the business of whisky

8/21/2019 The Business of Whisky

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FT SPECIAL REPORT

The Business of Whiskywww.ft.com/reports | @ftreportsWednesday December 17 2014

Inside

Drink it like BeckhamFootball star lendshis name to the launchof Haig Club singlegrain whiskyPage 2

Bubble trouble aheadThe market forcollectable malts isstarting to look frothyPage 2

Losing the tasteDemand in emergingmarkets hit by conflict ineastern Europe and

Latin America slowdownPage 3

Over the bumpDrinkers to drive USsales to furthermomentum afterinitial early year dipPage 4

For an industry that hasenjoyed years of heady growth,the newsthat exportsof Scotch whisky fell morethan a tenth by value in the

firsthalfof2014was sobering.Asthisspecialreportexplores,thefall

hasraised questions aboutthe strengthof demand for whisky in important

mature markets such as the US, andabout the prospects for emergingsources of demand such as China onwhich the Scotch sector has pinnedmuchofits hopes.

Anysustainedslidewill raise doubtsabout the likely returns on what hasbeen an extraordinary surge in invest-ment in distilleries, warehouses andbottling operations across Scotland inrecent years. At least £2bn in newinvestmentis setto flowintothe sectorin Scotland over the four years from2013, according to the Scotch WhiskyAssociation.

About30new distilleriesare planned,under construction or have recentlystarted production, the SWA says. Theburstingof whiskybubblesin thepast,however, hasshownall tooclearlythatdistilleriescancloseaswellasopen.

Still,industryleadersinsistthereis noreason to doubt the underlying funda-mentalsofthe whiskybusiness,or tobeconcerned that there will be a lake of unwantedScotch.

Pierre Pringuet, chief executive of PernodRicard, theFrench drinksgroup

that owns Chivas Brothers, says hiscompany sees no need to change itsinvestmentplansandthat itsproblemsstill hinge on the shortage of stock. “Idon’tthink a whisky lochis somethingtoworryabout,”MrPringuetsays.

Scotch is still placed to benefit fromthe emergence of millions of aspira-

tionalmiddleclassconsumersinemerg-ing economies, he says, and whileChina’scrackdown onconspicuouscon-sumption by officials has chilleddemand,the painwillbe temporary.

“China is definitely taking a longertimethanwe expectedinitially,buttheprospects for the Chinese market are

huge,” says Mr Pringuet, who thismonth was appointed SWA chairman.“Thereisnopanicatallaboutthat.”

There is also comfort in recent datafrom the US, which, with more than£800minsalesin 2013,iseasilyScotch’sbiggestexportmarket.

Some in the US market say Scotch’s

Distillers look beyond sales fallExports fell in thefirst half of this year, buttheindustry is bullish,says Mure Dickie

image hassufferedin comparisonwithmore lively US whiskey brands. Asdetailed inthis report,US InternationalTradeCommissiondata suggestScotchhasshruggedoff thesharp fallrecordedinthefirsthalfandisnowontracktotoplastyear’s$1.2bnrecord.

Howlongthe reboundcontinueswilldepend in part on how innovative thesometimesstaidwhiskysector canbe inproduct development and marketing.In one of the bolder moves of recenttimes, some leading drinks companiesare looking to single grain whisky toboostgrowth.

Grain whisky, which is produced inlarge industrial “Coffey” stills, is the

generallyoverlookedmainingredientinblends,butproponentssayit canstandaloneas adrinkcategoryalongsidesin- gle malts. And w ith a relatively mildtasteprofile,it canpotentiallyappeal toconsumersturnedoff bythe oftenpun- gent flavours of malts. It is also moreeasily matched with foods and couldbecome a flexible ingredient in cock-tails.

Drinks groups are also being moreinventivewith theirmarketing, toboostbr and l oya l ty a nd encour ageacceptanceof newproductssuchas theintroduction of whiskyexpressions(orversions) that do not rely on an agestatement.

Engagement with international con-sumers now includes William Grant &Sons’pop-upeventsintendedto mimicthe experience of a distillery visit andDiageo’s rollout in Chinese cities of Johnnie Walker House outlets dubbed“part-museum, part brand experienceandpartretail”.

“Thelong-termfutureof ourindustryis very, very strong,” says LaurentLacassagne, chairman and chiefexecu-tiveofChivasBrothers.

Here’s looking at ewePremium brands areincreasing in popularityamong Shanghai’sgrowing elitePage 4

Newmarkets: a workerpours a glassof whiskyat a distilleryin Taiwan — Reuters/NickyLoh



2 ★ FINA NCIA L TIM E S Wednesday 17 December 2014

TheBusinessof Whisky

Grainwhiskyisthe unsungheroof Scot-land’sspiritsindustry, usually relegatedto a quiet role as a core constituent of blendedScotch —but thatlowprofileissomething David Beckham hopes tochange.

The English footballer lent his nameandconsiderablefame tothe launchof Haig Club, a single grain whisky thatdrinksgroupDiageosaysis goingto beamarketing“game-changer”forthe category.

“Thereis a whiskyrenaissancegoingon and we feel that single grain is thenext bigtrendthatisabouttocomeon

to the scene,” saysKathy Parker, seniorvice-president at Haig Club, which isalso backed by British entrepreneurSimonFuller.

Diageo isnot theonly whiskypower-house excitedabout singlegrain.Inde-pendentdistillerWilliamGrant & Sonsisrampingup promotionof itsownnewbrand,GirvanPatent StillSingleGrain.

The family-owned company claimscredit for pioneering single malt as asalescategorywith Glenfiddich,whichitstarted promoting internationally in1963. Glenfiddich now sells more than1m 9-litre cases a year and KevinAbrook, William Grant’s global whiskyspecialist for innovation, says Girvansinglegraincouldbejustassuccessful.

