Scotch Whisky – Recovery Position

Scotch moved from recession to renaissance with ease, but the split between mature and emerging markets has never been clearer, says Spiros Malandrakis of Euromonitor International

TRIUMPHANT SHIPMENT announcements and boisterous production plans have been setting the tone throughout the resurgent Scotch industry for a while now. According to the Scotch Whisky Association’s latest announcement in April 2011, exports rose by 10% in value in 2010 to set a new record of £3.45 billion. Right on cue, key players unveiled plans to expand production capacity in a series of defiant statements hinting at expectations that the industry will not only survive the prolonged slump relatively unscathed, but is also bracing itself for consistent and rising gains moving forward.

For example, Diageo has lined up a capacity investment for its Caol lla distillery in Scotland. The spirits behemoth announced that it will spend £3.5 million (US$5.6m) expanding and upgrading the facility which is located on the western island of Islay, with the distillery seeing its production capacity increased by 700,000 litres of pure alcohol (LPA) per year from 5.7m litres to 6.4m litres.

Bacardi was not left behind. Having bought 100 acres of land in central Scotland and in the process of developing a second maturation facility for Dewar’s, the company is focusing on renovating three ageing warehouses, while a blending facility will be built during 2011. The group has also redeveloped its site in Glasgow, where it has built five maturation warehouses and a blend centre, as well as installed bottling lines and packing equipment.  Bacardi plans to invest US$250m in stages up to 2017 in anticipation of rising global demand for its flagship Dewar’s brand.

Meanwhile, Pernod Ricard has expanded production of The Glenlivet, having increased capacity by 75%, while The Edrington Group, distiller of The Famous Grouse, announced that it will invest £10m in installing 33 new whisky vats and a high-speed bottling line at the company’s Glasgow site.

So, the question remains, was the recession-induced slowdown merely a blip that has now been left behind?

Beyond shipment figures and buoyant company projections, actual sales volumes did indeed witness a relative rebound – if less spectacular than suggested and definitely not uniform. According to Euromonitor International, global blended Scotch whisky sales posted a 1% total volume increase in 2010, while single malt actually registered a decline of 1% for the year. Nevertheless, both the blended and single malt categories achieved a marked improvement on their respective 1% and 3% declines in 2009. However, not surprisingly, the widening discrepancy between the performances of mature and emerging nations, which has come to be a common thread permeating sales in all major alcoholic drinks categories, also left its mark on Scotch.

Within this context, Asia Pacific, the Middle East and Africa and Latin America all saw a strong bounce-back in both categories as consumption and drinking habits were quick to reflect the buoyancy of their respective economies and the resulting demand for aspirational, Western brands. On the other hand, sales in eastern Europe successfully escaped 2009’s virtual collapse in the case of blended Scotch, although they did not fare as well in the case of single malts. Stalling premiumisation trends and supply chain disruptions in Russia were to blame, although anecdotal information suggests that recovery is currently under way.

The key point and a common theme that was also witnessed during previous recessionary circles in emerging nations (such as the Latin American crisis of 2001-2002) is that while challenging socio-economic conditions in such markets can result in sharp declines in sales, consumption rates also tend to bounce back much more quickly than in mature markets. Taking into account the widening discrepancies between mature and emerging economies, it is indeed little wonder that developing nations are climbing higher on key players’ priority agendas.

As a matter of fact, Scotch sales in mature markets not only appeared to continue to be mired in stagnation in 2010, but the advancing wave of austerity and fiscal tightening measures sweeping these nations give little hope for a strong rebound any time soon. According to Euromonitor International, both blended and single malt styles saw more than a 2% total volume decline in western Europe at the same time as North America put in a largely uninspiring performance, with a minor gain for single malts and a continuing, if slower, decline for blended Scotch.

The really painful thorn in Scotch manufacturers’ still haemorrhaging sides is, unsurprisingly, located in the crumbling European periphery. The drops witnessed in key markets such as Spain, Greece and Ireland have been eye-watering to say the least. The example of Greece, posting a 16% total volume decline in blended Scotch and more than a 20% drop in single malts, provides a cautionary tale of the close if not direct correlation between drinking habits and the inescapable gravitational pull of economic fundamentals.

According to Euromonitor International, both the single and blended malt Scotch categories are expected to post a 1% total volume CAGR over 2010-2015. Nevertheless, the already apparent shift towards emerging markets will gain further momentum at the same time as sales in mature regions face further – if relatively more moderate – declines. Trademark protection negotiations will be the key to unlocking emerging market potential and escaping the plague of counterfeit products.

But beyond the great expectations stemming from the hopefully insatiable thirst for aspirational Scotch consumption in emerging markets, innovation and the riddle of expanding the categories’ demographic will also soon need to be addressed. The debate between the supporters of a tried and tested marketing approach revolving around age statements versus the backers of a more eclectic, vintage year-based proposition provides a glimpse of the available promotional avenues moving forward, and it is the latter that will increasingly come to the fore.

On a rather more radical note, the recent launch of Ginger Grouse on tap (a premix of The Famous Grouse and ginger beer, a ground-breaking launch rewriting the rulebook for the everconservative Scotch category, might provide an injection of some sorely needed youth and female appeal to the category. Scotch manufacturers might be thinking in decades, but tomorrow’s discerning Scotch aficionados could well be the casual, experimental drinkers of today. db