Thursday, June 5, 2014

The Current Whisk(e)y Boom is Built on the Last Glut

While I feel like this idea has been discussed before, with tales of shortages and projections of exponential growth in sales and prices on the rise, it seems worth emphasizing again.

It wasn't so long ago, say the early 2000s, that whisk(e)y was still far below the radar. The 1980s and 1990s had seen a rash of closures and sales of distilleries across Kentucky and Scotland, with the latter hit particularly hard. To put it in perspective, something like 20% of the distilleries in Scotland were closed or mothballed during the 80s and 90s, a huge decrease in capacity. In Kentucky, there were also numerous closures, with consolidation into only a few hands (Jim Beam, Brown-Forman, Heaven Hill, Four Roses, Buffalo Trace, Maker's Mark, and Wild Turkey).

While production was scaled back, often drastically at many distilleries, most were still putting new make spirit in barrels and casks, which then proceeded to sit in their warehouses. This was on top of old stock that had been made in the 1970s and even 1960s, which had been produced when sales figures were much more robust (Mad Men, remember?).

This meant that by the time the 2000s rolled around, most distilleries were sitting on a lot of very, very old stock. As most distilleries had at least some sales, they were dumping this older than usual whisk(e)y into even their entry-level offerings. Take, for instance, Ardbeg. I've written extensively about their situation before, so I will only summarize here. When the distillery was reopened in 1997, most of their stock was from 1983 or earlier. So the 17 Year and even 10 Year bottles contained whisky that was much older than the number on the bottle. The vaunted Uigeadail, which was first released in 2003, did not come with an age statement and included sherry casks from the 1970s. They made due with what they had and that meant you could buy extremely good whisky for next to nothing.

While not always as extreme, this was true of many different bottlings of bourbon and scotch that were on shelves in the early 2000s. Supply grossly exceeded demand, so even the bottom shelf was surprisingly good.

Fast-forward a few years. The wine and craft beer movements are firmly established. The cocktail renaissance is beginning to flower and people are once again paying attention to spirits that have been out of fashion for decades. Gin is gaining in popularity, if not quite supplanting vodka. Bourbon and rye begin to creep back into consciousness, as Manhattans and Old Fashioneds become fashionable again. Overall, people are thinking about what they drink and considering flavor and quality, instead of simply the ability to get them drunk.

When it comes to whiskey, the bartenders reintroducing classic cocktails have an almost embarrassment of riches. Bourbons and ryes are old and richly flavored, with Bottled in Bond expressions like Old Grand Dad and Rittenhouse providing excellent counterpoints to the recently reintroduced flavors of vermouths like Punt e Mes or almost forgotten ingredients like Chartreuse.

It didn't take too long before drinkers realized that many of the whisk(e)ys on offer were quite good on their own, as well as in cocktails. Exceptional spirits could be had for next to nothing. Bourbons with whiskey that had been aging for a dozen years or more, almost an eternity in sultry Kentucky, could be had for less than $20. Van Winkle bourbons from the shuttered Stizel-Weller distillery were significantly more expensive, running well over $40 - a fortune at the time. Scotch whiskies at 12 years old and over were regularly selling for $20-30, with even older expressions available for little more. Hyper-aged whiskies, at 25+ years old could be had for not much over $100.

This is the world that precipitated the current boom. As blogs and forums where people discussed spirits began to proliferate, word that whisk(e)y was both good and cheap continued to filter into public discussion. Sensing a shift in attitude, distillers began to offer more esoteric expressions catering to the connoisseur, like Buffalo Trace's Antique Collection or Balvenie's wood and barley experiments. These helped to spark more interest, as they were often very good and frequently stellar, usually without costing an arm and a leg.

Those with the right connections and a bit of cash could pick their own casks for bottling from the treasure-trove of slumbering whisky in the rickhouses of Kentucky and warehouses of Scotland. Legendary casks like LeNell's Redhook ryes, the KBD Vintage ryes, Willett's Iron Fist, or the Seelbach Hotel's Rathskeller rye were bottled by those in the know who were ahead of the curve. And all of these 20+ year old ryes were so cheap, even circa 2009, that it wasn't unreasonable to talk about making Old Fashioneds with them. In Scotland, now stratospherically expensive single malts from Port Ellen and Brora could be had for a song, because these were shuttered distilleries that had been mainly producing for blends, so no one had given the casks a second thought. This led to bottlings like those for the PLOWED Society, such as Brorageddon and Ardbegeddon that are some of the mostly highly rated whiskies of all time. This was also broadly true of other 'lost distilleries' that are now highly sought after as the remaining stock grows older and rarer.