“Thebigideawastocreatea thirdpil-larof Scotch.Youhaveblends,you havesingle malts, but nobody was reallydoing anything with single grain,” MrAbrooksays.“Wouldn’tit be great ifin50 years’ time you could establish

anothercategoryand haveanothermil-lion-casebrand?”

A first step to establishing the newsinglegrainsis explainingto consumersthe distinction between them and themore famous single malts. While maltwhiskyis madefrombarleyin batchesusing distinctive copper stills, grainwhiskyis madeina continuousprocessusingan elaboratecolumn contraptionknownasa patentorCoffeystill.

The technology, developed in theearly 19thcentury, turns grainssuchasmaize or wheat into a relatively cheapandpure spirit,which traditionallyhasthenbeen marriedto moreflavoursomemaltwhiskiesaspartofablend.

Butsomedrinkershavealwaysappre-ciatedgrain’s mildertasteand nowDia- geo andWilliamGrant seeit asa waytowidenScotch’sappeal.

Pungentsinglemaltscan putoff someconsumers, making single grain a gen-tlerintroductionto Scottish spirits.Sin- gle grainsalso have potentialfor use incocktailsthat amalt mightoverpower.

With Haig Club, Diageo is targetingdrinkers in China and other countrieswhere whisky is not just drunk on itsown, hoping that its taste will comple-ment food.Andthe Beckhamtie-up isintended to help it reach people whohavenevertriedwhiskybefore—or whohave,butdidnotlikeitverymuch.

“We wanted to bring in a brand thatwouldhelpus torecruitthe nextgenera-tionofwhiskydrinkers,”Ms Parkersays.

The veryaccessibility of singlegrainscreateschallenges,however.Some inthewhisky business are not convinced the

category willeverrivalsinglemalts,say-ing grain’s relatively restricted rangeof flavoursrendersit muchlessinteresting.

Itisa chargegrainadvocatesarekeento reject. Rather than new drinkers,William Grant is targeting whiskyenthusiasts as its primary market forwhat Mr Abrook calls the “crèmebrûlée”flavoursofGirvansinglegrain.

Onetoolof conversionis asamplesetthat allows them to compare the lightand fruity spirit that emerges from a grain still with the more complicatedflavours thatcome fromlater exposuretoAmericanoakcasks.

Previous efforts to promote grainwhiskies in the mass market have hadlittle lasting impact, however. WilliamGrant’s own Black Barrel brand,launchedin 1995, wasnot a success. “It justdidn’tcatch on,”admitsMr Abrook.

Still, Mr Abrook is sure the market

haschanged,and NickMorgan,Diageoheadofwhiskyoutreach,agrees.There is a buzz around single grain

amongbartendersand enthusiaststhatwas lacking even a few years ago, MrMorgan says. “What’s different now isthere appears to be real interest outthere.”

Beckhamhelps kick off promotion forsingle status

Scotch

The ‘single grain’ is being

pushed as the next big

thing to a rising

generation of drinkers,

writes Mure Dickie

1963Year Glenfiddich

was actively

marketed

internationally

1mCurrent annual

sales of 9-litre

cases of single

malt Glenfiddich

Thedistilleryvisitorcentreisa standardfeature of Sc otland’s whisky industryanda great wayto build brandloyalty.Butas aninternationalmarketingtoolithasonemajor limitation — ithasto belocatedin thedistillery.

That is quite a disadvantage giventhatonlya small fractionof theworld’swhisky drinkers are likely to travel toScotland,nevermind tothe oftenincon-veniently located distilleries on whichmuch of the sector’s romantic charmrests.

But the way independent whisky groupWilliamGrant& Sonsseesit, evenif the customer cannot visit the distill-ery, then at least some of the distilleryexperience can be brought to the cus-tomer.

That is the thinking behind the

pop-up Glenfiddich Experience rolledout by the company this year in Thai-land. Setup inBangkok’sgrandlycolo-nialNeilson Hays Library, thefive-dayevent offered “tours” of the whisky-makingprocess withthe aidof interac-tivetechnologyand tastings.

Marcus Low, regional marketingmanager, saysWilliamGrant hasfoundthattakinggueststo theGlenfiddichdis-tillery in northeastern Scotland’s Duff-town tends to make them “huge advo-cates” of the brand. “That’s why wewanted to bring the distillery experi-ence to those who are not fortunateenoughtogetthereyet,”hesays.

About 1,000 visitors attended thepop-up event and150 wereinvitedto adinnerpreparedbya celebrity chefwhomatched Glenfiddich expressions (dif-ferentversions ofthe singlemalt) withwhisky-marinated foiegras terrineandawhisky-flamedoatmealdessert.

Matthew Fergusson-Stewart,Glenfid-dich regional brand ambassador, sayshighlights included “3D” distillery artandinteractive tablesthat toldvisitorsmoreaboutthewhiskytheyweredrink-ing.

The GlenfiddichExperience ishardlythefirsttotrytogivevisitorsaflavourof whisky making from afar. In the Scot-tish capital Edinburgh, The ScotchWhisky Experience takes visitors on atour through the various stages of dis-tilling that ends surrounded by golden

bottlesof theworld’slargestScotch col-lection.Established by19 whiskycom-panies in1987 asa heritagecentre,theExperience hasbecome an attractionin

its own right, with more than 308,000visitorsin theyear toend-November, of whom157,000tookthetour.

