FROM THE VAULTS: RECESSION
Sitting pretty
Back in 2009, while the economic downturn was causing chaos in many sectors of the economy, the whisky industry was bucking the trend and even prospering. We asked a panel of experts at the time how they saw the industry faring in the years ahead. How accurate were their predictions? Find out in this feature from Unfiltered issue 2 in 2009
Sitting in a hotel room in the ramshackle town of Guwahati, capital of the remote north-east Indian state of Assam, I am honoured for my presence with what my business associates consider the ultimate gift – a bottle of Johnnie Walker Black Label. Unavailable in Guwahati’s spartan liquor stores, the precious cargo had in fact been flown in from Bangkok especially for our meeting. I’m sure Diageo could care less that their famous brand was drunk topped to the brim with a mixture of soda and water.
This scene is being played out in hotel rooms and bars across India, and across the developing world, where the increasing desire for Scotch is helping the industry weather the worst of the economic storms.
While other sectors are increasingly feeling the pain of the global credit crunch with nosediving profits and enforced job cuts, the whisky industry seems, at the time of going to press, well-placed to stand strong – and even prosper.
Last time a recession bit in the UK, in the early 1980s, the industry suffered a raft of closures with iconic names such as Port Ellen and Dallas Dhu going out of business. But this time round, the whisky sector appears to be bucking the economic trend and looks set to avoid a repeat of the closures witnessed in the 80s.
Things are different this time around, not least because the market is being driven by a global thirst for Scotch.
The Scotch Whisky Association says that the export market for 2007 was worth £2.8 billion. Tariff reform helped boost the Indian market by 36 per cent in value from 2006, to over £33m.
Direct shipments to Singapore, meanwhile – where the majority of the whisky is then shipped to China and other markets in Southeast Asia – were up 84 per cent to £58m. In simple export terms, that makes it the industry’s fourth largest market.
“It’s one of the interesting things about life that once a country becomes more prosperous, one of the drinks they all seem to want is Scotch,” says Brian Townsend, author of Scotch Missed, which documents the demise of Scotland’s distilleries. “We’re talking about countries with hundreds of millions of inhabitants, so even if only a small percentage of them buy whisky, you can reckon that there are a lot of people out there ready to buy it.”
Euan Shand, managing director at Duncan Taylor and Co (DTC), has been in the whisky industry his whole life, and has seen its good times and bad first-hand.
“The industry is cyclical and has been for 200 years,” he says. “It follows the ups and downs of the economy and has traditionally supplied mature markets such as the UK, the US, France and Germany.
“In the 1970s, our only real Far East market was Japan,” he continues. “We sold small amounts into Korea, Singapore and Taiwan, but these days there is an overwhelming interest from China and other major markets in the east. They know about whisky, they’ve seen the advertising and they’d like a piece of the action.”
Jeremy Cunnington, senior alcoholic drinks analyst at the business researcher Euromonitor, also sees the industry’s fortunes as closely pegged to a thriving export market.
Last time a recession bit in the UK, in the early 1980s, the industry suffered a raft of closures with iconic names such as Port Ellen and Dallas Dhu going out of business
“Emerging market growth has been driven by growing prosperity, and consumers are using their wealth to trade up to more premium products from their traditional local spirits. Scotch offers that more premium and prestigious appeal,” he says. “The current economic woes may well dent this growth in the short term if those countries are badly hit, but once economic growth returns, volume growth will follow.”
The expanding export market is the salvation of an industry left reeling by the closures of the 1980s, and now bracing itself for another recession. But experts agree that distillers are in much better shape now than 20 years ago.
Diageo is preparing to start production next spring at its new Roseisle distillery near the Moray Coast, a £100m facility designed to help meet long-term export demand. “Roseisle is a big statement of intent from Diageo – it’s a real stake in the ground about our positive outlook for the future,” says Charles Allen, Diageo’s director for single malts and Scotch whisky heritage.
