...where distraction is the main attraction.

Tuesday, January 6, 2015

What Was the Scotch Whisky Boom? Part 1: Value vs. Volume

...the value of the goods at the U.S. port of export. The value shall be the selling price (or the cost if the goods are not sold), including inland or domestic freight, insurance, and other charges to the U.S. seaport, airport, or land border port of export.
--Department of Commerce definition of "Export Value"


Scotch sales were up Up UP!  That was the message communicated by brand ambassadors, master distillers, marketing departments, and retailers over the past few years.  Bloggers and other whisky fans quickly picked up on the tune.  I mean, it seemed like there was a boom, right?  The quantity and size of whisky clubs increased.  The amount of whisky blogs increased.  The variety of bottlings in some areas increased.  The bottom lines of whisky companies' quarterly reports increased.  The prices increased.

But even though prices went up and whisky producers' profits swelled, how do we whisky drinkers know if more bottles were actually selling?  How do we know if there were actual supply and demand issues?  And why do I keep writing about this using the past tense?

One way to gauge the Scotch Boom was via quarterly financial reports by companies like Diageo and Pernod Ricard.  Along with the official numbers for each quarter or year, the reporting company includes a narrative about their ups and down, but mostly just the ups.  My problem with those reports are that they almost always cite only the increased revenues because that's all that most incurious investors and reporters care about.

But honestly, I don't give a flying French fig if revenues are up.  Okay, maybe a tiny fig (and if any of the proceeds actually went to Scotland, that fig would be a little bigger).  I don't want the Scotch industry to fail.  It has busted before and the results were punishing to drinkers; brands vanished and distilleries closed, permanently.  So it's good to see that Big Scotch isn't sinking, currently.

But if you don't own stock in or work for a whisky producer, bottler, distributor, or retailer, the quantity/volume of actual whisky being sold is of much more interest.  Is there a supply issue?  Is there or will there be scarcity?  Is the price of my favorite whisky going up due to real market factors?  Or do individuals and companies who stand to profit see me as nothing but a desperate addict, as they gradually increase the prices they'll know I'll pay anyway?

The fact is, disclosure of individual companies' volume sales are much more difficult to come by than their reported profits.  But!  But there's one source that comes to the rescue each year, a source that's much hipper to scorn than to compliment: The Scotch Whisky Association.  The SWA releases an annual Statistical Report (that's accessible to the public) which provides information about pound sterling as well as liters.  It does not provide information about individual producers, but it does detail some of the big picture.

All of the data in my Excel charts here can be found in the SWA's Publication section, where the reports for 2009 through 2013 are available.

EXPORTS

Firstly, here's a graph of Scotch exports from 1980-2013.


It's an okay graph, but not the best.  One can see the growth in exports since the early '90s, including a decent spurt starting in 2006.  But what you don't see is the value in £.  Plus you don't see how the growth in £££ compares to liters.  Now see this next graph below.  Using the 1980 totals as a starting point, witness the growth in Volume, Value, and GBP/liter:


See that blue line?  That's the growth in exports measured by volume (liters per year) over the last 30 years.  Less than 40% over that time period.  Not nearly as sexy as the other two lines.  The growth in Value has been comparatively astounding, over 470%.  And it's the value assigned to each liter that's driving the growth.

"But wait," someone might say.  "That's just the exports.  Consumption in the UK has to amount to quite a bit.  What about the UK's consumption growth?"  To that person I don't have good news.  I do have a graph.  Hold your breath.


Scotch whisky consumption has been cut in half since 1980.  But, as that hypothetical someone suggests, the UK makes up a significant chunk of where Scotch goes.  So, here's a graph that combines the growth of volume in exports with the decline of UK consumption for another look at volume over the years:


So the total volume growth hasn't been much more than 20% over 30 years.  Even if we just focus on the last decade, do we really want to call a 2.3%/year volume growth a boom?  But a 20%/year boost in the £ value of that volume?  That's sounds boomier.

AGED MALT WHISKY STOCKS

Let's take a look at scarcity worries.  Is there an increasing scarcity on aged whisky stock?  We're getting more new NAS (non-age statement) whiskies every week and price blooms on older stuff continue.  The SWA reports include data on aged stocks, but has a catch-all line for all stock older than 10 years.  Unfortunately they only provide the data since 2008, but that's prime boom time, right?

Here are two graphs showing what's going on:


What you're seeing here is a genuine decline in warehouses' aged malt whisky casks.  The drop in the first chart isn't as pronounced as you'd think it would be from looking at the second chart, because last year's 10 year old cask is 11 years old this year thus the count moves up and down through the year.  But it ends up down.  They're essentially netting a 20M liter loss per year which would become an emergency in a decade.  But (again with the but):


There has been a significant ramp up since 2007 (by 2013 malt production was 107M higher than 2006), so by 2018 the numbers will start to straighten out and then increase.

Hopefully everyone will then adjust their prices.

*crickets snoring*

Oh come on, that was my best joke of the night.

