of independent bottlings which are also getting more expensive. The bigger independent bottlers have been aware for years and diverse with their own distilleries.
  • Startup or rather expansion of small, private companies with own distilleries Example: Cooley (IRL), Ian MacLeod with Glengoyne, Speyside Distillers with Speyside/Drumguish but also Gordon & MacPhails with Benromach or Signatory Vintage with Edradour and Murray McDavid with Bruichladdich.
  • New founders without capital or support from the industry will have a very hard time. Example: Glenora (CDN), Arran, Ladybank or Blackwood

The consumer is looking forward to good times, since there is plenty of competition in the Whisky branch and Single Malts are no longer considered a byproduct by the companies.

But another significant negative trend should be mentioned. The development of more Malt Whisky leads to a smaller selection of good casks for bottling. The quality of the well selling Malts can decrease. If a distillery is no longer selling only 15% of their Whisky as Malts with the rest being used for blending, but it is 50% they sell, then mediocre casks will most likely find their way into Single Malt bottlings. Big stocks in the warehouse cost(s) capital interest(s), which is why the average age of Malt Whiskies will be younger. If more is sold, the warehouse needs to be fuller. A multiple-shift operation is applying to almost every big distillery by now. But expensive expansion or new building of warehouses is still not common and almost avoided (positive exception being Macallan).

But Macallan still has difficulties on steadily delivering their 18 year old Malt. Glengoyne replaced the 12 year old with a 10 year old and many distilleries have installed a no-age-statement bottling beneath their Whisky for beginners (Bowmore Legend). If a brand has suffered from bad reputation, it will be difficult to reinstall a good one. That’s why Glenmorangie release a new 15 year old on top of their mass produced 10 year old to keep core customers happy. Glenfiddich tried to establish several new Whiskies with 15, 18 and 21 years on the market in order to satisfy the demand for products with higher quality.

The Newly Built Still Room at Macallan
The Newly Built Still Room at Macallan

The Development of the Whisky Industry

The Whisky branch is usually built in this pattern:

  • Global corporate (Diageo, Allied Domecq, Fortune Brands, …)
  • Local production subsidiary (UK, USA, IRL, CDN)
  • Local sales subsidiary in the whole world. If the market is not big enough, local distributors are used
  • At the same time corporates do not only rely on their own sales departments, but also supply worldwide trade chains, including duty-free distributors (or what is left of it after the Europe Union.)

Along those main distributor chains, many traders and brokers have gathered, with all of them wanting a share of the revenue. ‘Half of a container too much Bowmore was delivered in New York?’ – No problem. A broker bought it and offered the content in pallets for a low price. ‘One pallet too much in London?’ – Also, no problem. An intermediary took it and stored it in his warehouse.

At the streams of Whisky which are flowing from Scotland all over the world, there are unbound traders at every branching who readily take the surplus and further distribute it. The big companies save on expensive interim storages or retours, and the traders earn a cheap purchase. But one thing is sure: More traders involved means a higher price for the consumer down the line, since every interim trader wants their cut.

This challenge of optimization to reach the maximum profit for the producer is faced differently by each company. Diageo for example sells Classic Malts to delicatessen shops and hotels through their own sales departments. This ensures, that the maximum creation of value of Diageo stays with them. But of course, the created value must be seen with the expenses of operating the departments.

With those examples it becomes clear, that the price of Whisky is not only coming from the production. The more hands are involved, the higher the price becomes.

Just like with every other product on the world, the Whisky segment is a good competition. In the end, the consumers will profit of it. The numbers of Whiskies available have massively increased. You only will have a hard time choosing.