In his second review of the Scotch whisky industry, Dave Broom investigates the challenges ahead of the smaller sized Scotch companies living in the shadows of ever larger competitors.

The Scotch whisky industry has been built on the principle of interdependence, typified by the way that firms exchanged fillings for each others blends. With increased consolidation now taking place, so those ties are beginning to loosen.

"Armchair bottlers are just picking famous names. I'd like to see them disappear as quickly as they appeared."

UDV doesn't need any fillings from Allied-owned distilleries anymore and vice versa. Highland Distillers is aiming at self-sufficiency, using as many of its own fillings for its blends as it can, as is Pernod-Ricard. But that interdependent linkage does still exist, meaning that the ramifications from the consolidation of the major firms has rippled all the way through the industry.

The strange thing is that this process, rather than reducing the opportunities available for smaller firms, seems to have precipitated a mini-explosion of growth among small, independent companies. Just as independent wine merchants are enjoying a new lease of life in the face of increased supermarket domination of the wine market, so independent distillers and bottlers are enjoying a higher profile.

The Grants of Glenfarclas and Wrights of Springbank have now been joined by Gordon & Macphail at Benromach, Isle of Arran, Tamnavulin, Bladnoch and the Murray McDavid-owned Bruichladdich. Every week now also seems to bring news of another independent bottling operation, joining established firms like Gordon & MacPhail, Signatory and Cadenhead.

As the big concentrate on getting bigger, so niches open up at the opposite end of the market. "There are opportunities for us," says Simon Coughlin at Murray McDavid, "but we have to be very focussed. If you just come in and play around you'll stay small, but people are looking for specialist stuff, therefore for us it is a growing market. But that's because we are focussed."

Gordon & Macphail's Ardmore brand in production

So are there now greater opportunities for the independent sector? Not according to The Signatory's Andrew Symington. "There are only three real independent bottlers with an active stock of casks and bottling facilities: Gordon & MacPhail, Cadenhead and us. There are plenty of other independent labellers, or armchair bottlers who are making things difficult for the rest of us."

That said, the emergence of independent bottling operations is in direct correlation to the global growth enjoyed by malt whisky. The independent sector is feeding the habit of the newly emerged malt junkie. Good news, but as more independent operations spring up, and major distillers decide they too can run small-scale premium end ranges, so the number of casks available on the open market is shrinking.

"Consolidation means that you're having to source casks from fewer people," says Symington, "so if you haven't built up a friendly relationship with them in the past you'll find the going tough."

While you may expect that distillers would be only too happy to get rid of their surplus casks at a time when they're in oversupply, the fact that they're concentrating on their top brands means a shortage of the very whiskies that are the lifeblood of the top quality independent bottler. It's virtually impossible to get hold of Islay malt these days. Many of the casks on the open market tend to be ex-filling stock in second-rate wood. The good quality casks are therefore being fought over by a growing number of players.

Golden Promise barley

There's plenty of whisky on the market, but how much is any good and shows true distillery character? "You can find young Macallan in plain [non-sherry] cask which has no Macallan character," says Symington. "But because it has a famous name on the label, an unsuspecting consumer or retailer will buy it. These armchair bottlers are just picking famous names. I'd like to see them disappear as quickly as they appeared."

The solution? If you want to be a serious player long-term you need your own distillery. If you want to, you need a production unit. Cadenhead has Springbank, Gordon & MacPhail has Benromach, now Murray McDavid has Bruichladdich and, according to Symington, Signatory is also on the lookout.

"Murray McDavid could have continued for another six years," says Coughlin. "But getting hold of sexy quality single malt is a problem and it would concern me long-term."

On paper it doesn't seem that difficult, there's plenty of distilleries out there waiting to be snapped up, but the industry is littered with the bones of people who have been seduced by the romance of whisky and forgotten that hard financial calculations are also needed. This is a long-term business.

While the industry is delighted with Murray McDavid's purchase of Bruichladdich, the fact remains that it has bought a brand which was sold as a loss-leader by its former owner, making it difficult to suddenly persuade retailers to rack prices up. The peated version is a long-term project and a lot of the stock laid down by JBB (the previous owners) was suitable for fillings for own-label blends, but not for a front line single malt. The firm went in with its eyes open and knows this is a long-term investment, but it takes time to turn an abandoned distillery around and time is money.

"I can't bottle 10 year-old Macallan or Glenlivet and expect to compete on price with Highland or Seagram."

"You have to be very sure which part of the market you want to operate in," says Coughlin. "It's dangerous to try and be all things to all people. We have a vision and know that this is the right way to go."

That way is specialisation and it is only the quality-oriented independent bottlers who will survive in the long-term. "There are a lot of closed distilleries like Rosebank, Dallas Dhu and Port Ellen whose stock will run out in five years time," says Symington. "And it's these unusual old malts that are selling well. I can't bottle 10 year-old Macallan or Glenlivet and expect to compete on price with Highland or Seagram. In this game you have to do different things, and it will get harder."