Malt frisky

With single malts growing at twice the rate of the overall Scotch whisky market, Kate Ennis believes the leading players can allow a little optimism to tint their predictions

When you are dealing with a product that takes at least three years to mature, but invariably much longer, to say that the Scotch whisky industry has to be forward thinking in anticipating future trends is putting things rather mildly. If Scotch distillers do, indeed, have a crystal ball to peer into, they would have already rubbed their hands with glee having foreseen the global renaissance the sector is currently enjoying.

Consolidating its position as a spirit with widespread international appeal, Scotch saw worldwide demand fuel strong growth in both volume and value terms during 2005, resulting in the industry’s third best annual export performance, according to the Scotch Whisky Association (SWA). The overall value of Scotch whisky exports was up 4% on 2004, reaching £2.36 billion and the biggest players, Diageo and Pernod Ricard, were major driving forces with both companies recording substantial profits. But where shipments of blends increased by 4%, malts rose by 8% (to £380 million) proving that single malt is no longer a niche sub-sector but a category in its own right. 

The future seems full of eastern promise, thanks to strong growth across Asia where the emerging middle class is looking to premium Western products like Scotch whisky to make a statement about lifestyle and success. There’s been good growth in Thailand, South Korea and Singapore, but China and Taiwan are the Asian markets causing the greatest stir.

Chinese potential
Latest figures show China has become the industry’s 15th largest market by value, growing 86% in 2005 to £46 million. In joining the WTO last year, China reduced its import tariffs to 10% and liberalised distribution channels, which attracted trade. Blended Scotch dominates the market (at around 93%) and Chivas Regal 12 Year Old is the largest imported spirit brand there, at 700,000 cases a year.

The Macallan is one malt brand already enjoying success there. “China has a great appetite for dark spirits and the market is being opened up strongly by other Scotch brands; but entering as the most expensive, most luxurious, highest cachet malt, we are more than doubling our business year on year,” says Ken Grier, Edrington’s director of malts.

William Grant & Sons is also a key player in China, having recently invested £1m to secure a base in Shanghai employing 25 staff. “Glenfiddich has been in key five-star outlets for some time, but single malt Scotch whisky is still a new category for the Chinese,” says David Hume of William Grant. “We have a brand ambassador in Shanghai who can start to communicate why single malt is different from the deluxe premium blends that consumers have typically come across,” he adds.

William Grant also has an office in Taiwan where an exclusive blended malt has just been released, and single malts are also of importance here too. Neil MacDonald, brand director for malts at Pernod Ricard thinks the connoisseur malt culture of Japan influences all Asian markets. “For our single malt brands, The Glenlivet in particular, we are seeing real interest within Asia, accelerated by the rapid growth in Taiwan and the strong appreciation for malt in Japan.” He points out, however, that the Taiwanese market has been very volatile. It has grown by 100% each year for the last four years, so the industry is aware that volumes could disappear just as fast.

Russia refined
Scotch recently overtook Cognac as the most popular imported spirit in Russia for the first time in 200 years and whisky’s growth here is being led by single malts, rather than blends, among the affluent and super-rich oligarchs. Encouraging figures show that malts are achieving 35% volume growth compared to 25% for total whisky.

The biggest sellers here are Glenfiddich and The Macallan. “The Macallan Lalique Decanter – a 50-year-old Macallan in a limited edition crystal decanter priced at US$6,000 – has proved hugely successful in Russia,” admits Grier. Yet the stereotype of Russians indiscriminately buying expensive products may be out of date. Grier feels there is real understanding of premium spirits’ credentials. “They appreciate the strong provenance and exquisite crafting that justifies the high price point,” he says.

William Grant has just announced the appointment of a country market manager in Moscow to consolidate its own strong position and maximise opportunities to drive growth forward. “We’re having much success at the super-premium end with rare whiskies from Glenfiddich and The Balvenie and we have a large stock of rare, aged malts to really capitalise on that area in the future,” says Hume.

Passage to India
Perhaps the market of greatest interest, however, is India but not because it’s a potentially big whisky market – it is a big market already, the world’s biggest in fact. Yet 98% of whisky consumed there is produced locally with Scotch whisky accounting for less than 1% as market access is severely restricted by a discriminatory tax regime. David Williamson, spokesman for the SWA says, “There is a basic customs duty of 150%, which is very high by international standards, but then there’s an additional tax on imported spirits inflating the duty burden up to 550% in some circumstances.”

According to the SWA this is a protectionist measure in breach of WTO rules. But in response India claims the SWA and EU have been building non-trade barriers over definition of their products (some are made from molasses) so Indian whiskies equally have no access to Western markets.

Negotiations remain at a stalemate for now. The SWA was disappointed this spring when India maintained this discriminatory fiscal regime against Scotch whisky imports in its new budget.

However Western whisky is still sought after in India, particularly by younger consumers, so they turn to the grey market which exacerbates the problem with fakes. The SWA works to protect Scotch from unfair competition like this and won a case at the Delhi high court against an Indian product called Red Scot which was deliberately misleading consumers into thinking it was of Scottish origin.

Turkey is another market earmarked as promising for Scotch that is being held back by fiscal trade barriers. Its current excise system effectively taxes Scotch at twice the rate of the local spirit, raki. However, the SWA expects things to improve when Turkey starts the EU accession process and will have to comply with single market rules.

Developed markets
In mature markets, conditions remain challenging and total exports to the EU were down 11%, as the industry faced
difficult economic and operating conditions. But it’s not all bad news in established markets. The US is acting as a beacon of growth in the premium and malt sectors.

