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Premiumisation.

General chat and talk about whisky.

Premiumisation.

Postby RufusA » Wed Apr 11, 2007 1:03 am

Apologies for the horrible term stolen from Pernod.

What are peoples thoughts on the growing trend towards the premiumisation of malt whisky. By premiumisation I mean taking a known (or even largely ignored) brand and repackaging it as a premium product. Taken to its extreme certain expressions are given a fancy name, put in a pretty box, and sold for 100's of pounds more than common sence dictates it's "worth".

Diageo, Chivas/Pernod etc. have in recent months spoken of it being a large growth area. Even smaller outfits such as Inverhouse have polished their Balblair brand, with no doubt the likes of Old Pulteney being given a tickle in the next round of marketing budget.

For me I can see it as a two edged sword.

I'm happy for distilleries to get more money, though how much of the premiumisation goes to the distiller, and how much to the shareholders and marketeers one wonders.

I don't much mind if big name distilleries are able to sell whisky to Japan at £500 a bottle by giving it a fancy name and package. Provided of course they are also equally happy to share a splash of it at WL :)

However I want to buy good everday drinking whisky at the £20-25 a bottle price point. Rather than the premium whiskies helping to support the price of the bread and butter expressions, it seems some distilleries are moving their whole range up a price / packaging notch!

I'm all for catching the eye of the supermarket purchaser, but I'd much prefer them to spend their money on developing a relationship with me (Ardbeg, Glenlivet), than trying to dazzle me with fancy curves on their bottles. I'd happily buy whisky in a cheap bottle with a screw top, provided it tasted the same, and cost a few quid less, and will have to look at IBs if I want something a little older / special.

Rufus.
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Re: Premiumisation.

Postby Lawrence » Wed Apr 11, 2007 1:26 am

RufusA wrote:However I want to buy good everday drinking whisky at the £20-25 a bottle price point. Rather than the premium whiskies helping to support the price of the bread and butter expressions, it seems some distilleries are moving their whole range up a price / packaging notch!
Rufus.


All the professionals (etc) in the industry keep on referring to China and India and the potential of those markets. As we all know there is only so much single malt available TODAY. If demand increases (and they all say it will) producers will divert product to the markets with the highest margin and this is usually the places with the lowest tax regimes.

However the producers are already starting to build capacity but will it be enough and soon enough? I bet we are going to see some serious price increases. Over and over I hear that single malt Scotch whisky is a premium product but is not selling for a premium price (in most cases, Ardbeg 1965 being an exception) and I think all producers are going to be taking their product up market where the higher margins are.

Interesting times ahead, stock up now.
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Re: Premiumisation.

Postby Deactivated Member » Wed Apr 11, 2007 2:24 am

Lawrence wrote:However the producers are already starting to build capacity but will it be enough and soon enough?


Or will the demand evaporate (or oxidize, if you insist), leading to the next bust cycle and round of closures? Are distillers, or the companies that own the distilleries, trying to immunize themselves against the boom-and-bust cycle? Do they see "premiumisation" leading to enhanced stability?

If there is a bust, it will ironically be good for us--prices will drop, and even if our favorite distillery closes, its product will be around for many years. Small flexible ib's will serve our needs at very reasonable prices.

I don't know what to hope for. I'd really like to see steadiness, not rapid growth or collapse. It's why I'm never comfortable with efforts to make whisky fashionable or trendy--trends are by definition unsteady. In a steady market, a few brands can get away wth premiumisation (eg Macallan), but if everyone tries to do it, market forces will bring them back to earth.

Lawrence wrote:Interesting times ahead, stock up now.


:? Is that a deliberate invocation of the famous Chinese curse--"May you live in..."?
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Postby shoganai » Wed Apr 11, 2007 4:13 am

It's the job of a marketer to create demand where there is no demand. So whether it's selling whisky to an untapped market like India, or convincing people to buy something they already buy but at a higher price, their goal is to sell more. The demand doesn't have to be permanent for a marketer to be successful.

In my opinion (for what it's worth), I don't think the whisky (specifically single malt) market could bear much more premiumisation. If all brands were priced like Macallan, the demand for 18 year old + scotch would be next to nill. I just can't imagine that there are that many people out there willing to pay those prices often enough to support the market. This isn't really based on any data, just my gut.

On the other hand, the cheapest blends would actually probably benefit a little from price increases (but only to a certain point, then quality would actually be an issue). In economics this is called a Giffen good, which is basically a product whose demand actually increases as price increases (whereas usually the higher you set the price, the less units you'll sell). It's not really the same as conspicuous consumption. With conspicuous consumption, the motivation for buying the higher price product is to show off your spending power. Whereas with a Giffen good, the motivation is a belief that the higher price means higher quality. How many of us completely ignore the proverbial "bottom shelf" when browsing the liquor store?

