...where distraction is the main attraction.

Friday, January 15, 2016

Scotch Ain't Dead Yet, Part 3: 2015 and The New Normal

Having experienced two stomach viruses (and maybe a poisoning) over the past three weeks (including 3 hours hooked up to an IV yesterday), and thus enjoying all of three fluid ounces of single malt over the past four weeks, I arrived at this series finale feeling as if I'm looking at all these whisky concerns from the outside.

Scotch is a commodity and there are A LOT of publicly traded corporations (nearly none of which are Scottish) involved in getting it to our whisky cabinets.  All of these interests make decisions not out of the good of their hearts, but to increase the Accounts Receivable line on their balance sheet.  And no matter how many gorgeous photos of cask-packed warehouses and weather-molded old Scot faces or articles waxing romantic on alchemy or crystal clear Highland water sources are published by marketing divisions, the producers, bottlers, importers, distributors, and retailers are all just trying to keep their jobs and figure out how to manage what has turned into an international billion dollar industry.  To paraphrase the Vulcans, "The needs of the many outweigh the needs of the few, and if you're a long time whisky fan you can go fuck yourself."

Part 3 did indeed become a little longer than I had intended (again).  Here's how it's structured: First, I have a moderate-length thought piece (read: data free bitch session).  Next I do some analysis on the one good bit of 2015 data released by the SWA, concluding with two charts(!) reflecting on the 2014 and 2015 numbers.  And then we will all go and have ourselves a good healthy weekend, okay?

Tiers of Scotch, Tears of Grief

Scotch whisky had a bad year in 2014.  Export values and volumes fell relatively abruptly after a few decent years.  At the heart of this decline was a £424million drop in exported blended whisky.  Single malts sales continued to go up, as did their prices, but that could not stop the overall drop.  And as the numbers showed, many more people are leaving blends than are picking up single malts.

I want to look at this from an angle we whisky geeks rarely discuss.  Most of the drinking world, including people with and without considerable means, rarely spend more than $25 on a bottle of booze.  So keep that in mind: $25.

Think about what blends are widely available at $25.  Johnnie Walker Red Label, Dewar's White Label, Cutty Sark, J&B.  Think about the quality, the flavor, of those blends.  I'm not talking about back in the day.  I'm talking about right now.  Right now, they are awful, awful, awful drinking options.  Yes, one could argue, they're not made to be neat sippers.  But their raw junk content can be tasted through cocktails, ice cubes, water, club soda, and Coca-Cola.  And they are amongst the ugliest choices for shots.

Think of the quality gap between Dewar's and Old Grand Dad 114.  Or a barely 3 year old Red Label and a 12 year old rum.  They're about the same price.  And, again, if shots are the game, Jameson's, Paddy's, and Tullamore Dew make for a softer (dare I say, smoother) experience thanks to their third distillation.  Hell, I'd do a shot of $25 vodka before I'd do one of Cutty.  Clan Macgregor anyone?

But most clearly, when it comes the $15-$25 pricing level, bourbon whiskey has scotch whisky beat by miles in scotch's largest export market, the United States.  Even in Europe: Buffalo Trace, Bulleit, Maker's, and Wild Turkey can be had for less than €30.  A similar situation exists in a number of Asian countries as well.  Bourbon's character is loud, sweet, and oaky.  And not scotch oaky.  Kentucky summer oaky.  When it comes to the quality within the price range that appeals to most people, scotch cannot compete with bourbon.

Back to scotch.  Where do people with inquisitive palates go when they want to move into single malts without spending much more?  (And let's not call it "graduating" into single malts. Tens of millions of blend drinkers would happily beat the life out of every last patrician single malt sipper who described them as a lesser person.  Let's demean the whisky, not the people.)  For $5-$10 more, maybe there's Speyburn, Glen Moray, and Tomatin.  The average price of Glens Livet, Morangie, and Fiddich are near $45 now.  Many of the new NAS bottlings are at that level or higher.  That is not the same as spending $25.

So once again we arrive at the tier problem, mentioned in Part 2.  Ten years ago, single malt drinkers were able to move around a brand's range with small price steps (think $50→$75→$100→$200).  Today, it's $50, $200, and $1,000.  The mobility is vanishing.  On a similar note, the financial significance of the jump from $25 to $45 should not be overlooked, and I think it has.  Maybe the Red Label drinker can find Black Label on sale sometimes, but if he's just looking to relax or get a comfy buzz (the original draw to this drug) then he can find many non-scotch options at the lower price ranges.  That guy represents most of the drinking planet.  If you can't meet his needs then he will go elsewhere.

Of course, the corporations who own both "elsewhere" and scotch aren't hurt as much as we wish they were.

And now, some 2015 stats

Welcome back to 2015!  Lemmy Kilmister, David Bowie, and Alan Rickman are all still alive and......goddamn it.
I was able to stiff upper lip it for the first two, but not when Sheriff Colonel Brandon Jamie Marvin Gruber Lazarus Snape left us.

I'll start this section over again.

Welcome back to 2015!

