Thursday, December 26, 2019

Can the Compass Box Model Work With Other Spirits? Pt. II - the Economics of Blending

On top of the limitations of consumer knowledge, basic economics and the structure of liquor distribution also make it difficult for the Compass Box model to be applied to other spirits. On a very basic level, the bigger the blend the more risk a producer is taking. As noted by David Driscoll in the K&L Spirits Journal, moving a single cask of 100-500 bottles entails a fairly small amount of risk because there is a small amount of capital invested and the bottles can probably be moved sooner or later. In comparison a multi-cask blend of thousands of bottles involves both a larger capital investment and a greater risk that the product won't sell.

This goes double if you are targeting the enthusiast market, where novelty is often prized above everything else. A single cask generates excitement and FOMO to help move it out the door. A blend, especially in higher price brackets, stands primarily on its quality and repeat buyers. In the other direction, a product aimed at bartenders faces different constraints. First, it needs to be priced competitively so that their pour costs are acceptable. Second, supply needs to be sufficiently stable that they aren't taking a risk of having to reformulate their menu if it runs out. This creates a relatively difficult balance between more flavorful, rare, and expensive components to give the final product a unique profile and the more pedestrian components needed to keep the price point down. Some producers still succeed, such as Denizen or Cutty Sark (specifically their Prohibition release), but it takes skill and good relationships.

As I've noted before, Compass Box was created in no small part because John Glaser came from the brand side of Johnnie Walker, which gave him the relationships to source whiskies and lock in long term contracts. More recently the stake Bacardi has taken in the business creates another set of relationships allowing them to access whiskies that might otherwise be difficult to obtain. Without those long-term filling contracts, it is difficult to maintain the kind of stable core lineup that has become another hallmark of Compass Box in comparison to other outfits.

A new entrant today would be unlikely to have the same ability to get those kinds of filling contracts, even if supply is beginning to loosen up in comparison to a decade ago. Approaching the majors would more likely than not get someone laughed out of the room. Independent bottlers might be willing to let go of casks, especially those from second and third tier distilleries, but supply would likely be inconsistent.

This task is frequently even more challenging for other spirits. While bourbon distillers have traditionally sold bulk spirits and casks, supply has dried up for those without contracts locked in before the boom picked up. MGP potentially remains a source, but even their supplies are thinner than they once were. The world of cognac and armagnac is extremely complex, with an array of small producers, negociants in the middle, and the big houses pulling in the bulk of what is made. Some, such as PM Spirits have managed to accomplish this by building up relationships with those smaller producers, allowing them to release armagnacs aimed at the cocktail market.

On the flip side, rum is in the almost unique position of possessing international bulk buyers who are willing to sell smaller parcels. E&A Scheer (and their subsidiary the Main Rum Co) is the most prominent example, albeit one that is still largely unknown outside of rum geek circles. They have some features in common with larger Scottish independent bottlers or American non-distiller producers, though they are notably different in that they don't produce any products for themselves, preferring to supply other brands. This is the source for the aforementioned Denizen rums, which have been pretty open about how they're put together. This opens a real avenue for the kind of provenance-oriented blending done by Compass Box, but the limitations laid out in the first post are still going to be an impediment.

This brings in the last factor, distribution and sales. With hundreds of spirits currently competing for shelf space in liquor stores, you need to convince multiple layers of distributors and retailers that your product will sell. Some of this is short-circuited for in-house blends such as those produced by Total Wine or K&L, but that means that all of the risk is on a single sales outlet. When a producer wants to get their product onto the shelves of a wider range of retailers, scale creates a number of double binds. A small-scale or one-off release needs to justify its occupation of space that could otherwise be occupied by products that might have more consistent sales, while a larger scale product needs fairly rapid, concentrated sales in a small number of outlets or a large number of outlets with a smaller number of sales to be successful. This is especially tricky in the United States, where interstate shipping is becoming increasingly difficult, constraining the reach of each retailer.

To conclude, while we're starting to see some glimmers in other spirits such as rum and armagnac, there remain series problems both on the consumer and the producer side of the equation that make it difficult for new producers to make spirits in the mold of Compass Box. My hope is that changes on the consumer side will eventually drive changes on the producer side, but we will have to wait and see how that goes.

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