...where distraction is the main attraction.

Monday, January 12, 2015

What Was the Scotch Whisky Boom? Part 3: Plateau and Decline

The seed for this series was planted in October 2013, back in the days when I read Shanken News Daily's site every day.  On October 9, 2013, they posted an article entitled, "Single Malt Scotch Volumes Continue To Soar Even As Retail Prices Surge".  It was twice as long as their usual articles and threw around lots of numbers about single malt prices (though they never cited their source).  But it was the chart at the bottom of the article that blew my whisky mind.  I encourage you to check it out, as long as Shanken doesn't put it behind a paywall.

It's a very small chart, "USA – Top Four Single-Malt Scotch Whisky Brands", but is dense with important information.  It shows actual nine-liter case unit sales numbers for the industry as well as the top four brands.  You'll note the bottom line, which shows a total volume increase of 7%.  That sounds like a good amount, right?  75,000 more cases of single malt were sold in the US in 2012 than was sold in 2011.  But here's the thing, 73,000 of the 75,000 cases worth of growth came from only four brands.  That's right, 97% of the growth was due to Glenlivet, Macallan, Glenfiddich, and Glenmorangie.  All other brands put together accounted for less than 3% of the growth, or only 2 thousand more cases nationwide in an entire year.  That's......not a boom.  Hell, that's stagnation for all but four companies.  In fact, Glenlivet and Glenmorangie accounted for more than 2/3s of all the US single malt growth that year.  And 2012 was right in the center of the boom times we were being told about.

Whatever growth that was happening was not balanced throughout the industry and probably never had been.  I had looked at an SWA report once upon a time but after seeing this chart I went back and downloaded all of them.  The following week, I met up with Tim Read (Mr. Scotch and Ice Cream) for lunch.  We both agreed that the boom was either exaggerated or a total fib.  The data was there for the public to see and whisky "journalists" to detail.  But the myth was printed and the readers consumed it.



First, I'll recap the actual growth that happened to the Scotch whisky industry, the sort of data that support a Pro-Boom Narrative.  (All of the data referenced below came from the Scotch Whisky Association's annual reports.  There's more info and visuals about all of these items in Part 1 of this series.)

1.) Export value.  Starting in 2007 and ending in 2012, Scotch whisky exports grew at a healthy rate:

2007 - +14.0%
2008 - +8.2%
2009 - +2.5%
2010 - +10.0%
2011 - +22.6%
2012 - +1.1%

By 2012, whisky exports' value was 72.4% higher than it was in 2006.

2.) Export volume.  Between 2004 and 2011 export volume grew 32.1%.  In 2011 alone, the increase was 19.0%.  You'll note that I didn't reference the 2007-2012 timeframe mentioned above.  I'll come back to that period's volume soon enough.

3.) Export price per liter. By 2012, the price per liter of export Scotch whisky had grown 44.3% from its 2007 amount.  Though inflation drove much of the increase in price of whisky in previous years, between 2007 and 2012 the UK's inflation was only 17%.

4.) Malt whisky. Between 2008 and 2011, malt whisky exports had climbed 72.3%  In 2010 alone, it had jumped over 50%.  And by 2013, the value of malt whisky exports had risen 78.4% since 2008.  As a portion of the entirety of Scotch whisky exports' value, malt whisky rose from 17% to 22% in that time period.  Meanwhile, existing malt whisky stocks older than 10 years were being emptied at an ever increasing rate.  In 2008, 12.9% of those stocks were emptied.  In 2009 it jumped to 19.8%.  In 2013 it was 22.65%.  Meanwhile malt production increased to meet future demand, going from 168M liters in 2006 to 275M liters in 2013.

5.) Whisky exports to the United States. By 2013, the value of whisky exports to the US were 120.4% greater than they were in 2008.  In 2011, the volume of whisky exports to the US were 21.4% greater than they were in 2008.  You'll see again that I changed the years referenced when comparing volume and value.  There must be a reason for this...



