Secondary Scotch

The primary market for Scotch whisky has spawned a volatile secondary market that is currently in the doldrums. The two are linked like a dog to its tail, but who's wagging who? wonders Tom Bruce-Gardyne …

Twenty years ago, the Scotch industry appeared blissfully unaware of the existence of a secondary market for its brands, though it was pretty small at the time, and it was mostly just an add-on to fine wine. But that changed dramatically with the advent of online whisky auctions when distillers woke up to the widening gap between the release prices for their limited-edition whiskies and what the punters were prepared to pay.

Diageo's former global marketing director for malts and now whisky writer, Nick Morgan remembers the company's early ‘special releases' like Port Ellen on Islay, and says "We always thought they were for drinking." Looking back, he describes the original pricing strategy as "philanthropic."

In 2007 you could pick up a bottle of Port Ellen, which recently reopened after forty years in mothballs, for just £140. Only you couldn't because the flippers – whisky's answer to ticket touts – had got their first, and the price on-line doubled or more within weeks. Nick recalls his bosses saying 'What the hell's going on!? – we're giving away this stuff to the secondary market,'. Each subsequent release of Port Ellen rose, hitting £2,200 in 2014, which he says "led to outrage on social media from the very people who'd been selling it."

It was the same story elsewhere. At The Macallan, Ken Grier says: "One of the single casks we did way back in the early 2000's, we sold for about £80 a bottle." Today, if you are lucky enough to own one, they are worth £5,000 apparently which suggests it was the auction sites that taught the industry the true value of its most precious stocks. But Ken insists otherwise and says: "I think we led the secondary market, rather than the secondary market leading us."

Whatever the truth, rare whiskies were once ‘seriously undervalued' or 'gloriously affordable', depending on your point of view. Those innocent days have gone, and with limited supply and growing demand prices have soared. Those still in the market – the collectors, investors and high-end drinkers – now compete with each other at auction.

But as Isabel Graham-Yooll of Wisgy has explained, these three characters can now be one and the same. She has met plenty of people who would never describe themselves as ‘collectors', and indeed turn their noses up at the very idea. They refer to their stash of valuable bottles as their ‘pension' which presumably means they will cash-in one day and reap the rewards assuming the secondary market has recovered by then. Right now, as she says: "prices are down significantly after a preposterous peak."

For Nick Morgan, the secondary market boom in Scotch over the past decade "led to a proliferation of absurd limited editions at ridiculous prices." Were these prices determined by what was happening at auction? – a case of the tail wagging the dog? You do wonder, although distillers will invariably tell you their pricing strategy is far more considered and long-term than that.

By far the biggest player in this market is The Macallan which accounts for a third to a half of the value of Scotch whisky sold at auction, and has done for the past 6 – 7 years. To underscore its importance, the brand's owners – the Edrington Group appointed Geoff Kirk as channel director – secondary market, a unique position in the industry. The role is "not about trying to control the channel," he explains. "[It's] about trying to understand the nature of demand to make sure we don't get too carried away."

Producers will recommend a retail price for their limited releases, but whether consumers pay that or enjoy a discount is beyond their control. Auction prices are more clear-cut, though they can be pretty speculative thanks to those flippers. For the moment the flippers seem to have disappeared causing a sharp fall in the number of bottles traded. Whether they will come back, is anyone's guess.

Another area that developed were those platforms like BlockBar on which NFTs (non-fungible tokens) of Scotch are traded in the Metaverse where those crypto millionaires hang out. Fearful of missing the boat, Scotch companies piled in, but things have gone quiet. "I haven't heard anyone in the industry talk about it for a year and a half," says Nick. "For me, it just seemed another indication of the greed which has sadly become a bit of a trait of Scotch whisky."

The economics behind all this, have been the period of quantitative easing which inflated asset prices everywhere, and the longer period of low interest rates which clearly make alternative investments attractive. Geoff Kirk talks of "those investors and consumers who hedge their bets and say ‘I'll buy something 'lifestyle', and if I ever have to sell it, that's fantastic,' but the fact it appreciates in value is also a feel-good factor."

"I think it helps the self-justification, and possibly the justification to a spouse, of being a good purchase well-made." For now, it might be unwise to test that premise at auction until the current ‘market correction' or ‘return to normality' (take your pick) plays out. Assuming it is not – cue drum roll and clashing symbols - a bubble beginning to burst.