MALT WHISKY GROWTH

This section may be short but it both demonstrates an actual boom AND it supports Part 2 of this series.

Reading books and magazines and interviews, a whisky fan will come upon quotes that single malt whiskies make only up 5 or 7 or 8 or 10 percent of whisky sales.  Well, not anymore, according to the official totals reported to the Scotch Whisky Association by the distilleries.  Here's a chart showing the growth of malt whisky as a percentage of total £££ and liters in exports between 2008 and 2013:


As you can see the value part is higher than the volume as single malts sell for a premium over blends.  While a percentage of this "malt" includes blended malts, the majority of malt is still being exported as single malt.  For instance, in 2013, single malts' value made up almost 90% of exported malt whisky's value.  So single malts now take up almost 20% of the value of exported scotch.  It's still blends' little brother, but it ain't 5% anymore.

EXPORTS TO THE UNITED STATES

Since I am an American and everything is about us, I'm happy to end with this section.  And it transitions into Part 2 nicely (I hope).  In 2009, the US was the #1 export market by value, just edging out the French, with a total of £418M.  In four years, that US export value DOUBLED.  Meanwhile the actual volume sales have increased only 20%, most of which happened over two years.  You probably know where I'm going with this...


The United States is not only the #1 export market for scotch whisky by value, its total is greater than the #2 and #3 markets combined.  While there was growth in 2010 and 2011, actual volume sales declined in 2012 and 2013.  Those declines have not stopped an explosion, a BOOM if you will, in the sale value.



The price per unit not only fuels the US boom, but fuels the entirety of the value increase from exports.  And exports are the key, as I've shown above, because whisky consumption in the UK itself has plummeted.  There is a gradual decline happening in aged stocks; that cannot be denied, but it is not drastic and it has been addressed by increases in production for the last seven years.

To the whisky drinkers out there, as you've seen for yourself, the prices on your favorite whiskies have risen.  Why?  Well, because you are being tested on how much you are willing to spend.  There's an increase in volume sales, but that jump nowhere near matches the jump in the price.  And how much have they risen?  In Part 2, I'll show you.  Yes, the actual whiskies themselves.  And I won't be using the term "Value", I will you show you the price tag...

23 comments:

  1. It seems like a lot of the talk about volume increases were predicated on the developing world, especially China and India. Since those haven't panned out, we're in the rather peculiar situation we currently find ourselves in.

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    1. Yeah, that's true. I guess the industry leaders were already speculating that there was a bigger boom to come. And while they were admiring those future markets, many of their current markets started to weaken. I don't blame Diageo for second guessing their expansion plans now, though I still think that many of their original expansion announcements were designed to excite investors.

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    2. That decline in UK whisky consumption fascinates me. I wonder what the drivers are. Doubtful that it's just the price of bottles since it's been going on since at least the '80s. Lower alcohol consumption in general? More interest in imported booze?

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    3. Retail alcohol sales stats for the UK: http://www.healthscotland.com/documents/24485.aspx

      There's been a general decline in the consumption of alcohol over here it seems, mostly in England and Wales. It appears we're still happy to drink ourselves to death in Scotland though :)

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    4. Thanks for the link! That's a fun document, for a specific sort of person. :) Page 19 shows quite a drop off in on-trade drinking. I guess everyone's drinking at home. I also like the chart on pg. 26 that shows that people over 85yrs are drinking (as much as or) more spirits than their kids! If I make it to 85, you can bet your ass I'll be drinking whisky.

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    5. That statistic fully justifies the joke with the old man being interviewed about the secret of his long age - "It's living clean: never smoked, never put a drop of that alcohol poison in my mouth". Then a big ruckus occurs -"What's that?" "Oh, never mind, it's my dad, back from the pub, drunk as a skunk as usual!"

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    6. In 70 years, I will be that father.

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  2. Excellent and fascinating analysis!
    Here's a second head scratcher (beyond the decline of whisky consumption in the UK): why do the aged stocks decline so rapidly, relative to the slow overall increase in volume? It would seem that what we see, besides prices rising overall (can't wait for Part 2), is a shift in the type of whisky being sold/drunk. Malt increase as proportion of whisky from 10% to 15% means a rise in malt consumption by 50%, skewing the distribution toward single malts. This should explain a part of the rise in revenues as well. More precisely, assuming that on average a single malt costs 3x a blended whisky, this shift in distribution (10% -> 15%) would lead to about 8% increase in total revenues, per liter sold. The rest up to 84% (or most of it) is from jacking up the price. But even this is hard to explain: most blended whiskies, which make the bulk of the sales, did not increase in price significantly in the past 5 years - JW Red & Black cost about the same as they did in 2009. So I simply cannot see where that 84% comes from!

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    1. Hey Florin, as an astute money person comments anonymously below, there may be some GBP inflation in the mix, even though whisky and CPI inflation have never danced together throughout history. If we do count the UK's inflation during that time period, that's worth about 17% right there. So if we add in the 8% then that's somewhere around 25%. The rest, the ~60%, is the heart of the cut (if you'll allow).