Now I'm going to dig deeper into items 1 through 5 in order to deconstruct the Pro-Boom Narrative and to demonstrate that if this Boom Time ever existed, it certainly has since passed by.

1.) Export value.  I'm going to add a number to the list of value gains from above:

2007 - +14.0%
2008 - +8.2%
2009 - +2.5%
2010 - +10.0%
2011 - +22.6%
2012 - +1.1%
2013 - -0.3%

It can't be denied that there was serious value growth occurring up until 2011.  But in 2012 that ascent was slowed drastically creating a potential plateau and in 2013 it was further confirmed.  Here's a graph from Part 1:


Here are the comparative data, using 2007 as a start date:


That red plateau equals about 0.8% growth spread out over two years, including an actual loss in 2013.

And it has gotten worse.  This past September, the SWA announced that export value in the first half of 2014 had dropped 11% compared to the first half of 2013.  They blame the loss entirely on “economic headwinds and uncertainty” and Chinese government austerity measures.  While the former is a term vague enough to mean anything, the latter is responsible for only a small fraction of the total decline.  China wasn't even amongst the top 20 export markets in 2013.  What was more important and what should have been noted was the fact that there were value drops in 8 out of the top 10 largest 2013 markets.  So not only is the value boom over, but when the final 2014 numbers are released that red line is going to drop to a point closer to 2010's level than 2011's.

2.) Export volume.  When I was referencing the export volume gains in my little pro-boom section above, I did not reference the 2007-2012 timeframe.  Here's why:

(Same chart as before. But note the blue line this time.)
During the big boost in value (arguably the Boom years), volume only had one year of significant growth.  It declined in 2008, 2009, 2010, and 2012.  In 2013 it nudged up all of 2.5 percent.  Using the "Scotch Whisky Export tables first half of 2014" report from the SWA, I did some manual math and found the top 20 export markets cumulatively dropped another 0.8% in volume during the first six months of 2014.  So though 2014's year-end volume slide won't be as drastic as the value's, any decline will mean that there were drops in five out of the last seven years.

3.) Export price per liter. I didn't mention 2013 when demonstrating the price/liter growth above and by looking at the "Growth in Scotch Whisky Exports since 2007" graph, you'll see why.  The price per liter actually dropped almost 3% in 2013.  And judging by the difference in value and volume drops, 2014's price per liter will decline again.

4.) Malt whisky.  While the value of malt whisky exports continued to climb in 2013, volume did not.  In 2012, volume dropped 2.4%.  In 2013, volume dropped a further 4.2%.  Likewise, as malt whisky's portion of whisky export's value rose in 2013, its portion of overall volume dropped.  Here are two little graphs to demonstrate these points:


5.) Whisky exports to the United States.  Here's another graph from Part 1:


While the value of US exports rose like a rocket from 2008 to 2013, the exported volume did not.  It dropped in 2009, 2012, and 2013.  There was growth only in 2010 and 2011.  Admittedly, the 2012 and 2013 decreases were smallish (1.9% and 0.2%).  But according to SWA's "Scotch Whisky Export tables first half of 2014" document, the first half of 2014's volume was 12% lower than the first half of 2013's.  That's not smallish.  IF that percentage holds up, then that would send US volume levels below their 2010 total.

And it gets worse, again.  With the SWA and its major members blaming the Chinese goverment's austerity measures as often as possible, they have until recently avoided alluding to the elephant in the room: us, the US, the largest market, the golden boy of Scotch whisky value growth (120% in five years) is no longer growing.  We're shrinking.  Our 16% value downturn in the first half of 2014 (compared to the first half of 2013), £64m, makes up nearly a third of Scotch whisky's entire export drop.



Taking these financial elements into consideration, I think it's fair to say that Scotch whisky sales are on the decline and some of its major elements have been weakening for more than two years.  Since it's patently untrue that Scotch sales are still strengthening, I would be curious to see how the industry adjusts in order to rebound, if it can.