Julie Trevisan Hunter, head of mar-keting at the Experience, says it hasbeeninvestingheavilyoverthe pastfiveyears and aims to be a vital marketingtool for the Scotch industry. “We alsoprovidea much-neededwhiskydestina-

tion for those people visiting Scotlandwhoaren’tableto traveltooutlyingdis-tilleries,”shesays.

As well as offering a restaurantboasting 365 whiskies and whiskyliqueurs, the Experience hosts weeklytastingsessionsandan annualtwo-day

Distillers’Fair.Such urban substitutes have hardly

eclipsed the now traditional distilleryvisitor centre, however. Many of theflock of start-up distilleries openingacrossScotlandsee visitorcentresas animportant sourceof revenueandexpo-sure evenbefore theyhaveany maturewhiskyto sell.

Established visitor centres are beingupgraded. At the beginning of Decem-ber, independent distiller Edringtonheldthe groundbreakingceremony fora new£100mdistilleryandvisitorcen-treforitsMacallansinglemaltbrand.

Oneway to build customerloyalty istoallowvisitorsto stayon site.LastyearArdbeg Distillery on the island of Islayrestored a cottage on its grounds andnowrentsitouttovisitors.

Distilleriesare alsomakingincreasingefforts to offer varied experiences for

visitors who range from keen drinkerstotouristswithlittlepreviousinterestinwhisky.

From January, the free tour of Glen-fiddich’s Dufftown home will bereplacedwitha choice of optionsstart-ing with a standard £10 tour and the

chancetoshelloutafurther£25todrawtheir own 20cl bottle from a selectedcask.

For £35 visitors can have a tutoredtasting that introduces them to thebrand’s Solera ageing techniques andthen blend their own version to takehome. The keenest tipplers can go forthe £95 “half-day immersive experi-ence”thatalso includesa tastingclassattheGrantfamilyhome.

Meanwhile, the Glenfiddich Experi-encecertainlylooksset totravel.

The company has replicated theExperience for nine days at a depart-mentstorein theSouth KoreancapitalSeoul, and marketing managers arelooking atrollingit outin China,MexicoandVenezuela.

“The Nordics as well,” says Mr Low.“They are very excited to look at it fornextyear.”

A wee dram of the real Scottish distillery experience

Marketing

The industry is finding

inventive ways to recruit

new advocates of its brands,

says Mure Dickie

‘Wewantedto bring the

distilleryexperience to

thosewho arenot fortunate

enoughto getthere yet’

Today’srain is tomorrow’swhisky, goesthe old Scottish proverb. But after aremarkableboomin thevalueof singlemaltsin recentyears, economicfactorsmaynowpoint tostormierdaysahead.

Collectablewhiskieshave emergedasthelatestbeneficiaryof theglobalboomindemandforluxurygoods.

The clamour by international inves-torshitthe headlinesthis January,whenacustom-madeLaliquecrystaldecanterof Macallan single malt fetched$628,000 at a charity auction atSotheby’sHong Kong.

“The market is very, very buoyant,”says Martin Green, head of whisky atBonhams, theauctioneers.“It hasbeenover the past few years. Interest fromthe Far East certainly has been risingandwe havehugeinterestfromAsia.”

According to the Apex 1000 index,run by consultancy Rare Whisky 101,

thepricesof the1,000 mostcollectablebottlesofScotchsingle malt rose by219per cent between 2008 and the end of November2014.

Famousnames suchas Macallan,PortEllen, Brora, Dalmore and Bowmorehave risen the most and the Apex 100indexof the mostdesirableexpressions(versions of different whiskies) hasrocketedby 473.5per centsince2008.

Theboomhasbeen drivenby a scar-cityof sufficientlyaged stock. Whiskydistillers50or 60yearsago didnot fore-seethe vastscale ofdemandthatexiststoday, and much of the stock they didputintobarrelsbackthenhasbeenbot-tledanddrunkalready.

Onlyrecently havethe distillersbeeninvesting in sufficient quantities toreflectthe surge indemand,withup to£2bnput by producers intoexpandingproduction capacity, according to theScotchWhisky Association (SWA). But

with a turnround time in the decades,therewillbe along wait beforetheycandeliver whiskies that command strongprices.In themeantime,high-endpro-ducers have been keen to promote theexplosion in prices for their rare oldexpressions,hoping to benefitfrom theresultinginterest whentheypricetheir

moreaffordable mass-marketofferings.But now some experts are warning

that collectable whisky prices look tohave hit “bubble” territory, in spite of the combination of supply constraintsandboomingdemand.

Ian Buxton, whisky consultant andauthorof the bestselling 101WhiskiestoTry Before You Die, says the fine wineinvesting market has already come off theboilin recentmonthsandwhiskyissetto follow.

“[Rare whisky pricesare]classicbub-blestuffandit’srun upby areally smallnumberofpurchasers,”he says.

Headline figures for whisky returnsoften fail to factor in the high transac-tionalcosts involvedin buyingand sell-ing suchitems, creatingthe impressionthatreturnsare higherthan theyreallyare,hewarns.

Auctioneers will typically charge upto25 percentof thevalueofwhiskiesin

order to sell them. Online auctionhousesmaybecheaper— oftencloserto10percent—but couldfailtoattractthesame attention. Meanwhile, whiskytransportation and storage costs canalsobehigh.

MrBuxtonsaysclaimsby promotersthat if you invest and prices collapse

thenyoucan,at least,drinkthe whiskyare a “fig leaf of a get-out clause” forthosequotingtheveryhighestprices.

There is evidence that a slump isalready takingplacein theretailwhiskymarket. In September, the SWArevealed thatwhisky exportshad takena hit in the first half of 2014, with aflurryofmarketsreportingdouble-digitfalls.Exportstothe biggestScotchmar-ket,theUS,fellby16per centcomparedwith the first half of 2013. Exports toSingapore, another big market, fell by46percent.