Also, I don't really see rising prices of some of the cheaper blends having much of an affect on single malt prices.
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Re: Premiumisation.

Postby lwknigh » Wed Apr 11, 2007 4:25 am

RufusA wrote:Apologies for the horrible term stolen from Pernod.

What are peoples thoughts on the growing trend towards the premiumisation of malt whisky. By premiumisation I mean taking a known (or even largely ignored) brand and repackaging it as a premium product. Taken to its extreme certain expressions are given a fancy name, put in a pretty box, and sold for 100's of pounds more than common sence dictates it's "worth".

Diageo, Chivas/Pernod etc. have in recent months spoken of it being a large growth area. Even smaller outfits such as Inverhouse have polished their Balblair brand, with no doubt the likes of Old Pulteney being given a tickle in the next round of marketing budget.

For me I can see it as a two edged sword.

I'm happy for distilleries to get more money, though how much of the premiumisation goes to the distiller, and how much to the shareholders and marketeers one wonders.

I don't much mind if big name distilleries are able to sell whisky to Japan at £500 a bottle by giving it a fancy name and package. Provided of course they are also equally happy to share a splash of it at WL :)

However I want to buy good everday drinking whisky at the £20-25 a bottle price point. Rather than the premium whiskies helping to support the price of the bread and butter expressions, it seems some distilleries are moving their whole range up a price / packaging notch!

I'm all for catching the eye of the supermarket purchaser, but I'd much prefer them to spend their money on developing a relationship with me (Ardbeg, Glenlivet), than trying to dazzle me with fancy curves on their bottles. I'd happily buy whisky in a cheap bottle with a screw top, provided it tasted the same, and cost a few quid less, and will have to look at IBs if I want something a little older / special.

Rufus.

I think all the distilleries are trying to go upscale to boost their margins whether it be in existing markets or in the emerging ones,case in point,
Highland Park,when they put the 15yo into the range and bumped prices way up,ie I could buy the 12yo for $29.99 and the 18yo for $39.99 in August of 2006,fast forward to January 2007-12y0-$39.99-15yo-$49.99 and the 18yo-$69.99,they all want their product to be in the premium catagory to the buying public wherever it may be,if the world economy stays up they will sell everything they can distill, if it hiccups it could be the 1980's all over again,so I will buy alot of what I really like now,just in case.Cheers
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Postby killerwhale » Wed Apr 11, 2007 6:24 am

I think it'll happen with prices 'inching' up all the time..... new packaging will probably come to those products that find themselves lagging behind the leaders..... some brands will get away with it, while others will suffer.... probably a good idea to stock up on the higher end malts that you like (if you can), may save you some cash in the not too distant future....
I do hope however that if some of these distilleries plan on China/India (as mentioned earlier) booming, that they will make a lot of product and hopefully these 'new' markets take time to grow.... this will leave a glut and benefit consumers.
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Postby les taylor » Wed Apr 11, 2007 8:02 am

killerwhale wrote:I think it'll happen with prices 'inching' up all the time..... new packaging will probably come to those products that find themselves lagging behind the leaders..... some brands will get away with it, while others will suffer.... probably a good idea to stock up on the higher end malts that you like (if you can), may save you some cash in the not too distant future....
I do hope however that if some of these distilleries plan on China/India (as mentioned earlier) booming, that they will make a lot of product and hopefully these 'new' markets take time to grow.... this will leave a glut and benefit consumers.



It brings us back to the old adage about stocking up while you can with things that you like. Then if prices boom you are quids in. If they crash then its stock that you want to drink anyway.

I just hope that the bean counters don't take they customers for fools and squeeze the prices to high.



:)
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Postby kljostad » Wed Apr 11, 2007 8:38 am

Well, as everybody who lives off selling something, I guess the distilleries want to make money from what they do. That is just the nature of the game. Luckily, it seems that most distilleries I have visited is very focused on quality. I hope that attitude survives the increasing market. Of course, the larger corporations distance themselves from the product more than a small independent distillery (the few that are left), and I suspect they have the money closer in mind. They also keep production levels under control, to keep prices high. I think one of the worst examples is Port Ellen. After they closed down the distillery, prices rocketed, and now they make a fortune out of it. What do you think will happen when they run out of stock? My guess is that they will reopen the distillery within months.

