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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.


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.


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.


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.


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...