The Business of

WhiskyF T S P E C I A L R E P O R T

Glasshalf fullIreland’s producersbrimwith optimismREVIVAL IN FORTUNES Page 4

Faking itThe industry tacklesthe counterfeit trade

ONE STEP AHEAD Page 2

Highs and lowsData give tradersinstant valuationsNICHE VENTURE Page 2

The taxman has tried to have his shareof whisky revenues since at least 1644,when the Scots Parliament passed anExcise Act fixing the duty at 2/8d for aScotspint.

After Scotland and England formed apolitical union in 1707, officials fromsouth of the border spent more than acentury trying to place smugglers andbootleggers under control, before dis-tillingwasproperly legalised in1823.

There are fewer bootleggers today,though the taxation of whisky remains atopic of debate among policymakersandthealcohol industry.

According to the Scotch Whisky Asso-ciation, the UK duty burden on a 70clbottle of Scotch at a price of £13 is £7.74.The total tax burden, including VAT,stands at £9.91, or 76 per cent of theprice of a bottle of Scotch. In his MarchBudget, George Osborne, the UK chan-cellor, cut 2 per cent off the duty onScotch whisky and other spirits, onlythe fourth time in a century that dutyhasbeencut.

The rate of duty and VAT remains asore point for the industry but there is anewer policy that is becoming moreprominent:minimumalcoholpricing.

The Scottish National party, whichhas a majority in the Holyrood parlia-ment in Edinburgh, pledged in its 2011manifesto to introduce a minimumprice for a unit of alcohol. In 2012, MSPsvoted 86-1 in favour of a 50p per unitrate.

For the SNP and public health cam-paigners, minimum pricing is a way ofcurbing heavy drinking by Scots, whodrink a fifth more per person than peo-ple inEnglandandWales.

For the industry, it is a worrying signthat other countries may follow theScottish lead.

“You can’t ignore the market when itcomes to tackling alcohol abuse,” saysPeter Rice, a psychiatrist and the chairof Scottish Health Action on AlcoholProblems(Shaap).

Dr Rice says the 50p per unit price —which would affect only a few cheapwhiskybrandspricedunder£14—wasa

“modest” response to a public healthproblem that had risen since the 1990sas the drinking of cheap spirits andhigh-strength ciders at home becamemorecommon.

The SNP, meanwhile, cites evidencefrom Canada and Sweden that it sug-gests shows minimum pricing candecrease rates of drinking among theheaviestusers.

David Frost, however, describes mini-mum pricing as “ineffective and illegal”.The chief executive of the Scottish

Whisky Association claims the policywould penalise those who drink moder-atelyandwouldnotaffect thebehaviourof theheaviestdrinkers.

Although some studies suggest heavydrinkers’ overall behaviour is fairlyresistant to across-the-board priceincreases, those effects cannot be pre-sumed for minimum pricing, arguesDrRice.

The chairman of Shaap says a mini-mum price prevents the option of “trad-ing down”, in which people respond to ageneral price rise by drinking a cheaperbrand.

Dr Rice does not see how a 50p perunit price would affect most whiskybrands. He refers to comments last yearby Alex Salmond, former leader of theSNP, who said: “I do not believe thewhisky association’s motivation is aboutwhisky, it is about cheap vodka,” imply-ing that the price would hit other prod-uctsof the industryharder.

The legality of minimum pricing hasbeen challenged by the SWA, whichargues it breaches EU rules on freetrade. Yves Bot, the advocate general ofthe European Court of Justice, whoseadvice the ECJ often broadly follows, inSeptember said minimum pricingwould be legal only if Edinburgh couldshow it was the only way of meeting itshealthaims.

An ECJ verdict is expected early in2016. After it has issued its final ruling,the case will be referred back to theCourt of Session in Edinburgh for a finaldecision.

How the Scottish debate on minimumpricing ends up could have global conse-quences: the OECD has recently recom-mended it as a public health policyacross therichworld.

Though pricing and tax are the mostimportant issues for the industry, thereare other areas of policy that influencethe production, distribution and sellingofwhisky.

Mr Frost said another crucial area wasaround free trade, adding the EU refer-endum David Cameron has pledged tohold before the end of 2017 will bewatchedcloselybywhisky-makers.

“I’m on record saying that the indus-try supports EU membership,” says MrFrost. “We are very willing to beinvolved in that debate.” He adds thatthe benefits were not only in the EU sin-glemarketbutalso inworkingtowardsasingle set of rules and the enforcementof intellectual property: Scotch Whisky,like champagne, carries geographic pro-tection.

Mr Frost hopes the EU can concludefree trade deals with India and the US,following its agreement this year withVietnam, which involved a drop in thetariff on spirits in that country from 45percent tozero.

A free trade deal with Delhi would,adds Mr Frost, see the Indian spiritstariff fall fromits levelof150percent.

Minimum pricing proposalprompts a spirited defencePolicy The industry iskeenly aware that salesare affected by tariffsand tax levels, explainsJohnMcDermott

Bottleneck: a 1955 production line

The ScottishNational Partyhas pledged in itsmanifestoto introduce aminimumprice for a unit of alcohol

Saturday 19 December / Sunday 20 December 2015

T he Ardnamurchan whiskydistillery sits on a remotesea loch in Scotland’s farwest, at a point where theHighlands splinter into the

AtlanticOcean,creatingmyriad islands.It was to this sparsely-populated

region, close to the Isle of Mull, wherePrincess Anne, the Princess Royal, paida visit in July, to open the distillery andadmire its environmental credentials asthe first in the country to be powered bylocalrenewablesources.

The distillery is one of seven to haveopened in the past year in Scotland.Another40arebeingbuiltorplanned —a steep addition to the 115 already inexistence,assumingallare finished.