Although America’s market for blended malts is mature, there’s still great potential for single malts. Only the size of the US is
an obstacle, in terms of securing effective distribution. Malt exports have almost trebled in the last 10 years (to £89m) as American consumers trade up from standard blends to more premium whiskies.

Yet if all premium malts are well-crafted with heritage and provenance, differentiation is needed to make products stand
out. This is a big opportunity for malts with bold identities. “We are really benefiting in the US with Laphroaig,” says Michael Cockram, Scotch category director at Jim Beam Brands. “It is outpacing category growth there, rising by around 23% annually for the last four years.” The Macallan, with its lighter style Macallan Fine Oak expression is also doing well.

Trading up
It seems that premiumisation and differentiation are the trade’s two watchwords when looking for improved performance in mature markets. In terms of building upon premium values, the entrenched culture of discounting in multiple grocers in the UK and France is detrimental and poses a particular problem. The strategy can drive volume growth in the short term but isn’t sustainable and devalues brands. It’s a particularly dangerous tactic with malts.

Creating a buzz around a brand also works to boost sales and Diageo has been particularly successful with this. “Brands like Johnnie Walker with its ‘Keep Walking’ campaign and Formula One sponsorship have changed the face of Scotch marketing,” says Diageo’s Stephen Morley. “We’re creating iconic global brands associated with emotional values
as well as the quality of the whisky. Johnnie Walker is in double-digit growth as a result,” he adds. J&B’s European Nightology campaign has also garnered a great response.

Promoting both “experience” and “luxury” is a theory that Luke Tegner, brand director for premium malt The Glenrothes, also believes in. “It’s about the moment, who you share it with.” But ultimately Tegner believes success is about taste credentials. “In established markets it’s so much more about the whisky in the bottle,” he says. “If you have an outstanding product people will stay with you.”

Attracting the more elusive new whisky drinker through innovative products is another crucial aim of today’s whisky industry. William Grant’s Monkey Shoulder, for example, is doing well at attracting a new audience. As a blend of three malts in a stylish bourbon-style bottle, it provides an ideal stepping stone between blends and malts.

A real pioneer in this innovative field has been John Glaser with his Compass Box Whisky range. So what’s his concept? “It’s all about making great whisky more approachable in terms of the liquid, the way to drink it, the look and feel, without dumbing it down,” says Glaser. “You don’t have to have a ‘glen’ associated with your name to get the interest and respect of premium malt drinkers.”

The thinking behind new releases such as John’s Peat Monster is a move towards explaining flavours too, which may help to demystify whisky for new audiences unsure of what to expect. Jim Beam Brand’s new launch from Ardmore in 2007 will be based on an “interesting flavour proposition”. “It will actually tell people what it tastes like on the bottle because few whiskies actually do that,” says Cockram.

These certainly are exciting times in an upbeat whisky sector where it seems pretty much anything is possible. But the most worrying question is whether malts that are already in limited supply, will be reassigned to these emerging markets. Perhaps the salient point to remember is that the Scotch industry has always worked hard to identify future patterns in different markets and manage supply over many years. The challenge is to continue to maintain sustainable growth across 200 world markets in the future. Looks like the industry will have to keep that crystal ball handy for a good while yet. 

MARKETS TO WATCH

CHINA
Distillers see big potential in terms of size of population and economic growth. There is an expanding middle class who want to associate with the West’s most premium products. The market is in its early stages, with a young, aspirational audience largely consuming premium Scotch blends in the on-trade. There is no malt category here yet – Chinese consumers just see the cachet of drinking branded international spirits. Distillers are planning for long-term growth.
Key brands: Chivas Regal 12 Year Old, Johnnie Walker, Famous Grouse, Glenfiddich, The Macallan.

TAIWAN
Growth here has been very fast – 100% year-on-year for the last four years – so the Scotch market has come from nothing to 300,000 cases. However, it’s not thought to be indicative of how the rest of Asia will grow. The Taiwanese lounge bar trend is an ideal platform
for malt growth. But this is a volatile market and volumes could disappear just as quickly so brand building is the key strategy here.
Key brands: The Glenlivet, The Macallan, Grant’s, Johnnie Walker Green Label.

RUSSIA
Russia has a burgeoning number of affluent consumers trading up from vodka and moving away from the country’s traditional brown spirit, Cognac. Blended whisky hasn’t caught on so much here and
the big success has been in single malts due to consumer appreciation of rare, high-end spirits. In global terms, it’s still small but speedily rising up the chart of important whisky markets. Continued growth
and expansion of the malt sector is expected.
Key brands: The Macallan, Glenfiddich, Glenmorangie.

INDIA
This is already a huge whisky market with a long history. However, Scotch whisky accounts for less than 1% market share of this 100 million case spirit market with access restricted by a fiscal policy
aimed at protecting India’s domestic whisky production. Only blends historically established in the market have benefited so far. If the market is liberalised, development for Scotch would happen very rapidly as the country has already developed a taste for malts and
has plenty of well-educated whisky connoisseurs.
Key brands: Teacher’s, Johnnie Walker.

USA
As a more established Scotch market, the US is mature in the blended whiskies category but has big potential for single malts with affluent drinkers trading up towards the premium end of the sector, largely in the on-trade, looking for bespoke products with heritage and authentic quality values.
Key brands: The Macallan, Laphroaig, The Glenrothes.

© db July 2006