Stormy Headwinds

At the production end of Scotch, it seems cool heads are plotting the category's long-term future. On the front-line, despite year-end targets to hit and a fierce battle for market-share, there are no obvious signs of panic yet, reports Tom Bruce-Gardyne …

To adapt the 1979 hit single by the late Ian Dury and the Blockheads to the times we live in – there are reasons not to be cheerful right now. UK Prime Minister Sir Keir Starmer seems to have caught this with his gloomy pronouncements, and so too have the latest export figures for Scotch whisky compiled by the HMRC. In the six months to July, the value of shipments slumped 18%, while volumes fell by just over 10%.

The figures 'reflect global economic headwinds' declared the Scotch Whisky Association, whose CEO, Mark Kent said: "We are a resilient industry, exporting to over 180 markets, and are experienced in navigating such periods of turbulence, and we are confident of the long-term growth opportunities for Scotch Whisky."

Are these mere 'headwinds' or something worse? In a recent post, leading whisky writer Dave Broom talks of a coming storm. "It would seem that we are now on the downslope once again," he wrote of "the twenty year peaks and troughs" that Scotch is subjected to. "Batten down the hatches, lash yourself to the wheel. It's going to get rough."

At WhiskyInvestDirect, CEO Antony Kime says: "Although the 2024 H1 figures showed a weakening export market, this is nothing new. The industry goes through cycles and recent export numbers show that consumption has eased, driven by the slowdown in consumer demand, intermixed with the filling of the post-covid pipeline by the big spirits companies."

Ian Palmer, chairman and founder of the InchDairnie distillery and part of the industry since 1978, believes the cyclical downturns were more frequent in the past. "Problems used to happen every seven years, but we've done extremely well for a very long time," he says. "It was never the downs – always the ups, to the extent we were running out of aged stocks."

You could imagine those manning the bridge of 'the good ship whisky' settling back with a dram as they pressed full speed ahead. And yet as Ian says: "There's now a lot of good quality data, and people are taking notice of it. The data is much more reliable and people are making decisions a lot earlier than they would have done. That, to me, is the biggest difference."  

As Ewan Andrew, Diageo's supply chain and procurement chief, explained a few weeks ago: "Rather than in the 1980s and 90s with its dramatic cuts and dramatic ramp-ups in production, the industry has learnt a lot from the bull-whip effects of that." Ian agrees completely, and says: "People need to make cool, calculated, sensible decisions, and not be having a hairy fit."

He adds: "I think you will find that distributors are being a lot smarter in managing their stocks, and shifting to a 'just-in-time' basis." That would certainly impact shipment figures, and lead to a healthier supply chain. In Latin America, where the data was less good, and where the incentives to stuff the market were perhaps too strong, Diageo was badly burnt.

Studying the half-year figures of the top ten markets, China was the worst performer – down 42% in value to £78m and by 14% in volume - a big drop from the £235m shipped in 2023, though it's worth noting that pre-pandemic, Chinese imports peaked at £88m in 2019. While Taiwan, falling 21.5% to £117m for H1 2024, puts the country back to roughly what it was shipping three years ago.

The falls in the big, mature markets of Western Europe may be of more concern. The value of Scotch into France crumpled by a third, while Spain was down by a quarter and Germany by 30% compared to the same period in 2023. The volume of French imports dropped by 13%, which suggests a lot of people were trading down with the average bottle now worth £2.06 on shipment compared to £2.72 last year.

Interestingly, the most valuable market of all – the USA, moved in the other direction with value down by a modest 3.5%, while volume fell by 7.6%. While bucking the whole negative trend altogether was India which leapfrogged France to become the biggest importer, up 17.3% and by 11.9% in value. And this, despite those notorious import tariffs of 150%.   

However, there are some serious caveats to make. First, most important, exports are not sales. The staggering £6.2 billion of Scotch whisky shipped in 2022 now feels like an aberration. It was the industry furiously pumping the market after all the shocks to the supply-chain following the pandemic and Putin's invasion of Ukraine. A further £5.6 billion was pumped in last year, just when demand was faltering in the USA and China, and collapsing in much of Latin America.

There has been a re-set in these past six months with exports worth £2.1 billion, which, as it happens, is around half the ten year-average including the recent mad years of the Covid super cycle. The splurging on US$100+ brands in the US during and after the lockdowns was never remotely sustainable as Diageo's CEO, Debra Crew conceded in the company's latest FY2024 results.

The struggles of blended Scotch in its mature markets are well documented, but Dave Broom wonders "is the rejection this time not blends but tired, old brands?" A good example perhaps, is The Famous Grouse recently acquired by William Grant & Sons from the Edrington Group. "It will be very interesting to see what Grant's do with it," says Ian Palmer. Indeed it will.