Ardnamurchan, like most of the newdistilleries, was planned in the mid-2000s. Then, the thirst for whisky wasso strong that supplies of Scotch —which must mature in oak casks insidethe country for at least three years to gobythename—lookedindangerofdwin-dling.

For more than a decade, wealthy

buyers in South America and Asia hadsplashed out on bottles of premiumScotch, often on expense accounts innightclubsandrestaurants.

In France, the historical “auld alli-ance” remains alive and well, at leastjudging by the amount of Scotch drunk.France is the spirit’s biggest export mar-ket by volume, according to the ScotchWhisky Association, the industry body.

The average French person drinksalmost three bottles a year, mainly ofcheaper brands, says Trevor Stirling,analystatBernsteinResearch.

“Orders were greater than we couldsupply,” recalls Alex Bruce, who is man-aging director of Adelphi Distillery, thecompany behind the new Ardnamur-chanproject.

Exports of Scotch doubled over 10

years and grew at a bracing 16 per centcompound annual rate between 2009-2011,accordingtoBernsteinResearch.

It was in this merry period that pro-ducers rushed to invest in new distiller-ies or extend the capacity of existingones, such as the Cameronbridge distill-ery,alreadythe largest inScotland.

Diageo, its owner, which is the world’sbiggest producer of Scotch, spent £40m

on expansion and another £65m on abiomass facility. The distillery producesspirit for Diageo’s Smirnoff vodka andGordon’s gin as well as for its Scotchbrands, which include Johnnie Walker,Bell’sandWhiteHorse.

Pernod Ricard, the French groupbehind Chivas Regal and Royal Salute,this year invited Nicola Sturgeon, Scot-land’s first minister, to open the £25mDalmunachDistilleryonthesiteofadis-tillery mothballed in 1998. It has alsoincreased capacity at a number of oth-ers including The Glenlivet single maltdistillery.

In all, more than £2bn of new invest-ment is being poured into the industryover the next couple of years, accordingtotheSWA.

Soberingly, however, demand hasslowed sharply after a decade of stronggrowth. Exports fell last year by 7 percent, the fastest rate of decline in 16years, having stalled in 2013 at £4.3bn,accordingtotheSWA.

Demand has been affected by theslowdown in economic growth inemerging markets, including China andBrazil. Rupert Patrick, chief executiveof WhiskyInvestDirect, the trading site,says: “Scotch sales and GDP growth areclosely correlated. Scotch whisky is seenas the most aspirational spirit foremergingmiddleclasses.”

In other countries, such as Russia andVenezuela, there has been political and

Continuedonpage3

Enthusiasm for single malt lifts slowing demandIndustry plans £2bninvestment despitedecline in exports,writes ScheherazadeDaneshkhu

Spirited revival:Ardnamurchanwhisky distillery

‘Scotch salesandGDPgrowth arecloselycorrelated’

2 ★ FT Special Report 19 December/20 December 2015

The Business of Whisky

DeepinruralPerthshire incentralScotland,abanker-turned-entrepreneur isbecomingthego-toexpert foragrowingbandof investorslookingtomakemoneyfrombuyingandsellingtheso-called“waterof life”.

Fora longtimerarewhiskyhasbeenanichemarketwheretrading iscarriedout throughcontactsandvaluationsarenegotiatedonanadhoc, subjectivebasis.ButAndySimpson,armedwithadatabaseofhistorical salescompiledbyhandover15years, thinkshecanmakeiteasier todiscoverthevalueofabottleofwhisky.

“What[I]didwascommoditise

single-maltScotchwhiskyandprovebeyonddoubtwhetherwhiskycangoupinvalue,”hesays,describingtheoriginsofhisresearchandbrokeragecompanyRareWhisky101.

MrSimpsonandhispartnerDavidRobertsonusemorethan130,000piecesofdatarelatedto internationalsales,vintage,bottlersanddistilleries toprovide instantonlinevaluations.

Theypublishmarketreportsonthesector,producean“FTSEof thevalueofwhisky”thatchartsprices inthemarketandintroducesellersofhigher-valuewhiskies topotentialbuyers. InAugusttheyreportedthatsalesofsinglemalt intheUKhadincreasedby35percent inthefirsthalfof thisyearcomparedwith2014.

MrSimpsonsaysoneof thestandoutsaleswasabottleofCaol Ila“Manager’sDram”giventoemployeesatCaol Iladistillery in1990andsoldatauction in2009for£380.Abottlewasbought inAugust thisyear for£2,100.

MrSimpsondescribeshimselfas the

techanalystof thepairatRareWhisky101,whileMrRobertsonisa formermasterdistillerofMacallan inMoray.“Heiswhiskydistillingroyalty,”MrSimpsonsays.

MrSimpson’s loveof therarewhiskyindustry ismatchedbyapassionfor thespirit,whichbeganwhenhewasgivenabookfromhis fatherwhosaidtheywould“drinktheirwaythrougheverydistillery inScotland”.

Whenhestarted,hesaysmanyinthe industryresistedthe ideathatrarewhiskycouldbecommercialised.“Thereweresomepeopleout therewho[thought]vehemently,massively, thatwhiskyisadrink . . . andtodoanythingelsewith it is sacrilege.”

But themarketvalueofabottleofScotchwillalwaysbeunderpinnedbyits“drinkability,”headds,which iswhywhiskies thatpriceoutdrinkers—suchasKaruizawaJapanesewhisky,acollector’s favourite

—experiencemoremarketvolatility.“Oneperson’s investmenttodayisgoingtobesomeoneelse’sdrinktomorrow.”

MrSimpsonwarnsthere ispotentialforasignificantcorrection inthemarket forsinglemaltScotch,whichhasyet toexperienceafull financialcyclebutaddsthatdepletedstockduetopoorplanningbythe industrywillensurepricesremainresilient inthemediumterm.

Hebelieveshisbrokeringbusiness,which introducesbuyersandsellers for

dealsstartingat£10,000andhasanaveragetransactionvalueof

£132,000,will insulateRareWhisky101fromchangestodiscretionaryspendinghabits.

