Is the Scotch whisky category on the way down?

Is the Scotch whisky category on the way down?

The Scotch whisky category appears to have hit a tipping point. What does the future look like for the until-recently booming category? Ian Buxton voices his concerns.

I suppose that I started worrying about Scotch whisky last Autumn. Had luxury marketing efforts by the industry led to the tail wagging the dog? Having become accustomed to a non-stop flow of good news - upbeat forecasts, increasing prices, growing output and distillery expansions - the 0.8% sales drop in 2013 came as a nasty shock. The bad news has continued throughout 2014: An 11% decline in exports in the first half of the year and little improvement by the third quarter, when a cumulative 8.6% decline in export value was recorded.

Have my bad dreams turned to nightmares?

Scotch may be facing a perfect storm: Western sanctions on Russia greeted with consumer patriotic resistance to imported luxuries; continued Chinese Government restrictions on extravagant entertaining and gifting; a slowdown in the Brazilian economy and a marked strengthening of Sterling suggest that Scotch does not have its problems to seek.

As we reported in October, Diageo were quick to respond, with a moratorium on further expansion. The company’s half-year results, announced today, have been initially welcomed on the London stock market, despite reported net sales for Diageo's North American business falling by 2% with the Johnnie Walker business in the US down 14%.

At least Diageo was able to curtail some major capital expenditure, which appears to have placated many critics in the city. With contracts signed and ground broken, others, such as Edrington with its GBP100m (US$163m) redevelopment at The Macallan, and Chivas Brothers (new Dalmunach distillery and proposed further expansion at The Glenlivet) may not have that option.

While the industry continues to express confidence, and the Scotch Whisky Association points to the significance of whisky to the Scottish economy, I am not alone in my concern. And others are not so sanguine: In their Q1 2015 Spirits Quarterly, released this week, analysts at Rabobank highlight many of the same concerns.

They point to a decline in seven of the top ten export markets, most notably the US (-10.9%) and Singapore, the latter being the main entry point for exports to China (-41.1%). Looking forward, Rabobank sees Scotch losing share to “other, more innovative spirits categories, including Bourbon, Irish whiskey, rum and gin”.

My view is that, for Western consumers at least, many Scotch brands are starting to look and feel expensive; offering poor value when compared to high-quality aged sipping rums, Armagnac and even the premium craft and small-batch gins, which are gaining traction with younger drinkers. Recent launches, such as Haig Club and the new Mortlach ranges, look to me to be testing the limits of consumers’ wallets, and the more general trend to no age statement expressions (NAS whisky) continues to fuel furious debate on social media.

While there may be no prospect of returning to age statements for many brands, at least until stocks have been re-built (which may not be quite the problem it seemed a few short months ago, if the slowdown continues), consumer acceptance of NAS whisky has been more grudging than the industry expected, at least if the blogosphere is any guide. While the more strident social media commentators clearly have an axe to grind, it ill behoves any category to antagonise previously loyal advocates and enthusiasts.

“Scotch companies will continue to face the challenge of drawing in new customers,” says Rabobank, which goes so far as to suggest that the industry could be “battling structural challenges”.

That has an ominous ring to it for an industry which has historically dealt with structural change too late, and then, arguably, too severely. Despite all the talk of a ‘golden age’, could whisky’s history be on the verge of repeating itself? That may be too depressing a prospect to bear, but it’s clear that some bold and decisive action is called for.  

What that might be - and who would undertake it - isn’t so obvious.