The latest research on Scotch whisky from just-drinks and The IWSR has been published this week

The latest research on Scotch whisky from just-drinks and The IWSR has been published this week

The standout success story of the Scotch whisky sector in the past 20 years has without question been the development of the flourishing malt category. Single malts have captured the imagination of consumers and provided significant growth opportunities for Scotch whisky companies.

According to a new The IWSR/just-drinks report, the malt sector grew by a compound annual growth rate (CAGR) of 6.3% between 2010 and 2014 to reach 8.61m cases. Over the same period, meanwhile. the blended sector grew by just 0.6% to 86.73m cases. Declines were recorded in blended whisky in 2012, 2013 and 2014, although a recovery for the segment is now on the horizon.

Single malts are nevertheless expected to continue to spearhead growth in the broader Scotch sector for some time to come. With current consumption trends set to continue, growth in malt Scotch will outstrip growth in blends over the coming few years, with the category forecast to top 10m cases in 2018 and reach 10.8m cases in 2020, according to the report.

This represents an impressive 3.8% CAGR between 2015 and 2020. Notwithstanding an anticipated recovery in the blended segments, fuelled principally by growth in emerging markets, the CAGR in blended whisky over the same period will be just 1.6%, with volumes reaching 93.06m cases in 2020.

"Malt growth looks certain to continue to outstrip that of blends, although the latter should soon start to reverse recent declines," the report states. "Only stock availability and the price rises that result from constrained supplies threaten the growth of malts."

One critical reason for the continued upbeat outlook for malts is that their appeal is founded principally on intrinsic, defining product characteristics and consumer interest in them. In contrast to the lifestyle advertising very often used by blended whisky brands, this focus on qualities and attributes was the principal defining factor in malt marketing during the years of expansion. Far from getting tired, the marketing device is becoming even more crucial in today's spirits market, particularly with regard to premium products.

A recent report from just-drinks on Emerging Drinks Industry Trends found that "consumer demand for products with provenance, tradition and a story they can relate to will be the number one influencing factor across all drinks categories". To say that this plays right into malt whisky's wheelhouse would be something of an understatement.

Given the growth that malts have brought to the Scotch whisky category, it is difficult to imagine a downside. According to the report, however, the development of the segment, and how that success was brought about, has created a difficult problem for malts. The forementioned comparison between the blended and malt categories tells a more fundamental story about the broader sector. While it underlines that malts are the more dynamic segment in terms of growth, it also shows that in volume terms they are dwarfed by blended whisky. Encouraging consumers to believe that malts are by definition better than blends would, therefore, be an extremely dangerous thing to do but that, the research asserts, has to a degree happened.

"There is a belated realisation from the Scotch industry that it has encouraged the belief that malts are 'better' than blends," the report notes. "Given that the latter is responsible for the vast proportion of sales, is a great recruitment tool and has far more supply flexibility, leading players must work to correct this consumer preconception."

The report summarises why this is so important to the future of the sector: "The buoyant market for malt Scotch will not be able to turn the category's fortunes around on its own, because its market share and supply base are simply not big enough to accomplish that. Blends remain vital to Scotch's future."

Generally, the malt revolution has been said to have been built on skilful marketing, so does the problem the category now faces suggest what companies did to build the malt category was not quite so inspired after all?

To suggest so would be slightly unfair, though perhaps, at times, the emphasis may have been wrong. Single malt marketers did face a conundrum. High malt content is a determinant of good quality in a blend, so there are important quality attributes to be brought out. It is unlikely that any marketer of Scotch would have rubbished the 'blend' as an idea, given how important blending is to the history and heritage of Scotch whisky. However, in seeking to put over quality attributes, by association there was a prevailing sense – which was picked up by consumers – that blends were somehow the poor relation.

That can be put right, notwithstanding the problems of consumer perception that may have arisen as a result of the malt boom. But, this is far more a question of saying and doing the right things about blends rather than changing the message on malts.

The report picks up on some interesting innovation in the blended market, which gives good grounds for optimism. For example, there is more work being carried out around flavours in blended whisky, with companies experimenting with peating levels and cask maturation. For instance, last year, Edrington launched The Famous Grouse Mellow Gold, using ex-Bourbon casks to produce a sweeter, more mellow flavour. Alos last year, the same company relaunched Black Grouse as The Famous Grouse Smoky Black, which has a richer, peat-smoked character. These are both flavour innovations that have previously been much used in malt whisky.

The report forecasts that blends as well as malts will increasingly be using flavour as "a branding device and communicator", which it forecasts "should play well with the flavour fascination of the upcoming Millennial generation".

Rather than putting right possible mistakes of emphasis made in the past, the future might be seen in terms of giving the role of the whisky blender the credit it deserves. Moreover, with pressure on malt supplies, the blender's art is likely to be in particular demand. As the report suggests: "Necessity is the mother of invention. As the malts shortage makes companies think of fresh ways of creating and communicating new products, they should see this as an opportunity to expand the appeal of all Scotch products beyond traditional markets and demographics."

The reassertion of blends as high-quality products to be savoured, not only as entry products but also by the budding or accomplished connoisseur, is the coming challenge for the Scotch whisky sector. Going forward, the two types of whisky will, above all, have to be presented as different but most certainly not inferior or superior to one another.

For full details on this new research from just-drinks and The IWSR, click here.