SpirosMalandrakis,alcoholanalystatEuromonitorInternational, says themarketforrarewhiskyis likelytobenefit intheshort termfroman“existentialcrisis” in luxurygoods.Hesaysmorebrandsarepresentingthemselvesas

“premium”,sodriving investorstowardsartisanalandrarerproducts.“[Whisky]willbecomemoreaboutunderscoringcraftsmanship,”hesays.

RareWhisky101,whichbeganasaspreadsheetonMrSimpson’scomputer,isnotalone intryingtoopenupthewhiskytrade. InSeptember,anonlinetradingplatform,WhiskyInvestDirect,openedforbusiness.This lets investorsbuyandsellunitsofwhiskywhile itmatures inthebarrel.

Forthemarketasawholemuchwilldependonthechanging landscape inemergingmarketssuchas IndiaandJapan.Contrarytopopularperception,MrSimpsonsays“China isalmostirrelevant”tothewhiskymarket:“Their interest tendstobe ingraperatherthangrain.”

MrSimpsonandMrRobertsonnowplantorevamptheirwebsiteaheadofwhat theyhopewillbenewinvestment.

“Iestablishedthebusiness intheheatofa financialmeltdown,”MrSimpsonsays.“I’maddictedto it.”

Venture charts the highs and lows of the water of lifeTrading Founders ofhistorical salesdatabase lead charge toattract investors,writesAliya Ram

At the fledgling R & B distillery on thesouthern end of the isle of Rasaay, Heb-rideanwildlifecomesbeforewhisky.Co-founder Alasdair Day, who is aiming tomake a single malt “lighted peated andfinished in Tuscan wine casks”, submit-ted his successful planning applicationlast year, and was asked to look for pro-tected species on site. There were three—theRasaayvole,ottersandbats.

While there are no voles on this partof the island, the creatures that causedthe most concern were brown, long-eared bats. The creatures have adoptedthe distillery building, the former estatemanager’s house, as their summer col-ony. “It was certainly unexpected,” saysMr Day. “We put ‘bat hotels’ in the roof;we’re hoping that becomes part of thevisitor attraction. These are things thatareof interestanyway.”

That the whisky industry leaves nomark on the craggy beauty of the Scot-tish landscape is expected by the con-sumer. But increasingly, whisky compa-nies are trying to reduce their impact onthe environment, targeting waste,energy and packaging as key areas. TheScotch Whisky Association’s environ-mental strategy report for 2015 says theindustry is close to achieving zero wasteto landfill (2 per cent in 2014); net wateruse is down by 14 per cent since 2008;and recycled content used in productpackaging is up from 29 per cent in 2012to33percent in2014.

Julie Hesketh-Laird, deputy chiefexecutive of the SWA, says “We’re hit-ting our targets — everything is movingin the right direction. The area we’remost proud of is the industry’s strongcontribution to the shift away from fos-sil fuel. We’re a major investor in renew-able technology.”

Michael Alexander, head of water,environment, agriculture sustainabilityatDiageo,citesanexampleof renewableenergy at the group’s Roseisle distilleryinElgin,Morayshire.

“In2007/08wedecidedweweregoingto build a new distillery,” he says.Although the plan was for a large distill-ery, Mr Alexander says Diageo did “notwant to reinvent a quaint distillery, it

was going to be a statement for thefuture.

“It cost about £45m — and of that wespent £17m on a bioenergy plant thatuses the co-products from the distillingprocess to feedbackintothedistillery.”

Using the draff “porridge” of barleyhusks left after malting, Roseisle createsbiogas that is converted to steam topower the distillery. “Any ash left over isspread over the fields that grows thebarley.”

Ms Hesketh-Laird says it makes senseto feed the pot ale and draff, the by-products of the distilling process, backinto the “circular economy”. Tradition-ally this has been achieved by using theporridge as cattle feed, but more techni-callyadvancedideasarecroppingup.

Martin Tangeny is president of CelticRenewables, a company launched fouryearsago,whichusesdraffandpotale tomake biobutanol, a biofuel that can bemixed with petroleum to run cars andotherengines.

The underlying process was firstdeveloped in the early 1900s by ChaimWeizmann [the scientist who laterbecame president of Israel], says ProfTangeny. Weizmann pioneered Ace-tone-Butanol-Ethanol fermentation, inwhich bacterial organisms are used to convert sugar sources into fuel. But the

raw material cost was “prohibitive” andABE fermentation dwindled. “I saw ahuge opportunity for reinvigorating aprocess that had died out 50 years ago,”adds Prof Tangeny. “We looked at a low-value, low-sugar material [draff and potale].”

Celtic Renewables has patented itstechnology and received an £11m gov-ernmentdevelopmentfund.“We’vehadindependent analysis that if we were totake all the available residue now fromthe malt whisky industry, we’d turnover£100myear,”hesays.

The company’s commercial demon-stration facility is being built in Grange-mouth, Scotland and once it has demon-strated that the process is viable it plansto roll it out across Scotland, Ireland,Japan. “We offer the whisky industry agreen, long-term disposal ‘out’ for theseproducts that they produce on a dailybasis,”addsProfTangeny.

Seeking harmonyin the HebridesEnvironmentThe industry is goinggreen and finding freshuses for by-products,saysNatalieWhittle

Addicted to thewhisky business:Andy Simpson

‘Oneperson’sinvestmenttoday isgoing to besomeoneelse’s drinktomorrow’

It causespoisoning ineasternEurope. InSouth Africans, nearly 3 litres of contra-band is drunk a year. It features lavato-ries-cum-breweries and factories thatare dedicated to producing caps for bot-tlesof fakewhisky.

The story of counterfeit alcohol is far-ranging, shady and costly. It is the baneboth of distillers, such as Diageo andPernod Ricard, and of governmentswhich bear the bill in terms of lost taxreceiptsandbloatedhealthbills.