What is more interesting is that some of the best known distilleries will have huge problems increasing their production. For example, the Islay distilleries face problems that are not easily solved. Because of the limited space on the ferry, they already have problems getting the raw materials to the Island, and the same problems getting the finished product and the grist off the Island. There is only so much raw materials they can produce on the Island, and what is produced there (for example the peated malt from Port Ellen) is already among the most expensive in the industry, I have been told. I read in their local newspaper that Caol Ila is planning to almost double their production. How they are going to manage that, with a ferry with already very limited capacity is beyond me. It will take massive investments to improve the infrastructure.
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Postby les taylor » Wed Apr 11, 2007 8:55 am

Kljostad wrote:-

I think one of the worst examples is Port Ellen. After they closed down the distillery, prices rocketed, and now they make a fortune out of it. What do you think will happen when they run out of stock? My guess is that they will reopen the distillery within months.



Kljostad I think I remember reading that they stripped all the machinery out of the distillery and that it will never re open. Which is an awful shame. Perhaps if I'm wrong, I'm happy to be corrected.



:)
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Postby kljostad » Wed Apr 11, 2007 8:57 am

les taylor wrote:Kljostad wrote:-

I think one of the worst examples is Port Ellen. After they closed down the distillery, prices rocketed, and now they make a fortune out of it. What do you think will happen when they run out of stock? My guess is that they will reopen the distillery within months.



Kljostad I think I remember reading that they stripped all the machinery out of the distillery and that it will never re open. Which is an awful shame. Perhaps if I'm wrong, I'm happy to be corrected.
:)


Well, if I am right, remember where you heard it first... :-)
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Postby corbuso » Wed Apr 11, 2007 11:11 am

kljostad wrote: They also keep production levels under control, to keep prices high. I think one of the worst examples is Port Ellen. After they closed down the distillery, prices rocketed, and now they make a fortune out of it. What do you think will happen when they run out of stock? My guess is that they will reopen the distillery within months.

I read in their local newspaper that Caol Ila is planning to almost double their production. How they are going to manage that, with a ferry with already very limited capacity is beyond me. It will take massive investments to improve the infrastructure.


To my opinion, Port Ellen is definitely out, same is true for Brora. These distilleries were old fashioned and were not designed for a modern production, where you need only a handful of staff to produce millions of litre of whisky. That's why Diageo is now building a new distillery.

To come back to Premiumisation, the distillers are not making much benefits with whiskies sold in supermarkets for £20. Now, with the premiusiation, they can make money and they will try do it as much as possible. If you can get earn more money, why don't make it? If we go back to the example of Macallan, Macallan can't produce enough 25 YO to satisfy the demand?
Personaly, the price are now getting very hefty and I would not be suprised to see the demand for Superpremiums going down in Eirope in the next few years if it continues like that. If you have an excellent 25 YO whisky for about £100, you might buy 2 or 3 of them. If the same bottle is now £200, then you might not buy one...
As long as the demand is there, prices will go up.

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Postby Mr Fjeld » Wed Apr 11, 2007 11:36 am

Personally I don't think the perception of the bog standard single malt will be that different in the future. And I agree with those who predict that only a few of the brands will be succesful as "premium malts" such as Macallan and Ardbeg etc.

The prices will undoubtedly go up irrespective of which brand or version, and as Lawrence says it might be the right time to stock up - at least the whiskies that is expected to have a future collector value.

But although standard single malts on the whole will be more expensive, it will not be outside the average enthusiast's economic reach. The older expressions may of course become very expensive but that is to be expected. My expectations on this is exactly that: the standard whiskies will become more expensive but still within most customers reach, the special editions however, and the rare and the older expressions will top the premium segment and will possibly be outside ordinary wage earners wallet. Collectors and posers alike always go for the top of the line stuff - of everything - but my impression is that the producers are aware of this and hence cannot risk making standard single malt too expensive. If it does become too expensive then there will be none left to make it a premium product. Who are we kidding - or don't we realise that despite our own ideas of single malt as fairly democratically distributed amongst all the society's strata - single malt is already considered as premium by all outsiders.

As for the Port Ellen, I'm sure the prices are going up but the annual releases are not really more expensive than other 20-30 year old whiskies are they?
Last edited by Mr Fjeld on Wed Apr 11, 2007 1:40 pm, edited 1 time in total.
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Postby irishwhiskeychaser » Wed Apr 11, 2007 11:45 am

Balblair is a very recent example of this which I am very skeptical about.

Old 16yo £30.00 8)

Old 1979 (26yo) £52.50 8)



New 1997 (Circa 10yo) £28.00 :shock:

New 1989 (Circa 18yo) £40.00 :shock: :shock:

New 1979 (Circa 27yo) £85.00 :shock: :shock: :shock:


I mean this is a good whisky and probably underpriced originally for the age but there was a reason for that. It is not a welknown distillery and does not even have a decent cult following so where are they comming from. What market research has shown that they can garner this extra price???? We will wait and see.

