Analysis - Time to stop boom-and-bust Scotch whisky supply
Scotch whisky production lurches from peaks to troughs
The rise in global demand for Scotch whisky is a fantastic opportunity for distillers. But the surge has squeezed inventories dry, with an estimated 25% drop in malt whisky aged nine years or over between 2007 and 2012.
Companies are racing to make up this shortfall, with Diageo, Pernod Ricard and other major producers investing in multi-million pound infrastructure and capacity projects across Scotland.
But could they have sidestepped the race to safeguard stocks with a little more forethought? A new report from Rabobank claims they could have, while simultaneously warding off that nasty side-ffect of quickly ramped up production - oversupply.
The Scotch industry, according to Rabobank, has far too an unsteady hand on its own spigots. Production lurches from peaks to troughs, despite demand charting a steady upwards trajectory.
To stop this happening, producers must learn a lesson from wine, which like Scotch requires planning years in advance to cope with unknown demand.
The Californian wine industry has gone through cycles of oversupply and shortage “so many times it has become an identifiable pattern,”Rabobank says. Spirits may have different signals and drivers, but Scotch producers should still be able to iron out the bumps in current production levels.
At the same time, Rabobank argues, producers should resist the urge to increase production too quickly when demand rises. Companies are in the process of rebuilding inventories, “and rightly so”, according to Rabobank. From 2006 to 2012, inventories rose by 17%, ahead of consumption which grew at 11%. “But,” Rabobank warns, “at some point production should return to a more rational rate of growth.”
This would help guard against oversupply, which has the potential to damage bottom lines across the industry. Despite arguments that any excess stock can be put back for ageing, short-term financial considerations usually outweigh long-term planning goals, and prices drop. “A look at the recent past,” Rabobank says, “suggests that when excess inventories build up, the discipline of ageing inventories for a longer period rather than discounting is often lost.”
Finally, Scotch producers need to learn the importance of innovation, particularly when stocks are high. Rabobank points to the success of the flavoured whiskies coming out of North America, underlined by Brown-Forman's full-year performance this month for its Jack Daniel's Tennessee Honey extension.
Scotch is traditionally more conservative in its innovations, with management fearful of damaging the liquid's prestige and premium position among consumers. That reticence, however, may have to change slightly, according to Rabobank. Though, it does make clear it is not prescribing “black cherry-flavoured 18 year old single malts".
Innovations can “strengthen brands that lack a more prestigious image”, Rabobank says. It can also protect Scotch from losing consumers “to more innovative segments such as Bourbon”. In the UK, for example, Scotch consumption fell by 5% from 2011 to 2013, while Bourbon increased by 35%.
It may take more than that, however, to persuade the Scotch industry to drop its current hard line on flavours - just look at Bacardi and its run in with industry guardian the Scotch Whisky Association over Dewar's Highlander Honey.
But the Scotch industry is already changing, beyond the perimeters of the SWA. There's a new generation of small Scotch distillers appearing on the scene that are looking at the Bourbon boom with hungry eyes. Couple that groundswell with Rabobank's period of oversupply, and conditions may soon be ripe for what the SWA would currently argue is unthinkable. If so, then in a few years time, we may be toasting Scotch's next global boom with a glass of black cherry single malt.
just-drinks on-trend: Craft beer - fortunes and future
This latest 'on-trend' report from just-drinks provides a strategic summary of where the craft beer category is at present, and where it might be heading in the short-term. Through a combination of sp...read more
Earlier today, brand valuation consultancy Intangible Business released the results of its latest survey of the world's wine and spirits brands. In this excerpt from the full report, which can be down...
Brown-Forman Corporation (BFB) - Financial and Strategic SWOT Analysis Review provides you an in-depth strategic SWOT analysis of the company’s businesses and operations. The profile has been compiled...
Bacardi Limited - Strategy and SWOT Report, is a source of comprehensive company data and information. The report covers the company’s structure, operation, SWOT analysis, product and service offering...
Bacardi Limited - Strategic SWOT Analysis Review provides a comprehensive insight into the company’s history, corporate strategy, business structure and operations. The report contains a detailed SWOT...
MarketLine's Company Mergers & Acquisitions (M&A), Partnerships & Alliances and Investments reports offer a comprehensive breakdown of the organic and inorganic growth activity undertaken by an organi...
- Diageo Q4 & FY - Preview
- Is Diageo approaching its "Et tu, Brute" Moment?
- Has Diageo added Beer to its 'Non-Core' List?
- SABMiller, Carlsberg, Heineken: Poland's beer itch
- Diageo, Heineken and NBL in South Africa & Namibia
- NPD: Tomatin Contrast, Cù Bòcan
- Diageo, Heineken end South Africa, Namibia JV
- Diageo comm's director latest to leave
- Diageo hit by SEC investigation in US
- Pernod launches pomegranate whisky drink
- Global gin insights - market data, product innovation and consumer trends research
- Global rum insights - market forecasts, product innovation and consumer trends research
- Global Tequila insights - market forecasts, product innovation and consumer trends research
- Global liqueurs insights - market forecasts, product innovation and consumer trends research
- Global cachaca insights - market data, product innovation and consumer trends research