“It’s a challenging issue for us, espe-cially in China,” says Richard Black, glo-bal brand director for Chivas Regal, Per-nodRicard’swhiskybrand.

However, country regulators areincreasingly stepping up to the mark tohelp, says Andrew Barber, managingdirector at the International Federationof Spirits Producers, whose job it is totackle thecounterfeit trade.

“Authorities are taking it more seri-ously. The police are taking a muchmore active role, so we are hopeful thatactingwiththem[willhelp],”hesays.

The battle against fakes is a broadone, but liquor offers more scope forwhat Lindesay Low, senior legal counselat the Scotch Whisky Association, calls“a sliding scale of tricking consumers”.Near-perfect copying of bottles andlabels means the whisky can be an infe-rior brand, heavily diluted — a hooch or

similarcheapchemicalconcoction.While Scotch — which by law must be

made in Scotland — can be illicitly pro-duced and sold overseas and labelled asScotchtosuggestgenuineprovenance.

Bulgaria illustrates thepoint: theSWAdiscovered a “grain alcoholic drink”called Highlander, with a label depictinga Scottish bagpiper in full regalia. Thelabelling may have confounded con-sumers but it landed the manufacturersin Bulgaria’s civil courts. The SWA suc-cessfully managed to have the High-lander mark removed from Bulgaria’strademarkregister.

The SWA has around 50 legal actionsin place at any one time. These can betime consuming: “In China, from firstlearning of the problem to resolution itcanbetwoyears,”saysMrLow.

However, the SWA claimed a break-through in September when a Chinese

court ruled against a packaging com-pany in China’s Anhui province whichhad been manufacturing bottle capsstamped “Scotch whisky” and used onfakebottles thatsurfacedinMyanmar.

It was the first time the SWA had beenvictorious in a case in the Chinese civil

courts, and the first time it succeeded inbreakingacross-bordersupplychain.

But while the industry is makingprogress on the legal side, the counter-feiters tooaresteppinguptheirgame.

“Bottles and labels could be genuine,”says Mr Barber. “Typically they reuse a

bottle or packaging, so from the outsideyou can have genuine packaging andquality isperfect fromtheexterior.”

While China draws the most lime-light, it is far fromthesoleoffender.Rus-sia has long proved a problem, both forindustry and government — whichalreadybears thecostofalcoholism.

In October Dmitry Medvedev, Rus-sia’s prime minister, ordered a crack-down on counterfeit products andequipment used to make it — a tighten-ing of rules that were generally under-mined by the corrupt recycling of prod-uctseizedbackontotheblackmarket.

Mr Low says there are two factorsthat lead to increased counterfeiting:“One is where Scotch has had a rapidgrowth — such as six to seven years agowhen China was a new market, so lots ofpeople are trying to cash in and makefake products. The second, which Spain

typifies, is during economic downturnsand finding products that meet people’sneeds encourages [counterfeiters] tocutcorners.”

Technology is the other big instru-ment in the distillers’ armoury againstcounterfeits. Chivas, for example, usescodes to verify bottles — scanning thecode leads to a three-digit numberwhich can be cross-checked against thenumber on the label. Laser marking isused on the foil on the cap, so users cantell if ithasbeentamperedwith.

At the University of St Andrews inScotland scientists have developed ahandheld device to test for toxicity infake and adulterated liquor. It is hopedthat this will reduce the deaths and inju-ries that can follow from dangerouslyconcocted brews. As Mr Low says: “It’snot like clothes. I don’t think people buyfakedrinksonpurpose.”

Distillers try to keep one step ahead of the counterfeitersFakes Bottles full ofhooch and false labelsare some of theproblems the industryfaces, says Louise Lucas

T he map of Scotch maltwhisky distilleries has anew location — Glasgow.The recently formed Glas-gow Distillery Company

started production this year of what willbe the first single malt whisky to bemade in Scotland’s largest city for morethan100years.

“There used to be 30 or 40 distillerieshere a couple of hundred years ago,”says Liam Hughes, chief executive anddrinks industry veteran who co-founded the venture with two partners.Mostdistilleries lie inrural locations.

A dip in Scotch whisky exports overthe past two years may have slowed theindustry’s investment boom but distill-eries are still opening, encouraged byyears of growth that preceded it. Eighthave begun distilling in the past 18months alone. Scotland had 115 licensedwhisky distilleries in 2014, according totheScotchWhiskyAssociation.

Mr Hughes and his partners wereinspired by the rise of craft distilleries inthe US and elsewhere. The movementaims to exploit a global shift from mass-producedbrands towardsproductswithastrongprovenance.

The Glasgow company, whose pro-duction site is at Hillington BusinessPark, takes its name from a distillery inthe city’s Dundashill area that operatedbetween 1770 and 1902. “We have had ahuge amount of interest from the inter-national markets, driven primarily by

the fact that it is the first single malt dis-tillery in Glasgow for such a long time,”saysMrHughes.

Launching a distillery is not to beundertaken lightly. “We have investedwell over seven figures in getting the dis-tillery up and running,” Mr Hughesadds. The venture has been part-fundedby a group of Asian investors and a£130,000 regional development grant.It has six full-time employees, as well asthe founders, and expects to add threeor fourmore in2016.

It will be several years before inves-tors see a return. By law, whisky has toage for at least three years before it canbe sold. Glasgow Distillery Companyplans a limited release of its whisky, asyet unnamed, in 2018 but it will bemuch longer before substantial quanti-tiesenter themarket.

To bridge the gap, the company ismaking and selling its own gin, namedMakar, the Scottish word for poet. It hasalso acquired a selection of casks of agedSpeyside single malt whisky, which it isbottling and selling as the Prometheusrange.