I have ordered an old 26yo anyway and saving 30quid in the process while I can :roll:
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Postby Lawrence » Wed Apr 11, 2007 4:00 pm

The other point I touched on briefly is the tax component of the price of malts. Here in my market the government monopoly takes in a huge amount of the retail price and the agent/distiller is left with very little. Naturally the agent/distiller will sell their product in a market when they get to keep more of the retail price.

Here is an example; Aberlour 12 DM is not normally sold in BC and the local manager brought in 50 cases before Christmas. He received a bit of a rocket from HO; they could have sold those cases in the USA for a much higher margin.

I think we will see repositioning of stocks to lower tax regimes in the future.

Good thread by the way.
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Postby peergynt323 » Wed Apr 11, 2007 4:54 pm

irishwhiskeychaser wrote:I mean this is a good whisky and probably underpriced originally for the age but there was a reason for that. It is not a welknown distillery and does not even have a decent cult following so where are they comming from. What market research has shown that they can garner this extra price????


In business class they always tell you the story of the tourist shop where the owner takes the day off and tells the worker to halve the prices of the Native American jewelry items that aren't selling very well. The worker misreads it and accidentally doubles the prices and the items sell out.

Wine works the same way. You can even find websites that say a $30+ bottle of wine has potential for long-term aging while a <$30 bottle should be drunk now.

Why wouldn't SMSW work the same way?
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Postby RufusA » Thu Apr 12, 2007 12:53 am

peergynt323 wrote:In business class they always tell you the story of the tourist shop where the owner takes the day off and tells the worker to halve the prices of the Native American jewelry items that aren't selling very well. The worker misreads it and accidentally doubles the prices and the items sell out.

Why wouldn't SMSW work the same way?


Indeed - I've often spurned Glen Moray, purely on the fact it's usually a good £10 cheaper than other whiskies, and has no age statement.

However was "forced" to buy a bottle when Sainsburys had reduced it to under £13 and I needed something to dilute my lemsip (a lemon cold and flu remedy) with! Whilst not the most complex, involved or characterful whiskies it's perfectly palettable, and much more pleasant to drink than blends costing over 25% more.

If however it had been on the shelf at £22 odd, then reduced to £17, I might not even have noticed the lack of age and grabbed and quaffed it as a billy bargain.

Mind, you can't beat Glen Ranoch (sic) as the best whisky for diluting medicine! Why would you buy blends?

Rufus.
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Postby irishwhiskeychaser » Thu Apr 12, 2007 10:27 am

peergynt323 wrote:In business class they always tell you the story of the tourist shop where the owner takes the day off and tells the worker to halve the prices of the Native American jewelry items that aren't selling very well. The worker misreads it and accidentally doubles the prices and the items sell out.

Wine works the same way. You can even find websites that say a $30+ bottle of wine has potential for long-term aging while a <$30 bottle should be drunk now.

Why wouldn't SMSW work the same way?



That is a bit too simplistic....

There usually is a reason why some whiskies are more expensive/cheaper than others. That is usually down to

1. Quality of the product (i.e. how good is the product)
2. Market placement (i.e. how good is it's public image)
3. Market Demand (i.e. how much do customers value the products, desirablity)

In Economics there is a basic premise ....

That in a competitive free market, price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium. SO basically any whisky will have a fairly predictable market share in ratio to the market conditions of the time. i.e. Laphroaig will always have a very large share in contrast to Balblair who will have a very small share. (Unless so super marketing guru turns it into the next thing but these success stories are few and far between)

In relation to ...

Premium pricing (also called prestige pricing) is the strategy of pricing at, or near, the high end of the possible price range. People will buy a premium priced product because:

1.They believe the high price is an indication of good quality;
2.They believe it to be a sign of self worth - "They are worth it" - It authenticates their success and status - It is a signal to others that they are a member of an exclusive group.
3.They require optimun quality for the high cost - The need to buy nothing but the best

Now my problem here is number 3. There seems to be a lot of single malts out their trying to punch above their weight in terms of price and more and more are jumping on the band wagon. Once people realise that this is the case it could well spell disaster for these distilleries.

The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex products that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the more of a premium they are prepared to pay. The classic example of this is the pricing of the snack cake Twinkies, which were perceived as low quality when the price was lowered. Note, however, that excessive reliance on the price/quantity relationship by consumers may lead to the raising of prices on all products and services, even those of low quality, which in turn causes the price/quality relationship to no longer apply.

This I believe is happening at the moment and can very easily have a negative effect of demand of the so called lesser distilleries in the long run.

Lastly whisky is a non essiential luxury item. Therefore if there is a major recession in the world economy (like so many analysts predict) then it's these very whisky companies that will suffer first.

Economies always work in cycles. Ups and Downs.
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