Fast-forward again to around 2012. Bourbon, rye, and scotch are now firmly in the mainstream and demand is rising exponentially. Old rye is becoming a thing of the past, with Heaven Hill struggling to meet demand for the roughly 4 year old Rittenhouse Bonded. Special releases like the Antique Collection are getting harder to find, as collectors and bars snap up most of the allocations. Port Ellens and Broras have passed out of reach of many if not most drinkers, though a few independent bottlers still put out something affordable here and there. While many established brands still offer good prices on their entry-level expressions, prices are steadily rising for older whisk(e)y and new expressions are introduced at higher prices than before. More and more non-age statement releases are appearing on shelves, beginning to clog the field with youthful mystery and the distiller's injunction to 'trust us'.

Now, a few years later, we are in full-on boom mode. New standard releases (Knob Creek Rye, Wild Turkey Forgiven, Larceny bourbon, the entire Bruichladdich lineup, etc.) rarely have age statements, despite the ever-increasing price tags. Almost every 'limited release' is snapped up and immediately resold on the secondary market, despite eBay and the Bourbon Exchange group on Facebook being shut down as resale channels. The prices paid on the secondary market have also worked their way through to retail prices as distillers try to capture more of the money that people are willing to pay. For example, the 2013 Diageo special releases included a Port Ellen at £1500 and a Lagavulin that clocked in at almost £2000. And every single bottle sold. Elijah Craig 18 Year used to sell for $50-60, but the new Elijah Craig 21 Year retails for about $130. There are stills some exceptions, such as the Buffalo Trace Antique Collection, but these are commensurately difficult to find at retail prices as resellers know the margins that can be obtained.

How did we get from one state to the other? Booms and busts (with their associated gluts) almost invariably lead back to the other side. The bourbon and scotch whisky industries have gone through sinusoidal changes in business for more or less their entire history. The growth of blends in the late-19th century led to the massive closure of distilleries in the early 1900s as a result of the Pattison Crash. The huge expansion of distilleries in Campbeltown eventually led to poor quality that meant few survived the tanking demand during Prohibition. The post-Prohibition demand for bourbon eventually led to its collapse in the 1970s, as distillers watered-down and thinned their product with neutral spirit in a downward spiral of 'lightness' in an effort to compete with more fashionable vodka. Eventually they bounce back as gluts allow them to build up better products and the cycle of fashion comes around again.

Whisk(e)y has ridden the recent wave of interest in 'vintage' products, whether it be clothes, vinyl records, or the cocktails of previous generations. The sense of whisk(e)y as being more 'authentic' than, say, flavored vodkas has been an important component of the upswing. Bourbon, scotch, and rye all have deep histories with associated stories that can provide a compelling interest in the product. The veracity of those stories is often mixed at best (Templeton rye, for instance), but that doesn't stop people from enjoying them.

The sense of authenticity was bolstered by the fact that in the earlier phases of the boom, whisk(e)y was almost universally an excellent product. As I noted above, old stocks were being dumped into even bargain expressions. It's easier to believe the claims about a spirit being 'hand crafted' by distillers with deep history when what you're drinking is really, really good. The question is whether that esteem can be maintained as old stocks are run down and distillers are increasingly putting out whisk(e)ys of increasing youth and dubious quality at higher prices.

Interest and excitement about whisk(e)y is currently propped up by the limited supply of older casks. Few distilleries foresaw this kind of interest in their products a decade ago, let alone twenty years ago, so expressions that requite older whisky are often genuinely limited. Instead of leaving money on the table, many distillers are responding by dropping age statements and using other markers of quality to convince customers of the quality of their products. While there are plenty of claims that 'age doesn't matter', there really is no substitution for time in the cask. This is most visible in Macallan's current lineup, with younger and cheaper whiskies being offered without age statements while the older and more expensive whiskies that are 18+ years old firmly retain them. While there are arguments that new drinkers will establish different tastes as the current offerings become the norm or, more cynically, that people will drink whatever is on offer, I don't believe that taste is quite that subjective.