Despite the Scotch whisky industry’shistory of booms and troughs, MrHughes believes prospects are bright forsmall craft distilleries in the single maltsector, which has grown faster than theoverall market. “The interest in newproducts and distilleries is massive on aglobalbasis.”

Diageo, the largest Scotch whisky

producer,hasdoubledproduction inthepast decade. The company said last yearit would “review and adjust” the timingof its next phase of investment, whichincluded a new £50m distillery. But Per-nod Ricard, which owns Chivas Broth-ers, opened a £25m distillery namedDalmunach, near the banks of the riverSpey, in June. It is expected to produce10mlitresofwhiskyayear.

Smaller distilleries that have openedrecently include Ballindalloch, on anestate in the Spey Valley, Kingsbarns inFife and Ardnamurchan in north-westScotland. Eden Brewery in Fife becameScotland’s first combined brewery anddistillery by branching out into whiskyandginproduction.

David Thomson, a sensory and con-sumer psychologist, and his wife TeresaChurch have invested £10.5m in reo-pening Annandale Distillery in south-west Scotland, established in 1836 butclosed in 1918. When they bought thebuildings in 2007 they were being usedas farmbuildings.

After building up their companyMMR Research Worldwide, a consumermarket research agency, they werelookingforotherchallenges.

Their venture has been fuelled bytheir passion for Dumfries-born MrThomson’s home region and a desire torevive a distillery in a part of Scotlandthat lacks one. Production began a yearago after three years of painstaking res-toration.

“A lot of people get dewy-eyed aboutrunning a distillery. Well, forget it,” hesays. “It’s hard work and it takes a lot ofmoney and a huge amount of effort.”The business plan aims for the distilleryto start making an operating profit in2018-19.

The company will launch two singlemalt labels: Man O’ Sword, inspired byKing Robert the Bruce, and Man O’Words, inspired by poet Robert Burns,both of which will be available for lim-ited release by early 2018. Both thesehistorical figures are local: Mr Thomsonbelieves Burns, an exciseman, wouldhave visited the site when it was an illicitdistillery.

Tostartadistillery,MrThomsonsays:“You have to have the money, you haveto have a plant that can create goodspirit, and in the end you have to be ableto market it and sell it.” Annandale’sunusual features include the ability toswitch between making peated andunpeated whisky on a batch by batchbasis.

Like many distilleries, Annandale —which employs 15 people — runs distill-erytours,partly togeneraterevenuebutalsotocreate interest inthebrand.

Mr Thomson believes the new inde-pendent distilleries are good for theindustry. “They are owned mostly byprivate individuals who are enthusiasticand want to make a difference . . . . Ilike the ideaofScotchwhiskydistilleriesbeing inScottishhands.”

Deep pockets,hard work andentrepreneurialspirit necessary

Distilleries Independent ventures are growingfaster than the overall market, saysBrian Groom Newmarkets: production at Annandale Distillery began a year ago

‘[Diageo did] not want toreinvent a quaint distillery,it was going to be astatement for the future’

‘They reuse a bottle so youhave genuine packagingand quality is perfect fromthe exterior’

19 December/20 December 2015 ★ FT Special Report 3

The Business of Whisky

economicturmoil.Thepound’sstrengthagainst some emerging markets curren-cieshasalsohitexports.

The question now is whether theindustry’s optimism could lead to anoversupplyofScotchandafall inprices.

David Frost, chief executive of theScotch Whisky Association, says thatthe extra capacity implied by thenumber of new distilleries is not as greatas it looks.

“This level of interest is new and is aresponse to 10 years of growth. Many ofthe new distilleries are start-ups and aresmall scale. Their addition to capacity isrelatively limited.What’sexciting is thatnew people are coming in and bringingnewenthusiasm,”hesays.

Mr Bruce points out that many of thenew distilleries, including Ardnamur-chan, will produce single malts — a mar-ket thathasdefiedthedownturnbycon-tinuing to grow, despite prices that aremore than double the average bottle ofScotch, according to BernsteinResearch.

Single malts — made, as their nameimplies from malt produced at a singledistillery — are still a small part of theindustry, accounting for just 9 per centofvolumes.But theirvalueequates to23percentofallScotch.

Alex Smith, editor of IWSR magazine,the house journal of the InternationalWine&SpiritsResearchgroup,says thatblended Scotch and single malts havegone indifferentdirections.

“Blended Scotch, which is the biglocomotive of the category, has stalledout, with sales down 1.3 per cent lastyear, whereas single malts grew by 4.8percent.

“Maybethe industryhas todoabetterjob of explaining the craftsmanship ofblendedScotch.”

That is where Diageo has placed theemphasis in a new marketing push forits flagship Johnnie Walker blendedScotch, sales of which fell by 6 per centlastyear intermsofvolume.

Its Blenders’ Rooms operate like apop-up chemist’s store, with rows ofelongatedbottlesofgoldenspiritusedtodemonstrate the skill involved in mak-ingblendedScotch.

But Diageo is mindful of the danger ofoversupply now that demand hasslowed and as a result has put on icesome of its Scotch expansion pro-grammes, including the construction ofanewdistilleryatTeaninich.

Continued frompage1

David Gates, head of the group’s pre-mium core spirits business, says: “Wefeel we are at a really nice level of equi-librium right now and as we see theeconomy slow down, we just took ourfoot off the accelerator a bit in terms oflayingdownstocks.”

Moreover, there are now signs thatdemand is picking up. Scotch exportstotalled £1.7bn in the first six months ofthe year, still 3 per cent down on thesame period last year but a big improve-ment on the 11 per cent drop in the firstsix months of 2014, according to theSWA.

Mr Frost says last year’s fall has bot-tomed out but is too cautious to makecheery predictions about this year. “Ourassumption is that growth will resumeduringnextyear,”hesays.

Emerging markets accounted for 56percentof thevalueofScotchconsump-tion last year, up from 40 per cent a dec-ade earlier, says Bernstein Research,whichiswhyrecoveryinthesecountriesis so important for the industry.