Butamid thebroadergloom,the mar-ketforrarewhiskiesdoesnotappeartobe suffering yet. The Apex 1000 indexhasrisenby 16.7per cent inthepast12months. In the past three months it grewby 3.1per cent,and inNovemberitfellby just0.2percent. Themorevola-tileApex100indexfellby1.3per centinNovember, a negative — but by no

meansdisastrous—result.Whether the prices of rare whiskiesareset tosuffera spectacularcollapseinthefuture remainsto beseen.But whatiscertainis thatinvestorswhomisjudgethetimingof acquisitionsorsales inthismarket could find themselves with averynastyhangover.

Collectable malts may be in ‘bubble’ territoryInvestment

There is already evidence of

a slump in the retail market,

and rare whiskies could

follow, says John Kenchington

Scotchin Swedenhasbeen rad-icallyrebranded.Gonearethetraditional grouse and stag’santlers,and allthatremainsisthebrandnameinacrispsans

serifalongwith theblue andyellowlogoof the bottler: Svenska Eldvatten, anindependent company that specialisesin bottling imported whisky and otherspiritsfor theSwedishmarket.Yetwhilethe contents are Scottish, the bottle’sdesign is unmistakably Scandinavian.The company is just part of the coun-try’s growing whisky industry, whichhas quietly started producing its ownsinglemalts.

TheSwedesare amongthetop whiskydrinkers inthe world.Accordingto theScotch Whisky Association, annualexportsof ScotchwhiskytoSwedenroseby £10m between 2003 and 2013 to£36.4m.“Swedeslovepeated whisky,sosinglemaltslikeLaphroaig,ArdbegandLagavulin are very popular here,” saysPeterSjögren,co-ownerof SvenskaEld-vatten.“WeSwedesalsoliketo explorenewground,like Japanesewhisky.”

Last month, the annual Jim Murray WhiskyBible causedastir whenit named Japanese distillery Yamazaki’s SingleMalt Sherry Cask 2013 as the numberonedrink.The globalmarketfor whiskyproductionhas changeddramaticallyinthepastfew years,and Scotland’splaceas the top producer of whisky is nolongersafe.Throughoutthe world,fromTanzania to Taiwan, distilleries are

beingestablishedto caterto localtastes.Sweden is now turning its hand towhisky making — 10 new distillerieshave started producing whisky since2013.

BoxDistilleryopenedin 2010,and hasproducedsmall-scalebut popularoffer-ings. In June this year, its batch of 700bottlessoldout withina day. Hvendis-tilleryproducesa numberof singlemaltofferings, and has won a number of awards at the International Wine &SpiritCompetition(IWSC)since2013.

The biggest distillery in Sweden isMackmyra, with the capacity to pro-duce 1.2m litres a year. The companywas created when eight friends fromSweden’s RoyalInstituteof Technologymetfora reunionin 1998.Each ofthemhadbroughta bottleof maltwhisky,andsoonsomeoneaskedwhy Swedesdonotmakewhisky.Spotting an opportunity,thenextyearthe groupset about creat-ingSweden’sfirstsinglemalt.

“Sweden produces some of the best-tastingbarley— someScottish distiller-ies even import it from us — so wewanted to create a whisky that show-cased Sweden’s natural offerings andreflected the country’s tastes,” saysLisa Collins, Mackmyra’s export salesmanager.

After experimenting with 170 differ-entrecipes,in2001 thecompanysettledon two, converted a deserted mill inGävle into a distillery and started pro-ducing single malts in 30-litre casks

madefromSwedishoak.The resultwasMackmyra’s personal cask service,where customers can create a singlemalt of their own, and are invited toannual tastings over the three-yearmaturingprocess.

“Our customers come first,” says MsCollins. “We listen very carefully towhattheywant.”

In 2008, the first regular bottledwhisky, “The First Edition” waslaunched,and since thenthe companyhasgrown intoan internationalwhiskybrand.Two yearsago,it wasnamedtheEuropean Spirits producer of the YearattheIWSC,withtheFirstEditiongain-inga goldaward.Thecompany hasalsobeen financially successful — sales forthe2013calendaryearwere £7m.

Mackmyrahashadsuccessin nearbycountries, but last year attempted toexpandintoNorthAmerica. Inits 2013annual report, chief executive MagnusDandanell saidthe expansion hadbeentoo fast, and that the company had“spreadourresourcestoo thinandlostfocus onneighbouringmarkets”.

Thecompanyhas nowreturnedto itsoriginal strategy offocusing onits local

customer base, although this has nottamed the company’s ambitions toexport.

“Swedenis ourmainmarket,”saysMsCollins, “but we have also had 100 percentgrowthinbothBelgiumandtheUKoverthe pastyear.In 2015andonwards,wewillbe lookingto focus more onouroverseasmarkets.”

There is some debate as to what thefuture holds for the Swedish whiskyindustry.

“Iget theimpression thattheSwedesareprimarily interestedin thedomesticmarket, and are tailoring the style of their whiskiesto suit Swedishpalates,”says Gavin Smith, a Scottish whiskywriterwho recentlyvisitedSweden’s13distilleries.

Tommy Andersen,managingdirectoratEldvatten,has a moreglobaloutlook:“Swedish whisky has a big potential tobecome one of Sweden’s [leading]exports. Even if the whiskies from thetop distilleries Box, Smögen and Hvenareonlyfour toseven yearsold,they arewell in line with the best Japanese orScottish single malts when it comes toquality.”

