Bantering semantics

[Rob Allanson]

Numbers don't lie. While the conventional wisdom among those in the liquor industry has long been that the spirits market is recession proof, data recently released by the Distilled Spirits Council of the United States, reveals that the liquor industry has begun to feel the impact of the recession.
During a recent briefing in Manhattan, Peter Cressy, the trade group's CEO, greeted everyone with a musing on semantics. "The industry is recession-resilient or resistant, choose whichever word you'd like, but it's absolutely not recession proof," he said, indicating that the fourth quarter, which is especially important because of holiday purchasing, showed softening.

Revenue for the industry was up 2.8 per cent to $18.7 billion while volume rose 1.6 per cent to 184 million 9-litre cases. As stand-alone figures, those numbers may be heartening in light of the global economy's skid, but it's a significantly slower pace than the six per cent annual growth rate seen each year since 2001.

The breakdown of the data by category tells a far more detailed story, one in which whisky plays a starring role. Premiumisation continued, albeit a bit more sluggishly than in years past. Whiskies, however, outpaced other categories, with gross revenues of super premium bourbons and Tennessee whiskey up 18.8 per cent (compared to the value brands, which were only up 2.7 per cent) and super-premium Irish whisky up an impressive 38.5 per cent. Super-premium single malts, though, only grew by 1.2 per cent. Overall, whisky sales rose 4.3 per cent by dollar value and 1.3 per cent by volume in 2008. (The figures are based on shipments from supplier to wholesaler, not consumer retail.)

On the striking growth of the Irish segment, Jameson brand manager Wayne Hartunian said: "Jameson continues to be the key driver of the fastest growing spirits category in the U.S. (Irish Whiskey) and one of the fastest growing brands in the total U.S. spirits industry due to evolving consumer dynamics, and growth in retailer support as they look to leverage the brand's growth and significant additional potential. Jameson also has several unique marketing programs that it leverages throughout the year to help drive the consumer demand."

Whisky drinkers appear to be trading up more than tipplers in other categories, who are reaching for less expensive brands. Rum, for instance, showed a gross revenue decline of 9.5 per cent in the super-premium segment while revenues on premium brands increased 8.4 per cent.

The news is a bit sunnier when it comes to exports of American spirits, whiskies in particular. "U.S. exports continue to do very nicely. Not all the numbers are in, but it looks like we're up about eight per cent," said Cressy. He noted that American whiskies in particular are a driving force. The international market has embraced bourbon and Tennessee whiskey as uniquely historical products and they're "capturing worldwide attention and acclaim."

This all bodes well for the entire whisky industry, as evidenced by the emergence of rye. "It's a small category, obviously, but it showed pretty good performance in a slow market," noted David Ozgo, chief economist for DISCUS. The healthy showing of newer American whiskey products, especially on the micro-distilling level, is another positive indicator.

"It's a sign of strength in the whiskey market," Ozgo said. "If people see development in that super-premium segment of the market, they want a piece of the pie. Brands develop with whiskey development. It's part of why rye grew. And there are all the micro-distillers. A lot of them invest their own capital. They're making a huge bet that people will be interested in the category for a while. And they're experimenting. Any time you see a lot of experimentation going on that's a good thing."

While nobody wanted to make predictions about the toll the recession will take on alcohol sales this year, DISCUS chiefs did acknowledge the chance that liquor companies would modify production plans, especially when it comes to a spirit that sits aging in a warehouse for years.

"Companies make careful decisions designed to optimize revenues," said Cressy.

"It's not like we've seen several years of strong whiskey growth," Ozgo explained. "The recent market signals good strength. I suspect people are looking at the state of the economy now and scaling back investment plans, but I would not see that as a big problem. The resurgent interest came at the same time as we saw the slowing of the economy."

[The Third Dram]

Fascinating read.

The spirits industry has certainly seen more than its fair share (or maybe I should say, "It has seen its fair share!") of ups and downs since it grew from an essentially artisanal/local merchandizing entity to become the world-wide phenomenon we know today.

