Scotch should smooth production rate

With the Scotch industry undergoing a spike in production to meet increasing demand worldwide, Dutch financiers Rabobank have lent a hand to help settle the spirit’s naturally unstable and fluctuating production model.

Following research into the Scotch business, the Netherlands-based bank picked out areas of improvement that could be made to help the industry capitalise on the current boom in sales in the US and emerging markets.

The industry is ramping up production to rebuild the declining stocks of longer aged whiskies, which run the inherent risk of missing their demand peak and becoming overstock when the barrels are opened and the spirit is bottled for sale in years to come.

“The long maturation process of Scotch adds to the challenges of trying to match current production with uncertain future demand”, stated Rabobank analyst, Stephen Rannekleiv.

As a result, “the Scotch whisky industry has historically suffered from the acute cyclicality of production, which has led to periods of excess supply followed by periods of shortage”.

The new report from Rabobank, ‘Now That’s Smooth’, suggests that a smoother rate of production growth could reduce these historic shifts between excess supply and shortages.

There are three main areas of improvement picked out by the report:

Smoothing out the lumps

“The production cycles in Scotch seem fairly predictable, generally moving in six to seven-year cycles (peak to peak) in which annual production increases range from 30 percent to 50 percent (trough to peak), and then return to near previous lows. These peaks and troughs typically create periods of excess supply, followed by periods of tight inventories.

“The Scotch industry should attempt to achieve more stable production growth in the future, eliminating the surges and declines that have been characteristic of the past.”

Slow and steady growth

“From 2006 to 2012, total inventories rose 17 percent, while annual consumption rose just over 11 percent. This level of inventory growth is clearly needed in the short term to create future availability of aged stocks, but at some point, the production should return to a more rational rate of growth more in line with a slightly conservative projection of consumption growth.

“For the Scotch industry, aiming to guide inventory growth based on projections that err on the side of conservative rather than optimistic forecasts, will inevitably lead to occasional missed sales opportunities, but for a category that seeks to build its premium image based on a perception of scarcity, this would be preferable to allowing excess inventories to flood the market.”

Innovate rather than discount

“At some point, a return to industry oversupply is probably inevitable and the industry should be prepared. In the current environment, whiskies of other origins (particularly American and Canadian) are generating tremendous growth through flavour innovations.

“In the future, should oversupply return, expansion into flavour extensions would be a better response from a strategic perspective than the discounting seen in the past, which also serves to undermine the prestige of the category.

“While this may not be appropriate for all brands, blended whisky brands in basic and premium price areas may need to innovate to retain relevance with their consumers in the face of increasing competition from other whiskies.”