Diageo is taking a full step back from their well-publicized £l,000,000,000 distillery expansion plans.  They were going to expand Glen Ord, Clynelish, Mortlach, Teaninich, and build a new distillery.  Adding together the figures from all of their press releases, my calculator never found more than a quarter of that announced billion pounds, so I assumed the big number was there to excite investors.  But the important part was that the largest Scotch whisky company saw a bright future for whisky and was willing to invest in it.  Yet those sunny skies clouded over once their quarterly reports started to sag.  But it takes more than a 1.5% quarterly decline to stop a billion pound facelift.  So either Diageo's bean counters know something the rest of us don't or they're more worried about the industry's numbers than I am.  Whatever they know, they're not sharing it with Pernod Ricard who is planning to triple Glenlivet distillery's size just as the biggest market (US) has had an industry-wide volume decline for the past three years.  I suppose they get points for optimism.

Meanwhile, though the Scotch Whisky Association's CEO more or less admits to the real decline in sales, he's either trying to force an optimistic message or is tone deaf when it comes to the "why".  In the linked Spirits Business interview he says “To be honest we’re not totally sure why,” and “To be equally honest we’re not really worried because the fundamental drivers seem so strong. The attractiveness of the category in recent years, the strong interest in malts, the premiumisation in the US – none of that seems to have changed."  Okay.  That's one way to look at things.

Here's another way to observe the situation.  In previous years, with the big increases in value and the moderate gains (or losses) in volume, customers were increasingly spending more on individual bottles.  But in the first half 2014, with the steep declines in value and smaller declines in volume, customers appear to be spending less on the fewer whiskies they are buying.  Have single malts (pricier than blends) lost ground?  Export volume results say so.  Have drinkers been buying blends instead, keeping their expenditures down?  We'll find out sooner than later.  Either way, "premiumisation" in the US (and elsewhere) took a hit during the first half of 2014.  And "attractiveness of the category in recent years" isn't a strong enough fundamental to lean on, especially since volume sales (again) not only never really exploded, and may have even declined for the last three years.

When the price per liter jumps 44% (and higher in their biggest market) in six years shouldn't the Scotch Whisky Association and its members have anticipated real market factors eventually countering their annual gains?  Or with drops in export volume potentially registering in five out of the last seven years, was further "premiumisation" the only tool in their toolbox?  Boost the marketing, product-place with television shows and celebrities, sell the glamour in the brand......and raise the price, countering the drop in unit sales.  How long will that work?  The Value Plateau of 2012-2013 and the first half of 2014's rocky report wouldn't give me the confidence that everything is "strong".

The Boom is over.  Prices are high, but demand has muted.  The Scotch whisky industry could be at a major turning point.  Though I have been cynical about their approaches thus far, I am looking forward to what happens next.  Will the NAS masquerade expand, cheap artificially-flavored whiskies grow in number, and aged single malts get pricier?  Or will consumers' palates and pocketbooks be better valued?  Or will the response be mixed among individual producers?

Where do we whisky consumers go from here?  We'll each have our own personal response: running after each new shiny bottle or being happier with less or ending the chase altogether.  We all have different financial and social circumstances motivating our relationship with our purchases.  The only approach I recommend is to be informed about one's buying decisions and seek out opinions independent from the industry.  Happy 2015 everyone!  It's going to be one hell of a year.

22 comments:

  1. Human beings are really good at deluding themselves into thinking that trends will go on forever. When nearly the entire world bought into the idea that housing prices could rise indefinitely, it's not too surprising that a much smaller number of humans were able to convince themselves that whisky prices could rise indefinitely.

    We had a nice debate about the value prospects of entry-level single malts shooting past $50 a bottle back in 2012 and I think we're finally seeing the end point. For at least 95% of people, $50 is just a lot of money to spend on a bottle of booze.

    http://cocktailchem.blogspot.com/2012/07/win-some-lose-some-thoughts-on-shift.html

    ReplyDelete
    Replies
    1. I hope we're seeing the end point. I've been hearing that some more brands are going to see price hikes this year. But that's anecdotal hearsay and I'm determined to stick to evidence here.

