Whisky Business

At the Glenmorangie distillery near Tain in the Scottish highlands, the distillers explain that their name means “valley of tranquillity” in Gaelic. Lately, however, Glenmorangie has echoed with the noise of builders and fitters enlarging the distillery. The family-controlled business has expanded three times since 1977, when it first doubled output to meet growing world demand. Production doubled again in 1990, and with the completion of the latest extension, the makers of the world’s third best-selling malt whisky — meaning it’s made from malted barley, unlike the grain whisky that makes up the bulk of most blended Scotch — will have the capacity to produce around 13 million bottles a year. “We’ve come a long way since 1960, when we sold maybe 70 bottles of malt whisky worldwide,” says distillery manager Graham Eunson. “Last year we shipped over 8 million bottles — and the new capacity says we’re confident we can sell a lot more.”

Glenmorangie, which last week announced increased U.K. market share and a 12% rise in pre-tax profit, is not the only distiller in high spirits these days. Despite a sluggish global economy, 2001 was a banner year for the Scotch whisky industry, with exports exceeding 1 billion bottles for the first time ever. “The world’s love affair with whisky is far from over,” says Ian Good, chairman of the Scotch Whisky Association and CEO of the Edrington Group, which makes Cutty Sark and The Famous Grouse whiskies. “It’s still the world’s No. 1 spirit, exported to over 200 markets.”

Staying No. 1 will not be easy. Last year may have seen record export volume, but what matters most is export revenue. (Fluctuations in currency and the wholesale price of whisky can cause large swings in that.) Although sales improved in 2001, to $3.6 billion from $3.3 billion in 2000, they have yet to return to the $3.7 billion level reached in 1997 before Asia’s financial tsunami cut consumption in that part of the world. Nor will they unless key markets like the U.S. — down 7.7% last year — rebound soon. Export volume for the first eight months of 2002 is down 6.5% from last year and Alan Gray, whisky analyst for ING Financial Markets, is predicting volume growth of only 1.8% per annum over the next five years as the industry grapples with volatile economies and stiff competition from other spirits. Although recurrent predictions that Scotch would be washed away by a tidal wave of vodka and other trendy tipples have clearly proved premature, the threat remains.

Can whisky fight back? It seems to be limbering up. Last year’s partition of the Seagram drinks empire by Britain’s Diageo and Pernod Ricard of France means that the big three — Diageo and Pernod Ricard, plus Allied Domecq — now account for 57% of global sales. Although global super brands like Diageo’s J&B (the world’s top-selling Scotch), Allied Domecq’s Ballantine’s and Pernod Ricard’s Chivas Regal will inevitably kill off other whiskies, the upside of consolidation is that the industry now has players with the financial resources and distribution networks to develop new markets and keep Scotch atop the international drinks league.

For the foreseeable future their main battleground will continue to be Europe, the largest market for Scotch with exports, now worth $1.4 billion annually. For reasons nobody has been able to fathom (unless they’ve actually tasted ouzo), the Greeks drink more Scotch per capita than anyone else. Equally surprising, the French buy more whisky in a month than Cognac in a year. France remains the largest importer in volume terms, but higher margins make Spain’s market more lucrative. Last year it was the world’s top market for Scotch in value terms with sales worth $460 million. And for a business keen to downplay its tweed-‘n’-tartan image and appeal to a new generation of drinkers, the good news is that Spain’s aficionados are young. Scotch Whisky Association spokesman Campbell Evans notes that 65% of Spain’s public whisky consumption takes place between midnight and 4 a.m. “Even allowing for how late the Spanish stay up,” he says, “that suggests it’s the young clubbers drinking Scotch.”

The big challenge facing the industry is to find the next Spain. Hopes are high that the coming wave of E.U. entrants from Eastern Europe will repeat the Spanish success story. This, as Good points out, was triggered by Spain’s E.U. accession when “tariffs came down and growth took off.” Pending E.U. enlargement, however, the hot market is South Korea, where last year sales swelled over 20% to reach $256 million. Edrington has just inked a $25.6 million-a-year deal to sell premium whiskies blended specially for the Korean market under the Lancelot label. “It’s a market that sells on quality,” says Good, whose company plans to charge around $355 a bottle for the 30-year-old version of its Lancelot range. “The Koreans don’t balk at paying top prices for top Scotch.”

Although the future of Scotch will be determined by the performance of its basic, blended brands, there’s good money to be made from the single malts — as Glenmorangie’s expansion can attest. Global enthusiasm for pure malt whisky has enabled the market to grow from practically zero in the 1960s, when almost all malt whisky was sold to the big blenders, to one worth $373.5 million in sales last year. “Malt whisky,” says Good, “seems to attract younger, more upscale drinkers — and they also deliver wider profit margins. It’s a winning combination.” Although malt whisky currently represents only 5.9% of total bottled Scotch whisky sales, Good predicts its share will climb even in markets like the U.S. and Japan, where overall whisky sales have declined steadily over the past decade. “Malts and premium brands are the way we need to go,” says Good.

If proof were needed, it is to be found on the sleepy Hebridean island of Islay off the west coast of Scotland, home to Caol Ila among others malts, and where five years ago Glenmorangie gave the kiss of life to a sleeping beauty known as the Ardbeg distillery. Closed for much of the 1980s and shut down again in 1996, Ardbeg is now producing at full capacity. And over in Brittany even the French are seeking a slice of the action: although it can’t be called Scotch, the Warenghem distillery has been producing a blended “Breton” whisky for the past 15 years and has now launched its own malt, dubbed Armorik. What could be next, a Glenburgundy?