Sweden movesfrom devotedconsumer toskilled producerEurope New distillerieswith globalplans reveal

thequality of Nordic malts,writes Louis Leslie

Personalservice:

at Mackmyra

customerscan

create a single

malt oftheirown

‘Sweden

produces

some of the

best-tasting

barley —

Scottish

distilleries

evenimport

itfrom us’

Contributors

Aaron Stanley

Washing bureau manager

Mure Dickie

Scotland correspondent

Liz Bolshaw

Freelance journalist

John Kenchington

Editor, Investment Adviser, an FT

publication

Louis Leslie

FT researcher

Patti Waldmeir

Shanghai correspondent

Zhang Yan

FT news researcher

Hugo Greenhalgh

Commissioning editor

Steven Bird

Designer

Andy Mears

Picture editor

For advertising details, contact:

MarkHowarth, +44 (0)20 7873 4885 and

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Wednesday 17 December 2014 ★ FINA NCIA L TIM E S 3

TheBusinessofWhisky

The big Scotch brands have binged onthe emerging markets for more than adecade.From Shanghaito SãoPaulo,aburgeoning new generation of well-heeled drinkers was only too happy tosplash out on brands such as JohnnieWalker Black Label, Chivas Regal andBallantine’s Gold Seal. It was easymoney.

Aspirationwasa bigpartof it.It stillis.But,overthe past12months,conflictineasternEurope,and aneconomic slow-down in Latin America and Asia havederailed demand for whisky in manyformerlyfast-growing markets.

Theglobalvalue ofScotch exportsfell11 per cent in the first half of this yearfromthesame periodin2013,according

to theScotch WhiskyAssociation.“Theexportfigureswere awake-upcall,”says Jonny Forsyth, globaldrinks analystatresearchfirmMintel.He saystheScotchindustry has been distracted by theemerging markets, and has missedopportunities in North America andwesternEuropeasaresult.

“Western markets were ignoredbecause it was so easy in the emergingmarketsfor sucha longtime,” he says.“Exportssold themselves.”

While the good times rolled in theemerging markets, a whisky renais-sancewas also underway inthe USandEurope. But it was American whiskeysdrivingit, notScotch.

“There’sbeena lotof innovationgoingon in bourbon, which has reallyappealed to people,” says Mintel’s MrForsyth. Flavour innovation has beenthegame-changerin theUS. JackDan-iel’s Tennessee Honey hasgrownintoa12m-litrebrandinonly fouryears.Andits growth shows no sign of slowing.According to Brown-Forman, whichownsJack Daniels, underlying net sales

of this honey-flavoured tipple were up33percentinthelastquarter.

“People have tired of flavourlessdrinks,” says John Hayes, managingdirectorof JackDaniels.

Industry regulations mean Jack Dan-iel’s Tennessee Honey cannot belabelled as bourbon, so they call it a“liqueur”. Asfar asthe consumeris con-cerned, it is honey-flavoured bourbonthough.And froma Scotchperspective,thisis abig deal.TheUS isstillthe biggest export market for Scotch, worthmore than £800m in 2013. But MrHayes says Americans are alreadyknockingback moreflavouredbourbondrinksthan Scotch,involumeterms.

He thinks he knows why. “Peoplethink of bourbon as less formal thanScotch,andmoreaccessible.It hasa cas-ual,down-to-earthAmericanpersonal-ity whereas Scotch tends to have moreofastuffypremium-nesstoit,”hesays.

TheScotchindustry usedtoshrugoff thosesorts of criticisms.Scotch whisky,theywouldargue,is atipple youmatureinto.

Industry looks west again asemerging market demand dips

Future

The bourbon industry has

been more innovative with

flavours, writes Rob Walker

£819m(+8.7%)

US China£50.9m

(+141.6%)

World£4.26bn(+3.9%)

0 200 400 600 800

USFrance

SingaporeSpain

GermanySouth AfricaTaiwan

South KoreaMexico

Brazil

+8.00

-3.0-8.0

+1.8+1.0-12.5-15.0+19.5+18.5

Top scotch whisky export marketsby value (£m)

0 1 2 3 4 5 6 7 8

Average price (70cl bottle)by country 2012-2013 (£)

% change2012 2013 2012 2013

Scotch whisky exports% change by value, 2013

FT graphic. Source: Scotch Whisky Association Photo: Dreamstime

WhenI firstjoinedDiageoin1991,Ididn’tjointhepensionplanbecauseIdidn’texpecttobeherelongenough,”recalls

DavidGates,globaldirectorofpremiumcorebrandsforDiageo,ashe looksback overhis23-yearcareerwiththedrinkscompany.“ThenIfellinlovewithourbrandsand thecultureofour business.”

MrGates’careerwithDiageohastakenhimroundtheglobewithlongstintsinBrazil,Japan,SingaporeandtheNetherlandsbeforereturningto theUK.“That’skept itexciting,”he says.

BeforetakingonresponsibilityforallDiageo’s premiumspirit brandslastyear,his careerfocusedonthecompany’s100whiskies,whichinclude

IrishwhiskeysandblendedScotchbrandssuch asBell’s,FamousGrouse, J&BandBuchanan’s.

DiageoalsoprovidessinglemaltssuchasLagavulinand Talisker,and theworld’sbest-sellingblendedScotch: JohnnieWalker.Diageobrandsaccountfor44per centof Scotchsoldglobally.WhiskiesofalloriginsaccountforathirdofDiageo’s£10.3bnnetsales.

Apivotalmomentin MrGates’earlycareerwasa businesstripto RecifeinnortheasternBrazil.“I wentintobarafterbarandsaw hundredsof bottlesof JohnnieWalkeronthe tables,”herecalls.“Theypouredme aglassoverice,toppeditupwithsodawaterandIthought,“Holyshmoly,this isdelicious!”

