Analysis

How can Scotch whisky build on 2017 growth in the years to come? - Research in Focus

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Last year's recovery in Scotch whisky sales, although marginal, was a welcome one - but the category still faces multiple challenges, from engaging with consumers in mature markets to managing restricted stocks of single malt.

The 1% sales increase recorded in this year's Global Scotch Whisky Insights report from just-drinks and The IWSR epitomises a category that, for all its size, is failing to fully exploit the brown spirits revival occurring in many markets around the world. Almost half of Scotch's top 20 markets recorded sales dips in 2017, and the prospects for blends in the top two destinations - France and the US - remain relatively bleak, in sharp contrast to the brighter prognosis for single malt.

Such is the size and reach of Scotch - the category sells more than 1m cases per year in 18 countries, with Chile and Canada set to join the millionaire club soon - that declines in some markets are generally offset by gains in others, providing a natural hedge. The uptick in 2017 was mainly constructed on gains in some of Scotch's emerging markets, with recoveries for Russia, Brazil and China in 2017 providing renewed optimism for brand owners.

For China, this was the first sales growth in six years.

India continues to impress, especially for bottled-in-India (BII) products, and there was a welcome return to form for Japan, where Scotch sales are at their highest point in a generation. Declines in Mexico and South Africa, meanwhile, disguise more positive long-term trends, but there was a shock reversal in Spain, where optimism had been building following a good year in 2016.

"The improvement in markets like Japan and Russia comes despite a growing challenge from US whiskey, demonstrating that the categories can grow in tandem in what is not a zero-sum game," the report points out. "However, the threat from US and Irish whiskey is real, with international consumers often viewing them as trendier and more approachable than Scotch."

While blends continue to confront challenges in mature markets - further declines are expected in France, the US and the UK - single malts march on, now accounting for nearly 27% of the global Scotch market in value terms (by volume, the figure is less than 11%).

Malts are forecast to add nearly another 2m cases of sales to 2022, with larger gains coming in smaller markets in the years ahead. That said, overall growth, while impressive, will decelerate slightly.

Meanwhile, distilleries are expanding production, and a number of new sites are opening, in an effort to cope with anticipated future demand; stocks for many leading brands remain tight at the moment.

"The malts segment requires careful handling in the years ahead," the report says. "First of all, navigating the period of short supply without alienating consumers through the injudicious use of NAS [non age statement]; second, making sure the market will be ready to absorb extra malt supply when it comes on stream in a decade and more's time."

For blends, an increased emphasis from leading operators on consumer education and engagement could be the key to rejuvenation, emphasising the 'craft' involved in constructing blends and using local events, fairs and tastings to push home the message. In addition, the current boom in whisky tourism can only help with engagement: Tourism was a key feature of The Macallan's new GBP140m distillery on Speyside, while Diageo is to spend GBP150m on a new Johnnie Walker tourist attraction in Edinburgh, and on refurbishing its 12 distillery visitor centres.

Flavour innovation is another tool with which Scotch can potentially renew its consumer appeal. Production rules are tight, and brand owners are largely reluctant to go down the 'flavoured whisky' route, but there is a growing willingness to explore the flavour potential of experimental production methods.

Increasingly, Scotch whisky brands are broadening their palette of flavours, while trying not to sacrifice their own house style. The report notes: "This approach is market-led, in that drinkers are now typically more adventurous and keen to try new things, rather than sticking to one product or style.

"The trick is to embrace this mindset without compromising the unique identity of your brand."

The resurgent market of Japan could also provide a template for success elsewhere. Here, Scotch has piggybacked on the local highball trend, exploiting the shortages and rising prices that are dogging domestic whisky brands. The simplicity of the highball - whisky, soda, ice and lemon in its simplest form - means that it is both easy to make and easy to translate into other markets.

It might also make Scotch - still seen by some cautious consumers as a "challenging" spirit - more approachable to category newcomers.

Global Scotch whisky insights - market forecasts, product innovation and consumer trends


Sectors: Spirits

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