Though demand in these countries islargely cyclical, moving up and downwith the fortunes of the economy, MrStirling, sees bigger structural issues forScotch in the US, the world’s biggest andmostprofitabledrinksmarket.

Despite a brown spirits revival in theUS, Scotch has underperformed Ameri-can whiskies over the past five years,which have enjoyed a boom particularlyinflavouredvarieties.

“The only area of consistent growthfor Scotch in the US has been high-endsingle malts and Hispanic-orientedblends,”saysMrStirling.

Ian Wisniewski, an author and spiritscritic who writes particularly aboutScotch whisky, says this is partlybecause of growing interest in various stylesofwhisky.

“This is great for brand owners. How-ever, consumers have also never had somuch choice which has, inevitably,resulted in the market being more com-petitivethanever,”hesays.

ContributorsScheherazade DaneshkhuConsumer industries editor

John McDermottPolitical correspondent

Louise LucasAsia news editor

Aliya RamConsumer industries reporter

Natalie WhittleAssociate editor, FT Weekend magazine

Brian GroomFT contributor

Linda AndersonCommissioning editor

Steven BirdDesigner

Emily LewisPicture editor

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Enthusiasmfor single maltlifts slowingdemand

T o make a Priory Sour, bar-men at London’s ZetterTownhouse infuse Ritten-house 100 rye whiskey witha nut butter which has been

melted, caramelised and frozen for 24hours. The liquid is then strained oncethrough a superfine food bag and twicethrough a coffee filter. Lemon and sugaris added, as well as the white from anegg that has been treated with drops ofoat essence that have diffused throughthe shell overnight. Then simply shake,pourandserve.

Cocktails based on whisky (usuallydenoting the spirit from Scotland) orwhiskey variants (liquor from Irelandor the US) have come a long way fromthe traditional combinations of an OldFashioned, a Manhattan or its Scotchversion,aRobRoy.

“More people are drinking whiskeycocktails than ever before,” says KeivanNemati, head barman at the Zetter incentral London. “And they have moreoptions than ever before in terms of fla-vours.” Whiskey-makers have trackedthe growing popularity of their productincocktails.

A quarter of all UK bars now offercocktails, according to the WilliamGrant & Sons UK 2015 market report.Although vodka and gin remain themost popular bases for mixed drinks, 6per cent of all cocktails downed in theUK are whisky or whiskey-based, saysthereport,andthatshare isrising.

“Consumersarewillingtospendmorein order to get the most out of theirexperience, so stocking special, on-trend and unique cocktails is key foroutlets,” says Ian Baines, category man-ager,WilliamGrant&Sons.

“With vodka cocktails you need toadd flavour, with whisky the richness isalready there, which is why simple, yetflavoursome cocktails such as the OldFashioned are becoming popular,” saysCat Spencer, brand manager for esotericwhiskiesatWilliamGrant.

Ms Spencer says consumers, espe-cially millennials, are becoming more

adventurous. “They’re on the look outto try something new which gives them‘social currency’. As millennialsapproach purchasing age, they seekquality, which they expect to get withwhisky.”

Also driving the trend is the “Ameri-can boom”, a rising demand for bour-bonsandryewhiskeys fromtheUS.

The interest in Scotch or whiskeycocktails has not escaped some of Lon-don’s classiest bars, such as the Zetterand the American Bar at the SavoyHotel. According to Erik Lorincz, headbartender of the American Bar, demandfor whisky cocktails has increased“drastically” inthepast fiveyears.

“In the past, consumers have beenverypuristaboutwhiskycocktails—thebelief was that you couldn’t possibly usea good whisky in such a way, that pre-mium whisky should never be mixed.Thisattitudehaschanged,”headds.

This shift in perspective has alsoprompted a change in how the Scotchindustry views its products and the rela-tionshipbetweenitswhiskiesandbars.

“Whisky brands now have more trustin bartenders — who are effectively‘liquidchefs’—andaremuchmoreopento them breaking the boundaries and

combining whisky with other ingredi-ents,”addsMrLorincz.

Declan McGurk, the manager of theAmerican Bar, says patrons want toappreciate the history of “Europe’s mostfamous cocktail bar”, one of the firstbars to serve mixed drinks to London’selite. But he adds that its willingness toinnovate with its menu shows that “wewillneverbecomeamuseum”.

The desire for innovation is a senti-ment shared by Jim Beveridge,the master blender forJohnnie Walker. Hejoinedthecompanyin1979as an analytical chemist inves-tigating the origins of malt andgrain whiskies and now leadsthe12-personteamthatblendsthevarietiesof theScotch.

For some of his blends, MrBeveridge “works back fromthe bar”, considering whichwhiskies would best suit a spe-cific cocktail. For example, theJohnnie Walker Select Cask,aged in a rye cask, was chosenfor its use in the US market forOldFashionedcocktails.

“Consumers are becomingmore sophisticated in terms of

the flavours they like. The challenge isbeing aware of consumer changes andhaving a diverse range that can respondtothosechanges,”saysMrBeveridge.

In their latest ranges, whisky brandsaretryingtoanticipateconsumertrendsand in doing so are being bolder than everwiththeflavoursof theirdrinks.

In November, Diageo, which ownsJohnnie Walker among other brands,launchedWhiskeyUnion,“anewexper-

imental whiskey collective inpursuit of the extraordinary”.Diageo gave its whisky-mak-ers near free range over itsstocks and asked them toexperiment.

The initial resultsareBoxingHares, made from whiskyinfused with hops, and SmokyGoat, a smoky, sweet, blendedScotch.

Experimentation may not godown well with traditionalistswho prefer their Scotch neat.However, Mr Lorincz believesthat: “As long as you use a pre-mium whisky and good-qualityingredients and get the balanceright by using good technique,theresultscanonlybepositive.”