Everyoneinvolved inDiageo’swhiskybrands,he says,has “tounderstandwhatwe’vecomefromaswellaswherewearegoing”.Respectforthe heritagethatunderpinsmanyofthecompany’s

best-knownbrandsiskey,MrGatesadds.“Weseek towritethe nextchapterinbrandsthathave200 yearsofhistoryandIhopethattheworkIproducewill

begoodenoughsothatwhenpeoplein50or 100years’timelookback . . . theydon’thold theirheadsintheirhands.”

Strongbrandassociationswithheritageandtraditioncanhaveadownside.“Whiskyis stillstronglyamalecategoryinthe developedworld—lesssoin placeslikeThailandor SouthAmerica,”Mr Gatessays.

However,appointing Christina

Hendricks—theAmericanactresswhomadehernameintheUS TVseries Mad

Men—as brandambassadorforJohnnieWalkerandthe launchearlierthisyear

ofHaigClub frontedbyDavidBeckham,thefootballer,are signsthatDiageoiskeentotakewhiskyoutofthe gentleman’sclub andintothe cocktailbar.

TheHaigfamilyisoneoftheoldestfamiliesinvolvedinwhiskydistilling(withrootsgoingbackto1627),MrGates says.

“Eventhoughtheelectricbluebottle

looksincredibly contemporary,”headds—anditistruethatHaigClublooksmorelikelyto containaliquidto splashonyourskinthantopourontherocks—

“itisbasedonthebluenosingglassesusedbywhiskyblendersforhundredsofyears.”

WhilethishasbeenastrongdecadeforScotchwhiskyin exportmarkets,witheightyearsof continuousgrowth,thepast12monthshaveseensalesinternationallyplateau.SalesinChinahavebeenparticularlyhitbythe government’santi-extravagance

campaign.“Progressparticularlyinemerging

marketsis nota straightline,”explainsMrGates,unfazedbythedip.

“Volatilityis veryvisibleinshorttimeframes,butovera periodof decadeswecanseesustainedgrowth.Ifyou taketheper capitaconsumptionofScotchwhiskyinFrance,Spain,SouthAfricaorGreeceand youcouldreplicate

thatin marketslikeMexicoor Brazil,theopportunityis justbreathtaking.”

Whereverthereis agrowingmiddleclass,he argues,there isan opportunity.“Thereisa veryhighcorrelationbetweenthegrowthofmiddleclasspercapitaincomesinanemergingmarketandthepenetrationofScotchwhiskyinthatmarket,”he says. Peopletradeupfrom localdomesticspiritstoaspirational,lifestylebrandssuchas JohnnieWalker.

CoretothecommunicationofsuchbrandsareJohnnieWalkerHouses,Diageo’sanswertothe AppleStore.TheywerelaunchedinChina,andBeijing,Shanghaiand Chengdueachoffera JohnnieWalkerHouseaswellasSeoul inSouth Korea.

MrGatessees “brandexperience,bothphysicalandvirtual,where wecan give[customers]exposureto thepeoplewhoactuallymaketheproduct,[as]incrediblypowerful”.(See storyon

page 4.)Asia’swhiskyhousesare thelatest

expressionofbrandimmersionthatstartedwith Diageo’sUSprogrammefor JohnnieWalkerthatMr Gatessayshasdrivengrowthof morethan100per centsinceitwas initiated.

Atthe otherendof Diageo’sline-uparethesmall,premiumbrandsthatareenjoyingstrongsales.Bulleit,forexample,the company’scraftbourbon,“isabrandthathasbeenbuiltbarbybar,streetby street”,saysMr Gates.“Itturnsupin remoteplacesallovertheworld,througha word-of-mouthnetworkbuiltby peoplepassionateabouttheproduct.”

Therookiewhodidnotjointhepensionplannowdirectsthefutureof someofwhisky’sbest-sellingbrandsfromAlaskatoZimbabwe.MrGates’slastwordisonthepunitive150percentimporttaxlevelledatScotchin India,but,characteristically,he isnot so

muchbitterasfrustrated.“TheIndianScotchwhiskymarketis

massive,”he says,“Andrespectfor JohnnieWalkerishuge.”

Building brands bar by bar and street by streetInterviewDiageo’sDavidGates talks to Liz Bolshaw about thechallenges of marketingwhiskies to a globalcustomer base.

David Gates:

‘Theypouredme

aglass[of

JohnnieWalker]

overice, topped

itup with soda

waterandI

thought,“Holy

shmoly,this is

delicious!’

‘Whiskyis

stillstrongly

amale

category

inthedeveloped

world’



4 ★ FINA NCIA L TIM E S Wednesday 17 December 2014

TheBusinessof Whisky

Scotchwhiskyexportsto theUS fell inthefirsthalf of2014but have returnedstrongly in the latter part of the year,assuaging fears that the spirit’s largestoverseasmarkethadtakena downturn.

Salesto theUSplunged16percent byvalue and 12 per cent by volume com-paredwiththefirsthalfof2013,accord-ing to figures collected by the ScotchWhiskyAssociation.It wasthe firsttimesince 2009 that a year-on-year declinehadbeenrecorded.

But the drop appears to have beenmore of a stutter than a reflection of changingUS consumertastes. DemandforScottish malts andblendshas risensinceJune, coincidingwith an improve-ment in the US economy and seasonaldemand as consumers sought to stock up for the summer and winter holidayseasons.

Intheninemonthstotheendof Sep-tember, imports of Scotch into the USwere up 2.4 per cent year on year, andlikely to surpass last year’s $1.2bnrecord, according to the US Interna-tionalTrade Commission,which tracksimportdata.