As a 'middle-of-the-road' enthusiast who tries his best to not be enticed by extravagantly priced offerings and seeks out good value over hyperbole, I'll be very interested to see how the 'ultra-premium' sector of the industry responds to the current economic malaise.

It's my suspicion (and perhaps my secret wish) that whisk(e)y producers will see sales of their top-end products squeezed by the unwilllingness of clients who normally support that particular sector beginning to hold back on purchases. Hopefully, the silver lining to this 'cloud' will be a renewed emphasis on the 'bread and butter' whiskies that have formed the foundation of many a company's success in the first place.

[Bruichladdict]

TTD,

You are bang on! If you were to take Glenmorangie, for instance, and construct a function for the profits of the whole company:

Profits = v1*(value brands) + v2*(premium brands) + v3*(superpremium brands)

I would defy any company to tell me that their premium + brands even comes close to the volume from the value brands. It is easily understood that the value brands are the driver of this function. If sales in that category fall off a cliff, there is no way that the premium plus brands are going to make up for it. There is too much capital and operating debt to service associated with the value brands' volume.

I've heard that we can expect a price decrease at the retail level in the next year from Diageo. I wonder who will be next to blink?

[Aidan]

I've heard that when a company produces a superpremium whiskey, it boosts sales of the "next-best" whiskey in their portfolio. I don't know how true this is, of course.

[Iain]

[quote="Bruichladdict"]TTD,

You are bang on! If you were to take Glenmorangie, for instance, and construct a function for the profits of the whole company:

Profits = v1*(value brands) + v2*(premium brands) + v3*(superpremium brands)

I would defy any company to tell me that their premium + brands even comes close to the volume from the value brands. It is easily understood that the value brands are the driver of this function. If sales in that category fall off a cliff, there is no way that the premium plus brands are going to make up for it. There is too much capital and operating debt to service associated with the value brands' volume.

I've heard that we can expect a price decrease at the retail level in the next year from Diageo. I wonder who will be next to blink?[/quote]

Not sure Glenmorangie is the best example here, as that company now concentrates almost exclusively on marketing Ardbeg and Glenmorangie - neither of which are v1 "value brands".

[kallaskander]

Hi there,

true, Glenmorangie and Ardbeg surely are iconic whiskies. But Glenmorangie plc made most of its profits in the bulk whisky sector and bottling of lower end supermarket whiskies with their Broxburn facility.

The new owner shed that one very fast as it does not fit their image and is not consistant with what they think and believe of themselves. THE luxury company.

Problem is that the base of the sales figures which made Glenmorangie plc so attractive to take them over in the first place has been damaged and the money making bread and butter business branch has now been cut off.

To compensate for that self generated loss you have to sell zillions of bottles of super überpremium expressions of Ardbeg and Glenmorangie.

See if this works out.

Greetings
kallaskander

[Bruichladdict]

By value whisky I am making reference to their 10 yo Original. This is by no means a premium + whisky. I am also sure that a very big chunk of their profits come from the original and the 3-4 finished products they produce. The pub market alone for the Glenmo Original is HUGE.

As the whisky lake forms, even Glenmo Original is going to have to come down in price as demand in general dries up.

[Iain]

Hmm.. if Glenmorangie Original is the company's "value whisky", then what are Bailie Nicol Jarvie and Highland Queen, which cost much less?

I was under the impression that "value brand" was marketing speak for a cheap whisky, such as a supermarket own-label blend (Lidl's Queen Margot springs to mind), or blends such as Scottish Leader or 100 Pipers (in some countries) which are promoted pretty much on price alone.

[Bruichladdict]

We don't get those products in Canada, but since they are blends, they are not part of the single malt family that I'm talking about. In comparison to the 200-2000$/bottle range, the 64$/bottle Glenmorangie is quite a good value for single malt. What I am trying to say is that those uber expensive bottles don't come close to matching the volume and sales of the 10 yo Original. If demand for the Original softens, so too must the price and the profitability of the company.