      We whisky folk really do have a skewed perspective on the price of a drink. $50 is a lot to spend on a bottle, which is why even middle class folks around the world are going for JW Red and Dewars White.

      I'm still having a difficult time seeing these large companies lowering the prices of their products, out of stubbornness or blindness or fear. If it happens then Yay! but I wonder if we'll just see a pricing plateau.

      Delete
  2. Well done, Michael. Interesting series on the potential sea changes in this segment. Jordan's comment above is very accurate - there is a history of market failure (due to optimism, the attraction of quick money) to recognize a shift indicating a peak has been reached. The whisky industry may have had their blinders on, merrily dancing through a mountain meadow of green grass and flowers, and tried to prop up their optimism through media releases. In reality, we may be seeing consumer preferences moving away from the "Dalmorization" of whisky and either reducing price paid per bottle, or migrating to a new direction (aged rums, tequilas, even rye and bourbon which are comparatively more moderately priced).

    ReplyDelete
    Replies
    1. I agree. Though, I suppose it depends on their purpose behind buying a bottle of booze. Is it for sensory enjoyment or to get drunk? If it's for the latter, everything is cheaper than whisky. But it's rare for something to match (good) whisky's texture and complexity. There are some great rums and brandies out there though...

      Delete
  3. Once again, amazing analysis!
    A few points that are rattling around in my head while trying to digest all this.
    1. Any single measure of change (exports in $, exports in volume, malt $, malt volume, sales to a given market, proportion of malt of total volume or $ sold, depletion of stocks) cannot capture the complex, dynamic reality, with built-in time gap effects. One needs to do what you did here - look at all of them in conjunction, and over a period of time (5-10 years or more), in order to get the picture. So press releases by companies or numbers quoted by eager retailers are garbage unless put in this context - they are 'lying with statistics' of the highest order!
    2. So, the malt volume growth seems to have stabilized or decreased, after a 72% increase 2008-2011. This means that the old stocks (>10yrs) depletion is temporary. I'm assuming that stock depletion is measured annually, which means that a steady-state depletion rate should be around 7-8% (guessing a mean age of >10yo stock being around 12 years). 18-20% annual depletion is a large number! Where did these old stocks go, especially in 2012, 2013, when we didn't see an overall increase in malt sales by volume? They went into the same bottles they went into in 2010,11,12: this is simply the industry catching up with the reality of the larger steady-state malt volume, created in 2010, until the higher current production volumes grow old. Nothing to see here, really - these numbers will get gradually smaller even without a decrease in malt sales volumes in the near future. There is no medium- or long-term shortage of malt. This is a short-term scarcity.
    3. The point above incidentally fully explains the big NAS push - this is not necessarily a new reality, unless we allow it to become one. It's an emergency, stop-gap measure on the part of the industry in order to fill up this unexpected, unplanned-for age gap! All the more reason to not engage in the "does age really matter" red herring! In five years this will be history. As we see, the industry adjusts really quickly with brands/expressions coming and going as fast as they can print new labels and the stores can put up a sale. In five years the ads in WA will be going on about how every drop of whisky waited patiently for a dozen long winters in order for the alchemy to take place and the butterfly to come out of the chrysalis blah blah blah.
    4. The big increase in malt volume was in 2010. However, pricewise there is an equally big increase in 2011 and subsequently. The industry saw the shift in the market towards malt whisky in 2010, and adjusted the prices accordingly in 2011 and continued to do so through 2013. The market responded, the malt volumes are now decreasing. The industry will do its best to not reduce prices, but that's probably unavoidable - unless there's a total collusion going on. Even with price collusion, in order to move a lot of stock - at the higher level created basically in 2010, and I'm thinking mainly malts here - they need to keep selling those bottles to people who need to be able to afford them; there's a hard ceiling there that they're up against.
    5. How does this all reconcile with our experience as whisky shoppers and consumers? Why have the whiskies been harder to find even though not more of them have been sold? Again, I think it's because we're looking at a *delay* in the market. The bottles flying off the shelves were those sold at the old prices, being replaced by the new, more expensive bottles. The figures reflect the whiskies produced/exported during each year, rather than those sold in the stores. And these figures show that people are not buying the new bottles as much as the industry would like. However much they'd like to sell Talisker 18 at $150 and Macallan 18 at $250, that's simply not going to work. We'll see more and more sales coming down the line.