“Scotchwhiskyremainsverypopularin the USA, but there was a fall in thevalue of direct exports recorded in thefirst half of this year,” says RosemaryGallagheroftheSWA.

“This wasmainly a resultof destock-ingafter someoverstockingin previousmonths and partly down to currencyissues.”

Thereboundoffersa reassurancethatwhisky consumption in the US, theworld’s dominant spirits market, willcontinue its growth trajectory. This isespeciallygoodnews forthe UK,whichhasincreasedwhiskyexportsto theUS

bynearly150per centoverthepastdec-ade.Importsfrom theUS’stwo otherpri-

mary suppliers, Ireland and Canada,have also performed well, posting 15.4and5.9 percent growthrespectivelyin2013.

Sales of Irish and Canadian whiskies

in the US, however, amount to just afraction of that of Scotch whisky intermsofvolumeandsales.

Further, thereare severalreasonsforcontinuedoptimismwithinthe USmar-ket. Whisky consumption generally isincreasing, mirroring a broader trendacrossthe spiritsindustry. Forthe firsttime since records began, every singlecategory of whisky, from super-pre-miumtolow-endvaluebrands,sawcon-sumption growth in 2013, according totheDistilledSpiritsCouncil(Discus).

IBISWorld, a market research firm,valuestheUS whiskybusinessat $2.4bnandestimatesthatthe industry grew atanannualrateof 3.3per centevendur-ing the recession years from 2009. Itprojectsa 2.6percent growthrateuntil2019.

In2014,maltwhiskiesaccountedfora9.6percentsegmentofthismarket—amajority of which is Scotch, thoughindependentcraftdistilleriesproducingtheir own single malts have gained afoothold recently.

The underlying trend behind the USspirits market is that the country isbecoming more accepting of responsi-blealcoholconsumption.

Stateand localjurisdictionsthat havetraditionally imposed restrictions onwhen and where alcohol can be pur-chased are also taking a more relaxedapproach.Excisetaxes,controlsonSun-

day sales and prohibitions on spiritstastings for marketing purposes are gradually being removed in statesacrossthe country.

This loosening of cultural and legalimpedimentshas allowedfora broaderbase of whisky consumers, particularlyamong women and young people. AnincreaseinUS populationgrowth intheearly1990smeansa largerpool ofyoungadults willreachlegaldrinkingagein thecomingyears.Thesenew consumerswillhave a much broaderrangeofdrinkstochoosefromthanpriorgenerations.

“Millennials are much more experi-mentalthan previousgenerations.Thespiritsandcocktail culture really drawsthemin,”saysLindaMontag,a beverageanalystat Moody’s.

Perhapsmost importantly,increasedconsumer confidence amid the eco-nomic recovery and a surging appetiteforsuper-premiumand ultra-premiumspirits will be drivers of growth in theyearstocome, especiallywithregardstothemoreexpensivebrands.

Accordingly, higher-end Scotchbrands have been able to penetratedeeperinto theUS market.Whileabout75 per cent of US Scotch imports aremore traditional bottled blends, con-sumers are starting to show a taste forhigher-end singlemalts (thoughsuper-premium blends have also performedwell).

In 2013, imports of Scotch singlemaltsjumpedby18 percent,comparedwithjust 5.4per centforbottledblends. Justa yearearlier,those figureswere theother way round, with imports of bot-tled blends increasing by 18.7 per centover12 months to2012 againstjust 9.2percent forsinglemalts.

FrankColeman,seniorvice-presidentof Discus, adds that the industry hasdonewellfor itself byinvestingsubstan-tial resources into promoting Scotchwhiskyin theUS,rolling outinnovativeproducts and marketing them effec-tivelyto consumers.

“There’s thisdynamism that’s occur-ring in the US market,” he says. “Youhave the cocktail culture [and] thewhole prevalence for premiumisation

amonga widearrayoffoodandbever-

agecategories.“We’rein awonderfulera, maybethebestever forinnovation indis-tilledspirits.

“Scotch whisky plays intothatnicely becauseit has

a charming and won-derfulheritage.”

Despite early year dip, US stillgrowing market for Scotch

Exports

Higher-end producers stand

to benefit from a bulge in

the numbers of young

people willing to experiment

with their drinks, says

Aaron Stanley

If you are collecting, buy two

bottles – one to share, one to

collect/sell on. Don’t buy at what

looks like the top end as prices will

not rise significantly. Rather, look to

releases such as

Glenfarclas Family

Casks; Macallan’s

Masters of

Photography;

and Gordon &

MacPhail

limited editions.

Outside

Scotland there’s a

buzz around

Karuizawa.

Dave BroomAuthor of World Atlas of Whisky

Thedrinksbusinessisnottheonly industry affected byBeijing’s anti-extravagancecampaign: sales of every-thing from seasonal hairy

crabs to thecountry’selaboratemoon-

cakes, Chinese pastries baked to cele-brate the mid-autumn festival, havebeen hit. Giving presents to officials of luxury beverages such as Moutai, ahigh-end Chinese spirit, as well asexpensive Bordeaux winesand cognacsisvirtuallybanned.Whiskyis notblack-listedin thesameway, buta cutin thenumberof lavishbanquetshas weighedheavily on sales through traditionalchannels such as karaoke bars andnightclubs.

The UK’sScotch WhiskyAssociationrecently blamed falling demand fromChina as a factor in an 11 per centdecline in whisky exports by value,from nearly £2bn in the first half lastyearto £1.77bnin thesame period thisyear. Exports to Singapore, which actsasa conduittothemarketsof ChinaandotherAsiancountries,fell46 percent inthe first half. According to Mintel,whiskysalesin Chinafell more than20percentby value last year,afterhaving

risen15percentin2012.Sales volume fell by nearly 15 per

cent,indicatingthat whiskypriceshavealso fallen, says David Zhang, a drinks

analyst at the market research firm.“Thereasonthe austerityban hadsucha big impact is because the marketstructure of whiskywas sodistortedinChina, with products highly concen-trated inthe premiumand luxury seg-

ments, and thus at risk when policieschanged,”he says.

