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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.