    ReplyDelete
    Replies
    1. Thank you! My notes on your notes:
      1. I'm really thankful for all the SWA reports. I hope they don't take them off their site or put them behind a paywall because their own numbers conflict with the given narrative. I'm greedy and wish there were pre-2009 reports available.
      2. One argument I guess they can make is that people are buying more older malt than they used to, thus the higher value of sales and the depletion of older stocks at a greater rate than malt whisky overall. I don't buy it but I could see it as a go-to excuse. Sadly all of the >10yo data is lumped into one number.
      3. Yeah, they've been working on correcting for the gap since the greater depletions began. Or that was all whisky that was planned for The China Boom. Also, anecdotally, I'm seeing more places selling Talisker Storm selling for less than the 10 year old.
      4. I'd love to see prices come down, but I'm having a difficult time picturing that happening (even considering my Storm example). Market forces say it'll have to happen, but (as I mentioned on Twitter) retailers are going to get hit with the burden first.
      5. I agree. But from what I gather, the disappearing availability of independent bottlings is probably legitimate. They're getting fewer casks (though I can't prove it with data). Thus indie bottles are going to remain pricey......until the distilleries start having spares again.

      Delete
  4. 6. How about the perception that a lot more people are drinking single malts than did five years ago? Is that not true, or is it just not reflected in the volumes sold? Is it just an illusion created in the echo chambers of the social media? Are we looking at the same drinkers, just more vocal, and more willing to buy tickets for WhiskyFest? All of Diageo's problems would be solved if they are able to recruit a new generation of drinkers, in higher numbers than us. Looking at these data, it doesn't seem like they are succeeding.
    7. Finally, are we going to see a decline in volumes and sales, or just a new plateau? The industry would love the latter - the boom is over, fine, but the new reality happens at more than twice the level of five year ago. They'll take that! Are we going to see a correction followed by another sustained growth? Hard to tell, of course, and many factors are at play. I do bet on a five-year correction though. Like you say, 2015 is going to be a hell of a year!

    ReplyDelete
    Replies
    1. 6. I'm wondering if the number of hoarders grew. :) Or individuals' accumulation rates grew due to scarcity fears. Scarcity fear has created quite a mania in bourbon recently but I think the breadth of Scotch single malt's scarcity fear is older and wider spread, though perhaps not as focused on specific whiskies.
      7. The final 2014 numbers are going to be interesting, but 2015 will show if a pattern is developing. That SWA report will be out in December 2016. Until then......

      Delete
    2. Much of this old chestnut is relevant here:
      http://thekrav.blogspot.com/2013/04/whisky-with-florin-part-two-whisky.html
      In particular, the point about the democratization of information through blogs, twitter, etc. I think that this alone may be responsible for the new plateau of consumption and prices in single malts!

      Delete
    3. Certain writers and retailers mock blogs due to what they see as the relatively small blog readership. What they don't take into account is that the people who are reading blogs are the same folks who are buying loads of bottles per year. To ridicule blogs and their readership is incredibly naive and puts off many of the largest and best informed consumers.

      Delete
  5. While I expected the bigger brands to be pulling the weight of this "boom", > 60% is just crazy for four brands. What I am wondering is if since most of the "boom" was big brands, will most of the "crash" also be those brands?
    I'm thinking so, your data suggests that single malts were a fad for a lot of people, replacements for the usual American and Canadian brands, and with the rebounding economy a lot of people could afford to "trade up" to the slightly more expensive malt whiskies.
    But what I don’t think is going to go away is the enthusiast community, or rather, the higher end buyers. The desire for quality of uniqueness in consumable goods is part of a much larger, and longer cultural trend in the United States, and while whisky may have taken longer to catch up to food, it's definitely here to stay. Pappy and BTAC are still going to be statewide scavenger hunts for most people, single barrel scotch and bourbon programs for liquor stores are still going to be de rigueur, and blogs like this one are going to thrive as a very small, but very dedicated group of spirits consumers will stay long after the party ends and the guests go home.
    How wrong am I?

