Awash With Whisk(e)y
Faltering demand, especially in the USA, has promoted concerns about oversupply and the prospect of another whisk(e)y loch. A number of Scotch distillers are slowing down production, but for Tom Bruce-Gardyne it feels like a bigger issue across the pond …
“Every drop of liquid we distil, every barrel we choose to fill, every palate that we make and move around the world has to work harder for returns on our capital.” This was the solemn pledge of Ewan Andrew, Diageo’s President Global Supply Chain & Procurement, at the company’s Capital Markets Day presentation that followed its full-year results on August 6th.
The current value of Diageo’s maturing stocks is put at $8.5bn, of which around two thirds is Scotch whisky. That represents a huge stash of casks slumbering in warehouses across Scotland, feeding the angels up above, and not exactly working hard.
Ewan describes Diageo’s inventory as “a sizeable competitive advantage if it is deployed correctly.” But it seems it has grown too big. “We have scaled back production and distillation,” he told analysts at the presentation. “That’s been done across Scotch, North American whiskey and Tequila. We are at the minimum requirements for future blend and support of growth.”
Judging by one of the graphs he displayed, there is to be a dramatic cut in production of about two thirds in this fiscal year, before a partial recovery through to FY29. In his words, compared to the past three years: “we are reducing our barrel by more than 50 per cent in the forward three-year cycle.”
How these cuts will fall between Scotch, North American whiskey and Tequila is unclear. We know that Diageo paused production at its third biggest malt distillery of Teaninich that has a 10m litre capacity last September, and did the same to its Roseisle maltings in November. Production at the company’s massive Cameronbridge grain distillery has also been reduced, leading to eight job cuts which has provoked the workers to go on strike.
Paddy Fletcher, co-founder of the Port of Leith distillery, believes these production cuts are really to appease City investors who struggle to grasp the long-term nature of the industry, and are demanding that Diageo look at its free cash-flow metrics. “The only way to reduce your free cash-flow, is to stop making whisky,” he says.
“But you’ll find in the background a couple of guys working in the supply chain screaming ‘Please, don’t do this to us again, because every ten years you do the same thing, and in five years’ time you’ll come back and say ‘Where’s the whisky? I’ve got massive growing demand’.”
Whisky producers cutting back
Time will tell, but it’s fair to say that Diageo is not the only Scotch producer cutting back. The independent whisky firm of Ian Macleod Distillers lowered production at its Glengoyne and Rosebank distilleries by 30 per cent this year, while there have intermittent pauses at LVMH’s Glenmorangie distillery and at Brown Forman’s Glenglassaugh and Benriach distilleries.
Brown Forman, famous for Jack Daniel’s, is well aware of the oversupply of American whiskey. The state of Kentucky is drowning in bourbon with 16.2m barrels in its warehouses at the start of the year, compared to less than 6m a decade ago.
Much of the reason for these vast stocks can be put down to speculation. Prospectors were lured in by the promise of quick returns. It was said you could fill a barrel for $750 and flog it for $4,000 four years later to someone who would bottle it up and sell it on. There was no brand or market in sight from the outset, and in the end, there were no buyers either.
There was a similar if somewhat smaller, whiskey ‘Gold Rush’ in Ireland where the speculators have since vanished, leaving the banks who financed the stock licking their wounds. As in America, the big brands will survive, though there are plenty of deals to help drain supply. Jameson’s is on semi-permanent discount in Irish supermarkets, apparently.
Irish and American whiskey share a similar business model for new entrants to the category whereby you conceive your brand, cook up some alluring backstory, buy the liquid from a contract distiller, and tell everyone your dream is to open your own distillery one day.
It all helped to inflate a big speculative bubble that has since burst. In the UK, there was a similar stampede into gin with an explosion of new brands that came and went. But with Scotch whisky, this didn’t happen because there isn’t that model of contract distilling.
“We’ve obviously got the secondary market, and there are independent bottlers and cask investment companies, but it’s small,” says Rupert Patrick, founder & CEO of indy bottler James Eadie. “Relative to the total size of the market, it’s not even 1 per cent.”
Having worked for Diageo among other big players, he sympathises with those like Ewan Andrew tasked with trying to forecast demand in these turbulent times. “It is a massive game of chess for them,” he says. Getting predictions long or short is par for the course. “At the moment most people are probably slightly long, but maybe by 3 – 4 per cent. I don’t think by much more.”
Scotch also has various tricks up its sleeve to help manage its inventory of maturing stocks. “We’ve gone through age statements, no age statements, over-ageing, under-ageing, all sorts of things,” says Rupert. “The industry is very good at adapting to the scenario.”
Award-winning drinks columnist and author Tom Bruce-Gardyne began his career in the wine trade, managing exports for a major Sicilian producer. Now freelance for 20 years, Tom has been a weekly columnist for The Herald and his books include The Scotch Whisky Book and most recently Scotch Whisky Treasures. This content has been produced in collaboration with WhiskyInvestDirect, the Scotch whisky trading platform for distillers, independent bottlers, and private investors.