The Whisky Success Story

In the mid-1980s, Alfred Barnard toured the malt whisky distilleries of Scotland and described them in the book: 'The Whisky Distilleries of The United Kingdom'. From today's perspective, the old world still seems fine to us. Many small whisky distilleries created by hand the kind of malt whisky that Alfred Barnard and we appreciate so much.

But even those days brought great changes. The advent of industrialisation reached even the remotest valley in the Scottish Highlands. The tax on alcohol and whisky had been introduced for some time and only licensed distilleries were allowed by law to produce whisky. The time of the moonshiners was over.

The whisky economy is in the starting blocks

By the end of the 19th century, the process of concentration that had begun with licensing was already continuing in Scotland. Rural farms with sideline distilleries became economically independent enterprises. The new railway lines opened up the last corner of Scotland and the malt whisky could be easily transported to the big cities. Here it was preferred for blending. The period of prosperity at that time produced such important blended whisky brands as Dewar's and Haig. Single malt whisky had a shadowy existence and was only appreciated and sought after by the Scots themselves and as a 'spice' for the blended whiskies that were now distributed worldwide.

The great success of the blended whiskies ensured the growth of the groups until 1914, and the brands and their taste were consolidated. As the malt whiskies were the most important and flavour-giving component of the blends, they became dependent on the supply of malts. The corporations began to secure their whisky sources. They preferred to buy the distilleries from which they already purchased casks for their blends. Payment was made in a currency that was as valuable to the buyers as it was cheap to the sellers. Shares! Consistent and strenuous work in the barren Highlands was rewarded by shares in the corporations that had grown up.

A world economy in the true sense of the word did not really exist at the turn of the 19th and 20th centuries. The Commonwealth with the British Crown Colonies and independent America were the preferred markets for whisky. America even more so than the colonies, where only the small, ruling upper class could afford whisky at all.

Prohibition and war dampen success

Because of the heavy dependence of the whole industry on a few countries, the First World War led to a drastic decline in production. Alcohol smuggling to the USA was able to compensate to some extent during Prohibition (1919-33), but production did not reach pre-war levels. Thus serious problems arose within the whisky companies.

High debts and the first collapses shook the Scots as a result. When Prohibition was over in 1933 and Great Britain was allowed to pay its war debts from the Second World War to the USA in whisky, things started to look up again. The Distiller's Company Ltd. became the uncrowned winner and was able to take over many companies and distilleries. The winner of that time has now become Diageo, the world's largest spirits group.

After the war, the pace of concentration accelerated and from more than two dozen large companies only six remain today. Global expansion, led by the US and the UK, fueled competition, so companies either merged or were swallowed up by the majors.

The spirits market grows and grows

For the past 20 years, it has no longer been about whisky alone. The entire spirits market has awakened desires. The cost advantages are too great if you can sell not only whisky but also vodka, gin, cognac and rum with the same infrastructure.

But the takeovers of Seagram's and Allied Domecq by Diageo and Pernod Ricard show that the takeover market has almost come to a standstill. Only under the strictest conditions were the takeovers approved by competition regulators in the USA and Europe. Concentration is already so high that there is fear that one company could gain a dominant position.

This allowed the pursuing groups to catch up significantly. The new star in the whisky sky is the French company Pernod Ricard. With the takeover of Chivas Brothers and Glen Grant, a newcomer has come into the way of the established Anglo-Saxon competition and is playing in the round of the big three. The American competition is not far away either. Jim Beam, Jack Daniel's and Bacardi are in a rapid race to catch up.

While the corporations were thinking deeply about Asian growth figures and ratios between whisky, rum, vodka, cognac and gin, a development took its course from which we as connoisseurs benefit today. Initially unnoticed by the big players, Glenfiddich sold its malt whisky via the duty-free route. The success was so great in the 1980s that the malt soon followed the travellers into the domestic supermarkets. By the time the big boys woke up, Wm. Grant & Sons, the owner of Glenfiddich, had cornered the market. Today Glenfiddich is by far the malt whisky market leader and even Diageo admits that the sales figures of the Classic Malts of Scotland are nowhere near Glenfiddich.

But the giants have awakened. While initially only the Classic Malts of Scotland were introduced as competition, they are now already on the fast track with the Classic Selection. One bottling follows the next and the big players in the industry are raiding their warehouses for us.

Who would have thought 10 years ago that we would once again see original bottlings from Port Ellen or Ladyburn? The groups are almost without exception public limited companies and the shareholders demand short-term success. If the market would allow it, one or the other might sell his mother-in-law.

The whisky economy is booming

In Glenfiddich's slipstream, other smaller Scotch whisky companies also took their chance. And they seized it maturely. InverHouse and Edrington were able to carve out a significant slice of the pie with sales of several hundred million euros. Whereas the billion-dollar companies had previously used their cost advantages in distribution, the smaller whisky companies were able to do business through valuable special bottlings.

Those of the big players who cannot join in the dance must part with the bride. Jim Beam, outstanding in the mass business with great growth rates, failed in Scotland. The takeover of Invergordon and Whyte & Mackay never really took off. What was the reason? The question remains idle. In 2001, a management buyout took place. With Kyndal, an independent whisky company emerged, which gained international importance with four malt whiskies and well-known blends, so that they were eventually bought out by the Indians.

But the popularity of malt whisky has also given small companies a new chance. Individual distilleries in private hands can successfully maintain and develop themselves. Even newly established malt whisky distilleries like Arran or Speyside have a chance. The market is difficult and often fresh capital has to be injected. But those like Bruichladdich who have made it in a few months enjoy the success of the brave.

To brand the big players as global job killers does not seem justified against the background of the successes achieved. Where would all those malt whiskies be compared to cognac or rum if the success of the blends had not supported the demand for malts? Without this support, wouldn't many, many more malt whisky distilleries have had to close?

The independent bottlers also have their share in this. But that's another story for another time.

May 2002