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Monday, March 13, 2017

Scotch Market in Flux, Part 1: 2015 and Misplaced Optimism

Welcome to this year's Annual Scotch Report! And by "this year" I mean two years ago and also a little bit of last year. Yes, this blog lives in the past. Speaking of living in the past, this report arrives two months late because the source of my data arrived two months late. The good news is that some additional 2016 information became available in the meantime.

This annual series will be structured a little differently than previous years' reports:
Part 1—which you are currently reading—focuses on the 2015 export value and volume data reported by the Scotch Whisky Association. It's the post with the charts! I will also add my concluding thoughts at the bottom, rather than pushing them out to Part 3.
Part 2—posting on Wednesday—will be about the available 2016 data, as a new narrative began to form that year.
Part 3—Friday—features a MUCH expanded table of US single malt prices. The table itself is the star of the show, so there will be fewer distracting words and charts than last year's post.

All the data from today's charts can be found in the SWA's Publication section. Their 2009 through 2015 reports are available, so feel free to follow along!



So what's this "misplaced optimism" stuff? It's twofold.

Last year I estimated the final 2015 value and volume numbers and......the market did worse than I had expected. So now you can accuse me of being an optimist.

Also, the industry continued to distill vast, vast, vast quantities of whisky while the actual exported volume continued to drop. And none of the targeted emerging markets were showing any growth. This production flood reached its tenth year while distilleries continued to expand and new facilities came online. As I've referenced in all these reports, and as you'll see in the charts below, the so-called "boom" was never about substantial volume sales increases. Since I write from the prospective of the drinker/customer, I look forward to all the well-aged single malt that will result from this overproduction. If I was writing from the POV of the industry, I'd be asking, "What the f***?"

Now that I'm done with the intro to the intro, it's time for the intro.



As you may have gleaned, 2015 was another bad year for the scotch whisky industry. Export volume declined almost 3% compared to 2014, and export value dropped more than 2.4%. Both sets of export totals were at their lowest points since 2010. After malt exports climbed 9.4% in 2014, they dropped about 0.5% in 2015. Blend exports continued their decline, and were at their second lowest levels in the past nine years. Exports to the United States, the industry's most valuable market, showed a 2% decline in volume, but a slight gain in value, demonstrating another rise in price per liter. Production did decrease by 2.7%, but other than that, good news is hard to come by for 2015.

EXPORTS


As always, I'll start with the big chart. Feel free to click any of these charts to enlarge.


This graph is always more historical than helpful, but this time one can see a small correction happening. After every boost comes a drop, and 2015 continued the decline from 2011's peak. This graph is also a bit misleading, because it makes the volume gains look significant. To give a more accurate perspective, here's a graph that adds in export value and shows actual percentage growth and decline.


This is always a fun chart to whip out whenever someone gushes about The Boom. As I've said many times before, the great "boom" gains were in £££, not in quantity of whisky sold (blue line). Again, one can see the correction continuing on the red value line, even though the GBP/liter (green line) amount inched up in 2015.

Let's take a more relevant look at the movement with this chart:


Volume sales in 2015 were almost at the 2007 marker, but value remained higher due to the increase in GBP/liter. I'm of the opinion that export value will not drop to 2007's total thanks to the increases in price per liter. Unless there's an absolute disaster in the market. Meanwhile, I wouldn't be surprised if the volume movement remains in the -10% → +10% range for a very long time. Unless there's an absolute disaster in the market. What we're seeing thus far isn't a disaster or a bust, but a steady leak.

If anyone is still looking for a positive note to 2015, I can show this:

I wouldn't say this is exactly comforting, but at least UK scotch consumption did not decline in 2015. It actually increased 2% over 2014's total. It's still the second lowest amount I've yet found, but I wouldn't be surprised if there was even more drinking going on after Brexit passed in 2016. Meanwhile, this 400,000+ liter rise in UK's scotch drinking doesn't even nudge the 9,500,000 liter drop in exports.


So, yes, 2015 was a bummer. Let's take a look at a few elements from the decline.

MALT AND BLENDED WHISKY SALES




In 2014, malt whisky exports experienced a big jump in value and volume (10.9% and 9.4%). 2015 stopped that growth in its tracks. Both volume and value dropped a half percent. Yet, the chart above shows a slight increase in the weight malt whisky carries in exports. And this is because...