The growing taste for an old-fashioned cocktailConsumers Brandsare becoming bolderwith the flavours oftheir drinks, writesJohnMcDermott

Mixing it:bartenders arebecoming ‘liquidchefs’ (above);a whiskeycocktail (right)

4 ★ FT Special Report 19 December/20 December 2015

Stephen Teeling has whiskey in hisblood. Before he takes a visitor on a tourof the new distillery he and his brotherJack have established in central Dublin,the Irish businessman stops in thebuilding’s foyer and points to a smallplaque.

The plaque honours an ancestor —Walter Teeling — who set up a distilleryin roughly the same spot in 1782. Thatwas when Irish whiskey was emergingas one of the world’s best-selling spirits.That distillery has long gone — it wassold to the Jameson family in 1826 and isnow buried somewhere in the DNA ofIrish Distillers, the dominant producerof Irishwhiskey.

Irish whiskey almost disappeared as apopular spirit in the last century,shunted into a shrinking consumermarketasaningredient inIrishcoffee.

However, seven generations afterWalter established his distillery, theTeeling family isonceagainat thecentreof theIrishwhiskeystory.

As the industry enjoys a tentative butencouraging revival, Mr Teeling hasopened the Teeling Whiskey Companyin a restored old stone warehouse build-ing in Newmarket Square, a few hun-dred metres from Dublin’s GraftonStreetshoppingdistrict.

The €10m investment — completewith grain silos, mill, German-madeextracting machine, and vast woodenfermenters—is the firstnewdistillery inDublin for many years, and for the Teel-ings it feels likecominghome.

“This used to be the golden triangle,the epicentre of Irish whiskey produc-tionandtherewasanopportunity forusto go right back to where it started forthefamily,”MrTeelingsays.

The 34-year-old is the son of JohnTeeling, the Irish entrepreneur whofounded the Cooley distillery inCounty Louth in 1987. But the whis-key drinking market of the 1980swas very different from today’s.

“When my dad was setting up, Irishwhiskey was drunk by old men in hats.Now it is being drunk by young Ameri-canwomen,”MrTeelingsays.

This changing market is in the sightsof the new Irish whiskey industry. In2013, there were four working distiller-ies in Ireland producing and selling Irishwhiskey — Cooley, Kilbeggan, Midletonand Bushmills. By the end of last yearthere were eight; within the next threeyears there should be 15 if plannedprojects reachcompletion, saysBernardWalsh, chairman of the Irish WhiskeyAssociation.

The revival comes after a long andsteep decline in the fortunes of Irishwhiskey. In the mid-1800s, when thedrink was the world’s most popularspirit, there were nearly 90 distilleriesin Ireland. But a combination of a lack ofmarketing, prohibition in the US, theIrish war of independence and subse-quent trade war with the UK, anddomestic economic upheaval saw theindustryshrinktoalmostnothing.

The creation of Irish Distillers in the1960s, which brought the four survivingIrish distilleries under one corporateroof, was a move to save the industryfrom extinction. Irish Distillers wasbought in 1988 by Pernod Ricard. MrWalsh says the Irish whiskey revivalwould be impossible without the Frenchgroup’s distribution and marketingexperience.

The revival in recent years has been

dramatic, although from a low base.Last year, according to the IWA, Irishwhiskey production reached 6.7m nine-litre cases — an increase of about 200per cent from a decade ago. The indus-try expects production to reach 12mcases by 2020. Exports last year wereworth €350m and about €1.1bn ofinvestment is expected to be pouredinto the industry in the 15-year periodupto2025.

Even with all that activity, the indus-try is a global minnow. There are 115working distilleries in Scotland and itsexports last year were £3.95bn, accord-ing to the Scotch Whisky Association.Pat Massey, director of Comecon, a con-sultancy that has published an exten-sive report on the future of the Irishwhiskey industry, is sceptical it canachieve its outsized ambitions: barriersto entry are high and there is no whole-sale market. The industry has the scopeto expand, he says, but mainly “becauseit is sosmall”.

André Levy, co-founder and chair-man of the Wild Geese whiskey com-pany, which uses whiskey produced byother distillers, says the reality of theIrish market is tougher than the indus-trywould likedrinkers tothink.

“A lot of these new distilleries are verysmall scale and most of them won’t sur-vive,” he says. “There is this claim thatthere are tens of thousands of Irish barsin America that are queueing up forIrish whiskey products — that’s just nothowithappens.”

However, investors continue to backthe industry. Cooley is owned by theBeam Suntory Group; William GranthasrelaunchedtheTullamoredistillery;and in September Brown Forman brokeground on a $50m distillery in Slane,near Dublin. IIlva Saronno, the Italianowner of Tia Maria liqueur, has investedin Mr Walsh’s Walsh Whiskey in CountyCarlow, where his family is building anewdistillery.

These producers are likely to domi-nate the new Irish whiskey market.

But there should still be room forsmaller operators, many in theindustry believe. Much of the newinvestment is in rural distilleries.Mr Teeling says that what sets hiscompany apart is its central Dub-lin location.

“We’re here, we’re urban, andwe’re hopefully the template forthis new generation of Irish whis-keyproducers.”