“This is a long-term business and we’re having to get our crystal ball out and look out over an 18–20-year horizon. But looking at that suggests we need extra capacity and what no one wants is to get to 2020 or 2025 and look back and regret not having put that capacity in place. We are betting on growth and we have a responsibility as industry leaders to drive that growth.”
But a number of smaller distilleries have also re-entered the market, and shown that there’s as much of a place for boutique distillers as for the major producers.
ABOVE: Billy Walker
Master blender Billy Walker led the acquisition of BenRiach from Chivas Brothers, the Scotch whisky business of Pernod Ricard, in 2004. This August, BenRiach increased its portfolio, taking over Glendronach distillery from Pernod Ricard, and helping to secure a bright future for a distillery which had been mothballed until as recently as 2002.
“The shape of the industry is healthier and the future looks better,” says Walker. “I don’t see any returns to the closures of the 1980s. Whatever’s happened in the current economic climate is probably still to feed through, but this is a long-term business, and the bigger companies have done such a terrific job that I think it’s unlikely.”
“The industry has a record of becoming overenthusiastic, and when that happens it opens distilleries, expands capacity and starts ramping up production, and in many cases it over-eggs the pudding”
ALAN GRAY
The industry is also going into the recession on the back of some strong growth figures.
“We had three very good years, in 2005, 2006 and 2007, when exports were up in volume by an average of 6 per cent,” says Alan Gray, who’s been compiling the Scotch Whisky Industry Review for the past 31 years. “That compares with the period 1995-2005, when there was average growth of about 1 per cent. So it has been a quantum leap.
“Based on 2007, I think over the next five years, average annual growth should be about 2.5 per cent in volume. It’s not as good as the last three years, but is certainly above the longterm trend. My projection is quite conservative, but I may have to revise it further downwards, because I don’t think anyone knows just how severe this downturn is going to be.”
Ingvar Ronde, editor of Whisky Review, also sees the industry facing up well to the economic downturn.
“Thanks to the momentum it has been building up these past couple of years, the next year might be one of at least zero growth, but the industry should be prepared for a couple of tough years in 2009 and 2010.”
One concern is the difficulty in making projections for output over the course of the time needed to create a single malt.
“The industry has a record of becoming overenthusiastic, and when that happens it opens distilleries, expands capacity and starts ramping up production, and in many cases it over-eggs the pudding,” says Alan Gray. “All it takes is a bit of a downturn to run into trouble, which could happen this time. I don’t think closures will be on the same scale as the 1980s, but I wouldn’t rule them out.”
For Euan Shand at DTC, the key to the industry’s continued success is not to fall into the trap of overproduction.
“To avoid closures, we shouldn’t produce too much and should continue to go upmarket,” he says. “Selling off blends at supermarket prices may be a method of keeping distilleries in production but it undermines a premium product that takes time to mature.
“Distilleries only close down when too much is produced and they consequently have to get money in fast. Maybe Springbank is showing the way forward, not just producing for production’s sake.”
Euromonitor’s Jeremy Cunnington agrees. ‘‘The industry needs to avoid getting irrationally exuberant with its predictions for future growth and over-building production facilities,” he says. “It has to avoid devaluing Scotch’s prestige image by selling it too cheaply in these emerging markets and ruining its cachet.”
For Trevor Cowan, former chief blender at Invergordon, the memories of the devastating closures of 20 years ago are still fresh in his mind, and he’s hopeful no one will have to live through a repeat of those times.
“I remember losing a tremendous number of friends from the industry in just one weekend at that time,” he says. “It was absolutely wicked. Now, what pleases me is that there are new distilleries actually being built and old ones are being reopened. I’m very enthusiastic about the industry’s prospects.”
There will be glasses raised from Scotland’s islands and glens to Guwahati and beyond in support of that sentiment.
*Job titles and information were correct as of time of writing in 2009