...blend exports continued the decline that began in 2014, losing another 3.5% in volume. Because blends make up such a huge part of the market, any decline on its part brings exports down as a whole. As you see here, the volume has dropped below 2008 and 2009's levels. And, like last year, the decline in blend sales is not being offset by enough of an increase in malt sales. In fact, as mentioned above, malt volumes also dropped in 2015. This shows, once again, that this decline in blend sales was not due to blend drinkers switching to single malts. People were just buying less scotch.

Here are a pair of charts showing totals rather than percentages:

One can see the malt sales plateau and the gradual blend descent. I don't think there's enough information here to extrapolate how dire the blend issue is, but if blend sales continue to decline for another couple years, some companies may need to start rethinking their bread-and-butter blend business.

AGED MALT WHISKY STOCKS


Within the next two years, aged malt whisky stock data will start to get very interesting. The seeds of this change are already here, hidden in the next two charts.


This is the sort of chart that gets some reactive people nervous. This one too:


But there's a story going on here that the charts don't tell. So let me do this in a lower tech fashion:

Decrease in remaining >10yo malt stock
2012 - 22,361,646 liters, -7.74%
2013 - 20,405,088 liters, -7.65%
2014 - 17,342,980 liters, -7.04%
2015 - 12,064,853 liters, -5.27%

Two things are going on in this list. Firstly is the gradual softening in the decrease of >10yo stock. But more importantly, 2015 showed the most reserved abatement yet. So, what happened? Was much less >10yo stock emptied in 2015 than 2014? Nope.

>10yo Malt stock emptied
2012 -2.71% compared to 2011
2013 -0.54% compared to 2012
2014 -4.34% compared to 2013
2015 +7.28% compared to 2014

Thus, more 11+ year old whisky was emptied in 2015, yet the decrease in remaining 11+ year old stock lessened.


Because the big production boost didn't kick in full force until 2007, this might mean that the 2003 and 2004 malts were well managed and remained less depleted than previous years. Now, imagine what will happen to the "Remaining Malt Stocks older than 10 years" chart once the production boost kicks in. I'd venture a guess the 2016 graph will start to show a flattening valley, and by 2018 we'll see the line start to rise. If volume sales don't increase more significantly than they did in the faux-boom, then we're going to start seeing A TON of well-aged malt whisky within 5 years. If this continues further there is going to be an embarrassment of oversupply in 10 years. Even if industry-wide production is cut in half in 2017, it would be too late to stop The Loch.

To put it another way: In 1983—at the low point of exports and production—there was 2.7 billion liters of whisky stock in warehouses. In 2015 there was 3.9 billion liters. The difference in stock: 1.2 billion. The difference in annual exports + domestic consumption for the years 1983 and 2015 was only 76 million (or 0.076 billion). That means the stock increase was almost 16 times greater than the consumption+export increase. Who do they think is going to buy all that whisky?

Probably not the United States.

EXPORTS TO THE UNITED STATES




The decline in export volumes to the United States continued apace in 2015, having now dropped 10.5% from its peak in 2011, falling quicker than the non-US export markets' drop of 8.1%. The value of US exports remains afloat thanks to the highest price per liter yet, with that price increasing at more than twice the pace of the UK's inflation rate. This in turn softened the entire export market's value drop. While the US (the largest value market) had a value increase of 0.14%, the rest of the market's value fell by 3.14%, resulting in an overall 2.4% decrease.



FINAL THOUGHTS ON 2015


2015 was another "crap year for the scotch whisky industry". India, the largest emerging market actually saw a loss in both value and volume. China remained a mostly negligible market, ranking 21st in volume and 20th in value. So when you hear/read people citing China as a major reason for the slump, just know that it was never a successful export market to begin with. It may be holding back major growth, but it's not causing the overall drop.

The actual largest existing export countries are the problem. In 2015, 8 of the top 9 export volume markets fell, and only 1 of the top 12 value markets showed significant growth. France, the only volume market larger than the US, had an even worse whisky year than America. So everyone needs to stop blaming China for this particular problem.

Blend sales are also responsible for pulling down the final numbers. When a 75% portion of the marketplace bleeds steadily, that should eventually become a cause for concern. Malt whisky sales remain excellent overall, and are the only positive thing remaining from "The Boom".

So where are the customers going? Bourbon, perhaps. In 2015, the value of American whiskey sales in the US rose 7.8%, while its export volume grew 5.4%. Between 2005 and 2015, American whiskey export value rose 110%. To put a finer point on it, between 2011 and 2015 scotch export volumes to the US dropped 10.5%, while American whiskey sales volumes with in the US rose 24%. Around here we call that an asskicking.