The Scotch Whisky Association released their "First half of year exports" 2015 document almost two months before they published the final 2014 export tallies.  What the report does not tell us about is single malts or blends or stock or production or the UK or most countries really.  It's a two-page list of the Top 20 export markets in volume and value.  If you think that doesn't sound like much on the surface, you're right.  BUT.  The Top 20 export markets were responsible for 75.6% of the total export value in 2013.  In 2014, they did 76.8% of the business.  Thus what happens to the Top 20 is mostly representative of what's going on with the entire market.  I encourage you to download the short PDF and follow along.

I'll take a look at 2014 for a sec, so that I can set up 2015.  In 2014, scotch's export value was 7.3% lower than it was in 2013.  (For the top 20 markets, the loss was about 6%.)  The first half of 2014 was really rough for the top 20, the value dropping 9.25% lower than the previous year's first half.  The largest market, the US, dropped 16% on its own.  The second half was less brutal, showing a 2.57% drop compared to 2013's second half.  The US dropped just a percent.  I've looked at previous documents and it appears as if the second half of every year is better for sales than the first half.  But that also means that each year there are higher expectations for the second half.

In the first half of 2015, the top 20 export markets dropped 1.7% in value compared to that difficult first half of 2014.  But that 1.7% wasn't evenly spread out.  The top 9 markets all suffered losses.  Meanwhile only 3 of the next 11 were down.  The top 9 fell 3.75%, while the next 11 were up 4.75%.  Singapore, the third largest market, appears to have stabilized a little after an awful 2014, being down less than 2% compared to the previous 46% drop.  China had a major rebound, growing almost 46% and launching itself onto the list.  Meanwhile Taiwan gave back some of its big 2014 gains.  Panama and South Africa, which had bad second halves last year, had bad first halves this year.  And Golden Boy USA was down almost a half percent in the first half of 2015, as opposed to the 16% tank last year.

While the larger markets struggle to match last year's weak numbers, the smaller markets (within the top 20) are mostly not having that issue.  I'm sure there are some analysts who are keeping hopes up by reminding everyone of a stronger second half.  But then again, if every year (including last year) has a stronger second half then the numbers still have to top that.

Decoding the volume sales from this document is difficult because the SWA for some reason uses a different metric than on their year end data.  They use "70cl BOTTLES @ 40% alcohol by volume" as opposed to "Liters of Pure Alcohol" (LPA).  So it's not the same as the data from my Part 1 graphs.  In any case, using this other measurement, the volume sales for the top twenty in the first half of 2015 was almost identical to the first half sales in 2014.  I'm talking about a 0.02% difference.

The one thing I find totally fascinating is the decline in value per bottle:
1st Half of 2014 vs. 1st Half of 2013: -8.3%
2nd Half of 2014 vs. 2nd Half of 2013: -3.6%
Overall 2014 vs. 2013: -5.8%
1st Half of 2015 vs. 1st Half of 2014: -1.7%
1st Half of 2015 vs. 1st Half of 2013: -9.7%

I'm not sure what happening here, but it's a real thing.  The value per LPA metric has been dropping annually since 2012 as well.  Here are some more value per bottle declines in the first half of 2015:
Spain: -19%
Singapore: -8%
Japan: -13%
Mexico: -15%
France: -4%
United States: -0.6% (though, as we saw in Part 2, this is not being reflected at the retail level)

Scotch whisky at point of export is getting cheaper.  Looking at 2015 in a bubble, since we'll have no official word of malt vs blend sales for eleven months, one wonders if malt (the more expensive sibling) sales dropped as blends (cheaper) grew.  But if we look at historical numbers, the value/liter of blends have been dropping steadily since 2012: £12.12 to £11.55 to £10.69.  Perhaps they continue to drop?  Are lower quality blends and younger (or NAS) single malts being sent out in larger quantities?

I'm not sure of the answer to those questions, but what we're seeing in The Big Picture is a market correction.  For the export market as a whole it's a return to the numbers of the Old Normal, before the big 2011 jump.  For the US market, it's a return to the totals from before the sizable 2013 bump.

To help, here are some visuals.  These are my Part 1 charts now extended to 2015 utilizing the percentages from the first half of the Top 20 export markets (which represent 75-80% of the entire market).  Again, these are not the final 2015 numbers, just an estimate based on what's been reported thus far.

What I'm not seeing here is a crash or recession.  I'm seeing a calming, some plateaus, a stabilization of volume sales, and an easing in the value per liter of scotch.  Perhaps I can even spot a market establishing a new normal, not as high as the heady days of just yore, but much stronger than a decade ago.

As I showed in Part 2, whisky consumers in the US aren't seeing this play out.  Because there are so many separate moving pieces in this country's daft multi-tier liquor sales structure, there are many companies involved in the price inflation, and I'm not sure which one will be the first to back down.

Of course, we whisky fans can back down first, but how much of a dent will that really make?  It's the new single malt drinkers, the ones who came to whisky when it was hottest, who have a different vision of the value of whisky, who will have to stop buying.  But why should they?  Talisker 18 is great, hasn't it always cost $150?