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  3. Excellent post! This is exactly what we need more of; counters the irrational exuberance that's out there. Thanks for putting this and what's to follow together.

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    1. Thank you! A little real exuberance is okay, but when it's artificial excitement utilized to separate people from their income, then I get itchy. And then I write really long posts.

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  4. Are you adjusting for inflation anywhere here? $1 of general consumption goods in 1980 costs about $3 today.

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  5. ... In particular, in the second graph your are conflating real and nominal qualities. The graph would be better if you had real quantities only -- e.g. volume of scotch versus *real* (inflation adjusted) price of scotch. Otherwise, if you graph anything at all -- volume of pens versus price of pens -- the price of pens will be growing exponentially and will dwarf the volume changes -- it will look like your graph, but the only meaning is that we live in a world where a fixed unit of real goods cost exponentially more units of money over time.

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    1. Hey Anonymous, thank you for this observation. Since last night I've been waiting for someone to bring up inflation. I've been going back and forth between the reports, and while there are adjustments made here and there, I do not think the SWA is adjusting for inflation in their reporting. So, from one perspective Inflation is the best challenge to everyone's rant about the price of whisky going up (and a number of the charts above).

      Historically, the price of whisky is WAY behind inflation. According to Bank of England, the pound inflated by 724% between 1949 and 1980. Meanwhile the value per liter of whisky exports went up only 253% during the same time period. Between 1949 and 2013 the pound inflated over 2900%, and the value per liter of whisky exports went up about half that rate (around 1460%). So if one was to look at it in adjusted prices, we might be paying half of what our grandfathers did for a bottle.

      But since I picked 1980 as my starting point (since the reports often used it as a starting point), let's take a look at that. I agree with you that inflation was probably a main driver. The price per liter was up about 330% while inflation was about 260% in that time period. But oddly the former doesn't adjust at the same rate as the latter (nor had it done so historically). The two are pretty close together (1980-2006) until there's a big spike between 2007 and 2012, during the prime "boom" time. In that period, UK inflation was around 17%, whisky inflation was 44%.

      So, some thoughts (this could be its own damn post): In the period between 1980 and 2006, price per liter inflation was very close to CPI, though in the 31-year period before that it trailed CPI by a factor of three. Between 2007 and 2012, price per liter grew about 2.6x the rate of UK's CPI. It's this last period that I'm going to focus on in part two, as the US export price/liter grew by 85%, while the US CPI was 12%.

      If I can figure out how to graph some of this, I'll include it in Part 2. Thank you very much for your comment. I could actually see someone taking the stance of "The Whisky Boom as Inflation Correction" if he or she were to focus on certain blocks of years.

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    2. On second thought, the whole whisky-price-versus-the-CPI analysis is going to need its own post. It's a subject unto itself, when looking at the historical picture.

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  6. Looking forward to part 2!

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  7. It would be interesting to see a similar analysis on craft/small batch American whiskies. Lots of similarities with Scotch whisky

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    1. I agree. I'm interested in seeing what's going to happen to the American whiskey industry. Bourbon prices are ascending and Scotch-style "premiumization" has begun with long-aged bottlings. The Kentucky Distillers' Association may have some info but Buffalo Trace doesn't belong to their group. And most of the tiny new distilleries are privately owned. So it's difficult to get real numbers. Perhaps there are some export stats out there to be found.

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  8. http://live-counter.com/scotland-whisky-production/

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    1. I've okayed this comment to be posted, but I'm concerned that it's some sort of clickbait and I have issues with everything on that page. Firstly, there are considerably fewer than one billion bottles of whisky (as per the slug line) bottled per year, and certainly fewer than 1.19 billion (as per the actual counter) being exported annually. There are AT MOST 750 million being exported at this point.

      In the blue text box it reads "The longer a whisky is stored, the stronger and darker it is." That is almost wholly untrue. In the cool conditions of Scotland, the ABV reduces each year. In warmer climates, like Kentucky, it may rise. Ardbeg Galileo did not go into space, instead Galileo was an bourbon cask matured, marsala-finished special release by the distillery (their worst reviewed one, no less). A test tube of oak and Ardbeg spirit is what went into space. In the text box in the upper right hand corner, I'm not entirely sure what the upper paragraph means by "outsourced by the burning process", then the second paragraph is something that's no longer a given fact now that whisky geeks are testing out old bottles and finding consistent changes to the whisky within. The text box about investment is at best debatable and cites no sources for its claims. In fact there are no sources cited for any of the information on that page.

      If the commenter who left this link (or anyone else out there) is the creator of the above site, I encourage you to cite your sources on your page, and double check all the information you've listed because there are more inaccurate statements about whisky made online than there are accurate ones.

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  9. Excellent work. Come check out The Whiskey Reviewer's Friday featured op-ed. I'm citing your stuff.

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    1. Thanks, Richard! The Whisky Reviewer is great, and thorough. Plus we seem to have similar palates when it comes to bourbon (Elijah Craig BP and Blanton's), which makes you both great and correct.

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