Former scotch drinkers may also be switching to Irish whiskey. Though Irish whiskey is a smaller industry than Scotch whisky, it's not as small as it used to be. The Irish Food Board announced that Irish whiskey export values have increased by 60% since 2009. And according to the Irish Times (and IWSR), Irish whiskey export volume to the United States increased by 19% in 2015, and was up 409% since 2005.

So the competition was clear and the competition was winning. Fewer bottles of scotch were being sold. Cheap blends were slowly failing while malt sales weren't plugging the leak. Tremendous quantities of spirit were being produced without an audience to drink it. 2015 continued 2014's losses and there was nothing on the horizon to prevent the following year from continuing the fall. Something unprecedented, something outside the whisky industry, would be needed to stem the tide in 2016.

13 comments:

  1. All in all, I consider this as good news.

    Maybe the major producers start realizing at some point that we want awesome quality hooch instead of 'yet another vague release that doesn't add anything to the portfolio'.

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    1. I think they'll only recognize it if or when it makes financial sense to them.

      While I understand a corporation desire to expand a brand, many of the NASes make no sense to me. I don't mind two types of NAS bottlings: 1.) a starter whisky priced lower than the youngest age stated whisky in the portfolio; 2.) cask strength batches, as long as they're not priced as high as an 18yo malt. NASes that seem to work fine are things like Bowmore Legend (RIP) and Aberlour A'bunadh (or Dronach and Goyne's CSes). But then again, Benromach 5yo works even better. Honesty and all that.

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  2. One of the most interesting things about now compared to the previous boom and bust is that the industry is far more consolidated now. The first whisky loch was more understandable because there was far more fragmentation, which prevented coordinated action from restraining production until the bottom really fell out. Now Diageo and Pernod Ricard should have had far better data and been able to act accordingly, but it seems that they were still unable to correctly predict the market.

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    1. Agreed. I'm curious to see how this consolidation plays out: When will they cut production quantities? Are they currently banking on a future boom in the next decade? Do they still see China as the cure to all the sales ills? How many distilleries will they close once Death Stars (like Roseisle) result in redundancies?

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  3. I interpret the data in the 1st part as a result of the interplay between demand and prices. It looks like the industry has found the top of the market, the point where raising prices leads to reductions in consumption. They'll now try their best to keep the current level as the new normal, but expect to see more and more price reductions, sales, the sort of thing we were used to pre-2011. (Except maybe in the super-old whiskies, 25yo+, where the racket will keep going for a few more years.)

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    1. I knew the jig was up when it became relatively normal for entry-level single malts to be priced at $60 (*cough*Tamdhu*cough*).

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    2. @Florin - Yeah, I think the ultra-luxury whisky market will continue for a while. Whisky Advocate is banking on it!

      You're probably correct about "the point where raising prices leads to reductions in consumption". Highland Park did a very good job with that with their 18yo, as much as I may personally bitch about it. This is an approach that Suntory did not utilize with their Japanese single malts until it was much too late. But now that the Scotch industry has met that breaking point, it will be interesting to see how each distillery/brand responds.

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  4. As Florin said, the takeaway for me is that Scottish distillers, through insane amounts of price increases, forced consumers towards alternative products; bourbon, rye, Irish being alternative whiskeys with *much* better value propositions.

    It'll be interesting to see if a correction of prices can save them, or if they've lost all those scotch drinkers for good. The fact of the matter is that whisky is a consumable, *not* a durable good. This isn't iPhones they're selling, and you can't turn an entire product segment of consumables into luxury goods, especially when other, similar, and high quality items exist in the "disposable goods" price bracket.

    Can't say I feel sad for Scottish producers-- they simply fucked themselves with their own greed. Looking forward to the returns that patience sows.

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    1. This is why I've kept track of who was clearly out to hoover money out of the fools and who wanted to play the long game by maintaining established customers. With that said, it's been very difficult for a lot of producers to sit by while the secondary market pulled in piles that should by all rights have been going to the distillers, but it's tricky to do that without alienating the less fervid customers.

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  5. "This is why I've kept track of who was clearly out to hoover money out of the fools and who wanted to play the long game by maintaining established customers."
    And how are they doing in the "whisky loch" picture?

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