    ReplyDelete
    Replies
    1. As I've mentioned elsewhere, I think a lot of high end prices will be dependent on how much people have been drinking and how much they have been stocking away as investments, either literally or as a hedge against rising prices. A lot of whisky nuts probably have enough stocked away that they could stop buying for years yet keep drinking at the same pace. If the fear of missing out slips even a little bit, the frenzied buying could shift dramatically.

      I think it may be even more dramatic for 'investment grade' whiskies. As with many speculative bubbles, rising prices were predicated on rising prices. Even if prices simply stopped rising, that could lead to a lot of unloading as people try to get out of the market. Yes, there's the "you can always drink it" mantra, but I do wonder how many people would actually follow that advice.

      Delete
    2. I think those top four single malt brands got to the US market first, but they also all have massive marketing units keeping up them up at the top. Their familiarity will either protect them from the fall or, as Andrew referenced, will harm them as the non-geeks find interest in other booze.

      I'm curious how the hoaders/stashers/enthusiasts ultimately react to the price increases. Every anorak I meet has a larger collection than mine, which means they own decades' worth of whisky. Will some stop buying? Will many stop buying? Or will everyone remain hooked? I'd bet on the latter.

      The fate of "investment grade" whiskies seems very grim. "Investors" keep buying bottles at prices that are without precedence in the history of bottled liquid. I can't believe anyone thinks this is a sound idea.

      Delete
    3. Last year I spent on whisky (liquor, really) probably about half what I spent in 2013, which was less than I had the year before. I see this trend continuing. However, I'm still buying more than I drink - and I drink plenty. I'm looking forward to the point where drinking and buying will balance out, but I'm not there yet.

      Delete
    4. I keep spending less $$$ each year too. Sadly, because of a couple ill-advised dusty hunts, my overall bottle count might have been higher than the year before. This is the year I try to even up the purchase and consumption volume.

      Delete
    5. Personal update: In 2015 I spent on whisky 15% more than in 2014, by $ and by number of bottles. (Some of the purchases were spurred by having also sold some bottles.) For 2016 I commit to only buying as much as I drink. That is: 50 bottles, to make it a round number.

      Delete
    6. Shoot. If I'm reading my numbers right I bought more in 2015 than 2014, in volume and value. Though the price/bottle was almost identical. Hmm. I'm going to commit to one purchase per month. Maybe two. Damn.

      Delete
    7. Correction! I did not count my 2014 empties. In fact I purchased 22% fewer bottles of whisky in 2015 than in 2014 and 15% fewer single malts. I'm glad my four month purchase shutdown had some sort of effect.

      Delete
  6. Long overdue. Glad to see you took the ball and ran with it.

    ReplyDelete
    Replies
    1. Thank you, sir. As you had noticed, the information was all there but it was just so darn inconvenient to the boom narrative. If only some published or better-connected writers would keep running with this. There's more data behind industry paywalls that could blow this up even further. Or if those individuals are worried about their jobs then they can share the data with me anonymously, then we all could talk about the whisky industry like grownups.

      Delete
  7. There was afigure attached to commentary on Johnnie walker -12% in uSA in Diageo half year results that scotch was -19% but i am not sure whether for last quarter i

    ReplyDelete
    Replies
    1. Two weeks ago, Diageo revealed that their Scotch shipments to the US were down 9% for the entirety of 2014. Because they often report that their Buchanan's brand is doing well, it's possible that Johnnie Walker has dropped more than 9%. So your number could be similar to the year end number. If JW did drop that much, holey moley.

      Delete