Research in Focus - Global reach gives Scotch whisky an edge during downturn
The international scope of the Scotch whisky sector and its strong growth in emerging markets has allowed the market to continue growing in spite of the global downturn. However, as a new just-drinks/IWSR report points out, the performance in mature markets has led some to question whether more innovation is required to rejuvenate the category in what remain key markets.
It seems almost counter-intuitive that, after four years and counting of global economic turmoil, the Scotch whisky industry could be said to have been enjoying a "golden period", but that is exactly how a recently-published just-drinks/IWSR report has described the last decade for Scotland's 'water of life'.
According to IWSR's Global market review of blended and single malt Scotch whisky – forecasts to 2017, between 2002 and 2011 the global Scotch industry grew by 21.5m nine-litre cases, taking total volumes to 93.26m cases and representing a compound annual growth rate (CAGR) of around 1.3%.
This growth is by no means restricted to the standard end of the market, as the report points out. In 2011, the premium-and-above Scotch category increased by 7.7% year-on-year, from 23m cases to 24.8m cases. The super-premium segment, meanwhile, has increased its share of the market in the past ten years from 8.3% in 2001 to 12.2% in 2011.
Furthermore, the Scotch sector's growth was more than maintained in 2011 and into 2012, with global shipments increasing by just under 3.9% from 2010 to 2011. Scotch exports increased in value by 12% in the 12 months to the end of June 2012 from GBP3.8bn (US$5.98bn) to GBP4.2bn, led by growth in the US, Venezuela, Germany and Russia. Asia remained steady, with good growth in Taiwan, the Scotch Whisky Association (SWA) reported.
So, in spite of pressure in some mature markets and in Eurozone countries such as Spain and Greece, Scotch exports still maintained their value in the first half of 2012 at GBP1.8bn.
The report goes on to say that Scotch has been a major beneficiary of the growth of BRIC markets and other emerging economies, such as Mexico, Vietnam, Thailand and South Africa. Globalisation trends and, in particular, the World Trade Organization’s (WTO) tariff-busting measures have also contributed to the industry’s success.
Scotch's boom, moreover, represents a dramatic reversal of fortunes. In the mid-1990s, with consumption falling across many major markets, production was being reduced. Indeed, that is why so many companies today find themselves short of inventory.
Aside from benefiting from rising GDP and disposable income in key emerging markets, Scotch's apparently recession-proof progress can be attributed to one principal strength, namely its broad international profile. Scotch sells more than 1m cases in no fewer than 19 countries, with a further ten markets boasting sales of at least 500,000 cases.
"There are few categories that are as international in scope as Scotch whisky and this is one of its real strengths," the report states. "That acts almost as a natural hedge. When one market such as Spain or Greece declines, as is the case currently, other markets compensate such as France or China. Global Scotch sales are always balanced between rising and declining markets."
It helps, of course, when more markets increase than decline. Fortunately, this has been the case for Scotch. In 2011, some 17 of the spirit's top 25 markets posted growth.
However, it is in the main the large mature markets that have declined and the emerging markets which have grown. While Europe remains the largest single region, accounting for around 43% of total volume sales, this is down from 54.5% ten years ago. In fact, Europe is the only region to have seen a decline over that period.
Bringing in new consumers in developing economies, where there is still so much potential for growth, has been extremely beneficial for Scotch. But, amid the exultation, there is concern that the sector needs to do more to bolster its presence in mature markets.
As the report states: "The industry has not yet successfully tackled the fundamental problem in its major markets: For young consumers, Scotch remains the drink of their fathers. The hope is that it will go full cycle and regain its novelty value."
While the large, mature markets, such as the UK and France, cannot produce the high growth rates of the BRICs and other emerging markets, the report points out that these mature markets are "still very large and profitable".
It is in these markets that innovation is most required. However, given that Scotch's enduring success is built on its heritage, this raises some interesting debates in the region. "Innovating within Scotch is complicated by the fact that much of Scotch’s appeal is based on status and heritage, and is ultimately quite a conservative drink to many consumers, particularly in the mature markets," the just-drinks/IWSR report states.
In particular, there are differences of opinion over whether the industry should go down the same route as the US whiskey sector in allowing flavoured variants.
The introduction of products such as honey-flavoured Bourbon has benefited the US whiskey market, attracting consumers from the vodka sector and boosting appeal among female drinkers, leading some in the Scotch industry to advocate loosening its regulations. The report found opinion to be divided among senior Scotch whisky marketers.
While Chivas Bros (Pernod Ricard) marketing director Eric Benoist ackowledges that the US whiskey sector has managed to "turn things around" and rejuvenate a mature sector through "innovation, consumer activities and level of support", he says Scotch whisky "can do something similar to build excitement although not in exactly the same way".
However, Diageo category director for whiskies David Gates appears more open to the idea of flavoured whiskies. "The Scotch Whisky Association regulations would make it impossible [to introduce flavoured Scotch] for the time being," Gates says. "I do ponder in my own mind whether we should deregulate that aspect at some stage. You can see the benefits of what flavours have done for [US] whiskey. It has really added some vitality and vibrancy to the category. The SWA should at least have a discussion at some point and land on a point of consensus."
Edrington Group sales & marketing director Bill Farrar believes that "on the whole, regulations have been an enormous power for good", and points out that Scotch would not be as aspirational around the world if it were not for the regulations that underpin its production.
However, Farrar pointedly adds: "We must be innovative within those regulations, and there is plenty of scope for that. I think flavours may come in. You may also see more RTD activity, for instance. There has been a lot of great innovation from the Bourbons, whether it is honey or other flavours. Scotch has not done that and Scotch needs to do that, so we will be looking at how we take some of those things forward. We have to make Scotch whisky innovation work."
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