“Theeconomicslowdown[in China]andtheausteritycampaignhada nega-tive volumeimpactonthe whiskycate- gory especially for business entertain-mentin thetraditionalKTV[karaoke]channel,” says James Slack, a PernodRicardspokesmanin China.“However,weremainoptimistic andconfidentforthelong term.” TheFrench drinkscom-pany aims to attract new consumersfrom the country’s middle class andaffluentpopulations,and expects theirnumberstoreach440mby2020.

Pernod Ricard dominates the highlyconcentrated premium whisky marketinChinawitha57percentsharein2013,according to BernsteinResearch. Sinceitfirst introducedChivas Regal12-year-old to China more than a decade ago,mixingitwith greentea hasbeenpopu-larin China’skaraokebarsand high-en-ergyclubs whereofficialsand entrepre-

neursusedto entertaineachotherwithexcessivedrinking.

But nowadays, as officials fear beingseen drinking at public expense, and

after an anti-prostitution campaignshut down more than 200 entertain-ment venues in southern China, thatrecipe mayno longerproveso popular,drinksanalysts say.

“Very few people drink whisky with

green tea nowadays because they allknow that’sabig waste.It’sanoutdatedtuhao [nouveau riche] style,” saysthe bartender at Bar Constellation inShanghai, which features single maltselections.

Discerning whisky bars like this onehave begun to emerge recently in thelarger Chinese cities where urbanitesare displaying a new taste for singlemalts as a way to show off their goodtasteratherthanmerelytheirwealth.

Sam Fischer, president of Diageo inChina andAsia,seesit asnatural foranincreasinglysophisticatedmarketsuchasChinatoshiftawayfromanobsessionwithbling, andtoward a trueapprecia-tionfor oneof theworld’soldesttipples.“Chinese are increasingly interested inthe craftsmanship,knowledge,not justthebigfatbrand.”

He points out that whisky has suf-fered less than cognac in the currentcrackdown, and that super-premium

brands like Diageo’s Johnnie WalkerBlue Label have continued to grow –withChinasalesup by40 percentyearon year by value in the 12 months to

June30 2014, andgrowth in lowdoubledigits expected for the current fiscalyear.

“More Chinesepeople areconsumingwhiskyin a different way,”saysTorstenStocker, greaterChinaretailpartnerat

AT Kearney, the consultancy, in HongKong. Rather than drinking ostenta-tiouslywith officials, business partnersor clients, they have begun to enjoydrinking at home with friends, familyandevenalone,he says.“Althoughthesedriversare notmakingup forthe reduc-tionindemand,I thinktheywillunder-pina slowerbutultimatelymorestable growthindemand,”he adds.

Diageo said recently that the demo- graphics of whisky drinking in Chinahasstartedtoshift:the drink previously“hadmostlymasculineassociations,butwomen nowaccount fora quarterof allwhiskyconsumption”.

Mintel’s Mr Zhang also notes thatsome western spirits such as vodka,rum,tequila andsome liqueursgainedmarket share in China between 2012and2014.“Chineseconsumersare get-tingtoknowthatwesternspiritsarenotlimited to whisky and cognac, whichmakesit impossiblefor eithercognacor

whisky to resume the previous high-speedgrowthinChina,”he says.

Additional reporting by Zhang Yan and PattiWaldmeir

Austerity drivehits sales but

drinkers growmore discerning

China Thegreen-teamixeris outand premiumwhiskies in specialistbars arein, write FT reporters

In China, high-end whisky is trendy,

and the city of Chengdu in the middle

of China is even trendier. The capital

of Sichuan province, famous for its

pandas and its new millionaires, has

recently become a magnet for luxury

brands, upmarket hotels and elite

property developers. Chengdu is a

symbol of how lower-tier Chinese

cities have finally become wealthyenough to indulge a taste for the best

— and most expensive — things in life.

Diageo says the regional capital has

25,000 millionaires.

The UK drinks company wants to

appeal to the new generation of

affluent Chinese, so it chose Chengdu

to open its latest Johnnie Walker

House in China last September. The

house is a cross between a museum

and a bespoke blending shop, where

the rich of Chengdu can learn how

whisky is made — and how to drink it.

The name of the game here, as at

Diageo’s other Johnnie Walker Houses

in Shanghai and Beijing, is exclusivity:

part of the house is open to the public,

but the best bits can be visited by

invitation only. Diageo says that it has

hosted more than 20,000 rich

individuals at its houses in Shanghai,

Beijing and Seoul in the past year. The

houses are, the company says, “part

education, part private club, part

museum and part retail”.At Chengdu House, for example,

local enthusiasts are offered special

edition whiskies, including one

engraved with the city symbol of the

golden sunbird, for the elite price of

Rmb3,450 ($560) for a 1.75l bottle.

Diageo says the design of the house,

which includes the brand’s signature

“Striding Man” emerging out of water,

is meant to symbolise the prowess of

Chengdu. The city of 7m people is

famous for its third-century BC

irrigation works, which are still in use

today.

Patti Waldmeir

Luxury Johnnie Walker Houses spread word

Raisingthe bar:in largercities suchas Shanghai,urbanites areincreasingly

paradingtheir taste as wellas wealth bychoosingpremiumbrands — Reuters/AlySong

the business of whisky

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