Coupled to the fact that tastes and fashions change, whisk(e)y is not limited in its production capacity in the same way that fine wines or cognac are. While a few distillers will create whisk(e)ys specifically from local grains, they can ultimately come from just about anywhere on the globe. While barley crops have occasionally done poorly in recent years, increasing demand should encourage farmers to grow more, which will eventually bring supply in line with demand for whisk(e)y's raw material. A few distilleries, such as Oban, are genuinely limited in how much they can expand, but capacity is being built at a furious pace in Scotland and America right now. Buffalo Trace is putting $70 million into new warehouses and expansion of the 1792 distillery in Bardstown. Brown-Forman is pumping $100 million into Jack Daniels. Jim Beam is investing $28 million in expanding their own facilities. Diageo is spending roughly £1 billion in new distilleries and facilities in Scotland - the Roseisle project that opened a few years ago was £40 million, the Mortlach clone will run into the millions of pounds, and another mega-distillery costing £50 million is being sited next to the existing Teaninich distillery, which itself is getting £12 million worth of upgrades, £30 million will be fed into Clynelish, in addition to roughly £40 million spread across their other distilleries in Speyside. Pernod is building a mega-distillery on the site of the former Imperial distillery, which will expand their malt whisky capacity by 10%. This is in addition to reopening the mothballed Glen Keith distillery and expanding its other Speyside distilleries. Eddrington is planning to spend £100 million building a newer and bigger version of Macallan, while mothballing the old distillery on the off-chance that it needs even more capacity. All of this implies that America and Scotland's already vast capacity to produce spirit will be growing geometrically over the coming 5-10 years, with whisk(e)y ready to be bottled as entry-level bourbons and blended whisky only three years after the new facilities make their first drops.

All of that is to say that while demand may continue to exceed supply for older whisk(e)ys for some time, there will never, ever be a time when you are unable to find some kind of brown spirit on liquor store shelves. The turnaround time for basic bourbon and blended whisky is so short that supply will likely outstrip demand first.

Which, of course, sets up the conditions for the next glut. With capacity increasing wildly and the quality of what's on the shelf decreasing, it may not take all that much longer for demand to start faltering. Without the spectacular offerings of even a few years ago to buoy interest, the plaudits may not come as thick as they have been recently. Many customers may be priced out, with the price of entry-level single malts approaching the $50-60 range while real wages in many developed countries remain stagnant or continue falling. Without refined spirits, connoisseurship will not have as much to work with. People may decide that it's cheaper and easier to drink unaged sprits if their primary goal is getting drunk. The secondary market, which has done a lot to drive up prices on the higher end and encourage the spread of 'limited editions' may eventually pop, as it has all the hallmarks of a bubble, with people 'investing' on the expectation of prices rising simply because they have been rising for as long as they have been paying attention. More broadly, the economic rise of China, India, and Brazil that has fueled much of the demand for aged spirits may falter as they become mired in the middle income trap. Just as the demand of today was impossible to forecast 10-20 years ago, assuming that todays conditions will continue unabated is just as iffy.

The indicator to watch is whether the planned expansions actually go forward. With the exception of Roseisle, most if not all are in the planning stage, with little to nothing done as yet. If trends hold and the money is actually invested, then the owners clearly expect the new plant to be necessary to keep up with demand. But if these plans end up being quietly shelved, then even the people at the top see the boom ending sooner rather than later.

Ultimately, I'm just speculating. Aged spirits are a very peculiar industry, where it is extremely difficult to match supply with demand, no matter which way each variable is going. But the claim that "this time is different" had been made about countless situations over the centuries and rarely is it ever true. The whisk(e)y industry has always been a creature of boom and bust and I lean towards the opinion that it will continue to be so.


  1. "Ultimately, I'm just speculating"

    We all are. Good read.

  2. Excellent writing. Thank you.

  3. Your crystal ball shines bright, young Jedi. You are vindicated.