PEAKS AND TROUGHS OF THE SCOTCH WHISKY INDUSTRY 1900-PRESENT DAY (PART 2)

Part 2

Gavin D. Smith

Exports of blended Scotch to the USA were a major contributor to the renewed health of the Scotch whisky business in the years following the Second World War, and between 1959 and 1966 grain production in Scotland rose from just over 41 million gallons (186 million litres) to almost 90 million gallons (409 million litres).

The malt sector’s on-going expansion also continued, with output growing from 29 million proof gallons (131.8 million litres) in 1963 to 51 million proof gallons (231.8 million litres) in 1967, and new capacity was created in a diverse range of geographical locations.

Despite all the individual distillery creations and expansions, a significant part of the overall increase in malt capacity during the 1960s was due to the Distillers Company Ltd (DCL), which embarked on a programme to augment output at many of its existing distilleries. Indeed, between 1959 and 1967 DCL increased the number of stills in its distilleries by more than 50 per cent, with major reconstruction projects being undertaken in some cases.

Overall, the 1960s was a decade of growth for Scotch whisky not seen since the heady days of the late-Victorian era, with the malt sector doubling its output. As Moss & Hume (The Making of Scotch Whisky) explain, “The reasons for the rapid growth of distilling in the 1960s lie in the relaxation of restrictions on production. The United States market, which had taken the bulk of exports since the end of the war, showed a phenomenal rate of expansion, reflected, for example, in the great success of Dewars, Cutty Sark and J&B Rare blends. In 1960, American imports were 12,000,000 proof gallons [54,000,000 litres]); by 1968 they were 33,000,000 [150,000,000 litres].”

Over-production

However, economics difficulties began to develop as a result of the Arab-Israeli war in October 1973, which caused a major rise in oil prices the following year. The global economy faltered as a result, with US demand for Scotch fluctuating wildly during the next few years.

Once again, enthusiastic expansion had caused supply to outstrip demand, and the press dubbed this surplus stock ‘The Whisky Loch.’ The Distillers Company Ltd was particularly hard hit, closing nine malt and one grain plant in 1983, followed two years later by a further 10 malt distilleries.

Brora distillery - Gone but by no means forgotten.
Brora distillery – Gone but by no means forgotten.

Malt whisky output had peaked at 207.660 million litres in 1978, falling to 93.383 million litres in 1983 – its lowest level since 1964.   This “crash” in production helps explain the very tight supply for aged malts from the 1980s now affecting the 25 and 30 years old sector.

The economic policies of the UK’s Conservative Government headed by Margaret Thatcher from 1979 led to a fall in inflation and greater business confidence, and globally the situation was also improving. As a result, output of malt spirit rose from 264.947 million litres in 1986 to 428.762 million litres during 1990, and Scotch began to find new markets in countries such as Brazil, Russia, India and China.

Return to growth

The impetus of growth through the past decade has seemed unstoppable, and having spent £40 million establishing the vast Roseisle distillery near Elgin during 2009/10, in April 2013, Diageo announced an additional £30 million of investment in Speyside, including a doubling of capacity at Mortlach.

Roseisle distillery - Affectionately known as the Death Star.
Roseisle distillery – Affectionately known as the Death Star.

At the time, a  Diageo spokesperson noted that “These developments build on recent Diageo investments in Speyside totalling in excess of £40 million, including distillery expansion and upgrade projects at Linkwood, Mannochmore, Glendullan, Dailuaine, Benrinnes, Inchgower, Cragganmore, Glen Elgin and new bio-energy plants at Dailuaine and Glenlossie.”

Meanwhile, Chivas Brothers, having increased capacity at The Glenlivet by 75 per cent in 2010 with the creation of a new distillation unit, went on to enhance potential output at at Glenallachie, Longmorn, Glentauchers and Tormore distilleries in 2012, as well as re-opening the silent Glen Keith plant during April 2013. Overall, Chivas has committed £40 million annual capital expenditure on its whisky operations, the bulk of which is being spent on Speyside, most notably with the creation of a ‘super-distillery’ named Dalmunach, destined to rival Diageo’s Roseisle on the former Imperial distillery site.

An end to boom?

However, after Scotch whisky exports hit a record £4.3 billion in 2012 – an increase of 87 per cent in 10 years – the trend began to reverse, with a decline in sales, and the first half of 2014 saw a slump of 11 per cent, or £220 million in terms of value.

The Scotch Whisky Association (SWA) blamed new anti-extravagance drives in China, the stronger pound and an economic slowdown in some markets for the decline in Asia and the Americas, previously two of Scotch whisky’s fastest-growing regions.

Overall, the downturn principally concerns blended Scotch, with malts continuing to perform well. In 2013 malts sold more than eight million nine-litre cases for the first time, and in the USA, the volume of the malts market grew by 12.9 per cent.

The USA and Asia Pacific are becoming increasingly significant malt territories, while there is an ongoing premiumisation of malts in France. Over a 10 year period, the global ‘Super premium plus’ malts sector has grown by 10.2 per cent Compound Annual Growth (CAGR), compared to an overall malts growth figure of 4.3 per cent CAGR.

‘Premiumisation’ is the key term here, as both malts and blends in what is termed the ‘Premium plus’ segment have outgrown the Scotch whisky category as a whole, increasing by 4.9 per cent CAGR in the last decade, compared to a sector rise of 1.8 per cent CAGR.

Such statistics provide some comfort for the Scotch whisky industry, but by far the bulk of its sales are of ‘standard’ blends, and Diageo has blinked first in the face of headline figures, halting construction of a proposed £50 million malt whisky distillery at Teaninich, north of Inverness, as well as a £30m expansion of Clynelish distillery, construction of a bio-energy plant at Glendullan, and the planned £18m expansion of Mortlach distillery in Dufftown.

To date the situation has really only caused the sound of quite muted alarm bells. What should, in theory at least, prevent too much pain for the Scotch whisky industry this time around is the sheer geographical spread of its spheres of operation.

However, the current dip in Scotch whisky’s fortunes serves as a timely reminder that ‘boom’ cannot last forever, and there is always a reckoning of sorts…

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