A revival in fortunes for atraditional Irish productWhiskey The industryonce faced extinctionbut nowhas ambitiousplans for growth,writesVincent Boland

Whiskey revival:Stephen Teeling

The Business of Whisky

Loch

Nes

s

INNER HEBRIDES

OuterHebrides

A1

Inverness

Oban

Fort William

Lewis and Harris

Isle of Skye

Jura

IslayArran

Isle of Mull

GreenockGlasgow

Edinburgh

S C O T L A N D

Scotland’s islanddistilleries

Tobermory

Talisker

Isle of ArrandistilleryArdbeg

Bowmore

BunnahabhainCaol Ila

Bruichladdich

Lagavulin

Laphroaig

KilchomanIsle of Jura

Abhainn Dearg

Isle of Harrisdistillery

Orkney

HighlandPark

Scapa

N

Thirst for single malt helps island distilleriesIsles Buoyed by a risein tourism and anincrease in sales,producers are thrivingand bringing jobs tothe region, writesBrian Groom

R obert Louis Stevenson, in hispoem The Scotsman’s ReturnFrom Abroad, praises hisfavourite Scotch whiskies:“The king o’ drinks, as I con-

ceive it, Talisker, Islay, or Glenlivet.”The first two refer to drinks producedon islands which are among the mostromanticofScotland’swhiskylocations.

Sixteen of Scotland’s 115 licensedwhisky distilleries are located on islandsoff the country’s western or northerncoasts, where they bring employmenttooftenfragilecommunities.

In the past they have suffered fromScotch’s cycles of boom and bust andseveral were closed for long periods.Recently, however, these distillerieshave benefited from the growing world-wide popularity of single malt whiskywith exports of single malt up by 159 percent since 2004, according to the Scot-tch Whisky Association. Half of the dis-tilleries have opened or reopened in thepast 20 years, though others date backtothe18thcentury.

They produce single malt, meaningwhisky is distilled at a single distilleryusing a pot still distillation process andmade from a mash of malted barley.Some goes into blends, but single maltcommands premium prices, which ishelpfulgiventheexpenseof transport.

“There are significant ‘on’ costs tobeing on Harris,” says Simon Erlanger,managing director of the Isle of HarrisDistillery, which opened in September.He calculates the cost of building thedistillery in the Outer Hebrides was25-30 per cent higher than it would beon the mainland and operating costs arehighertoo.

“Everything has to be brought to the

island and everything has to be taken offagain,”hesays.

Islay, with eight distilleries and plansfor a ninth, has the biggest concentra-tion of island distilleries. Others aremore thinly spread: Tobermory on theIsle of Mull, Talisker on the Isle of Skye,theArrandistilleryonArran, Isleof Juraon Jura, and Scapa and Highland ParkontheOrkneyIslands.

The Isle of Harris Distillery is only thesecond legal distillery in the Outer Heb-rides, after Abhainn Dearg on Lewis,established in 2008. Harris is not actu-ally an island, but the southern andmore mountainous part of Lewis andHarris, the largestof theWesternIsles.

The Harris distillery is the result of aseven-year project led by its chairmanAnderson Bakewell, a US-born formermusicologist. He fell in love with Harris50 years ago but was dismayed to see itspopulation, now just under 2,000, fall

by about a third during that time. He wanted to create a sustainable businesstoencouragemore islanders tostay.

The distillery employs 10 people, ris-ing to 25 in the summer. The aim is alsoto boost tourism and encourage otherventures. “If we can create pride, thatlifts the spirits and motivates people todootherthings,”MrErlangersays.

The project raised £8.3m in equityfrom 17 investors in Europe, the US andAsia and a further £3.1m from grants. Itaims to create a distinctive whiskycalled The Hearach, the Gaelic name foraHarris inhabitant.

Islay, sometimes known as “whiskyisland”, is one of the southern mostInner Hebridean islands. It has seen clo-sures in the past but is now profitingfromthesinglemaltboom.

“If you are into whisky, it’s nirvana,it’s Shangri-La. Islay tends to hold aplace at the pinnacle of single malt,”

says Simon Coughlin, the chief execu-tiveofBruichladdichdistillery.

Bruichladdich, built in 1881, reo-pened in 2001 after being bought by agroup of private investors including MrCoughlin, after closing in 1994 for thethird time in its history. In 2012 it wasboughtbyRémyCointreaufor£58m.

The distillery employs nearly 80 peo-ple, up by 30 since 2012, and the head-count is still growing. It is more labour-intensive than other distilleries as itsproduction isnotcomputerised.

Mr Coughlin says: “We’ve got a teamof still men, mash men and blenders —wemakeitbyhandandeyeandtaste.”

The other Islay distilleries are: Ard-beg (owned by LVMH); Bowmore andLaphroaig (Suntory); Bunnahabhain(Burn Stewart); Caol Ila and Lagavulin(Diageo); and Kilchoman, a farm distill-eryopenedin2005.

Mr Coughlin estimates that Islay’s

distilleries together employ only about200 people. However, they supportmany more in maintenance, transportand especially tourism, which hasgrown strongly in the past 10 years onthe back of single malt enthusiastsarriving for distillery tours. Agricultureandfishingalsoremainbigactivities.

“The tourist season used to be April toOctober but now people come at alltimes of the year,” says John Campbell,distillery manager at Laphroaig, whichhas seen annual visitor numbersincrease from 6,000 a decade ago to25,000.

Islay’s population is declining, how-ever, Mr Campbell, the first Ileach(native of Islay) to run Laphroaig in its200-year history, hopes the distilleries’success will slow that. Hotels and res-taurantshavebeenopening.

ManyIslaymalts,not leastLaphroaig,have a smoky character derived from

peat used to dry the malted barley. MrCampbell says demand for Laphroaig inmarkets such as the UK, Germany, theUS and Australia exceeds supply, so ithas not ventured much into China andIndia.

He adds: “Blends are pretty flat justnow and sales of single malts generallyare growing by 4-5 per cent, but Islaysingle malts are seeing double-digitgrowth.”

Mr Campbell is optimistic that con-sumers’ focus on taste and authenticitywill maintain Islay malt’s popularity,though some distilleries on the islandthat sell whisky mainly for blendingcould be hit if there were a big downturninblends.

Even if that happens, he thinks thatthe closures of the past could beavoided. “I think the industry will reactbetter,” he says. “They have got muchtightercontrolof theirstocks.”

Island life: KennyMaclean, productionmanager at Isle of Harris Distillery—Laurence Winram