Trading Up – The Long View

While premiumisation, the great driving force in Scotch whisky for the past two decades has clearly slowed in the West, Ron Emler argues its axis has now shifted to the East, particularly to India …  

The former chief executive of Diageo, Paul Walsh, gave a forthright insight into why the biggest Scotch whisky group was enticing drinkers up the quality scale. His UK best-selling eight-year-old Bell's blend was not being discounted for the Festive Season. Big retailers were unhappy that Walsh was not funding their Christmas promotions.

He made two points.

First it was economically illiterate to discount a product when annual demand was at its peak. 

Second, why should he market a commodity blend when he could mature the same spirit for longer and thereby offer a better quality, more desirable product which he (and retailers) could sell at a higher margin.

Premiumisation would generate returns that easily outweighed the additional financing costs and all concerned could make extra profits. Not that premiumisation was a new idea, distillers had been burnishing their bottles since at least the turn of the Millennium.

Varying iterations on a theme appeared, all designed to entice drinkers, increase margins and push up profits from ever more prestigious packaging to exotic cask finishes, the introduction of heritage identities and limited editions aimed at the travel retail market. The full panoply of marketing skills was then deployed to convince drinkers that when they moved up the price ladder these special bottles confirmed their taste and discernment as well as signifying their growing wealth.

In addition, by pointing to the higher quality of the products in the prestige packaging, distillers were able to counter the health lobby. Their profits were rising because consumers were drinking better and in moderation.

The Scotch Whisky Association reported that in 2012 exports were worth £4.13 billion; in 2019 that had grown to £4.9 billion, an 18% increase in value. Volumes had risen by a more modest 15%.

Then came Covid, the world went into lockdown…and Scotch sales soared on increased consumption at home.  And with choices of entertainment limited, consumers found pleasure in moving upmarket and experimenting, notably with cocktails.

In 2022 Scotch Whisky exports topped £6bn for the first time, up a massive 37% in value on 2021 but only 21% in volume to 1.67 million bottles. By Christmas 2021, Diageo's share price had broken through £40 and Pernod Ricard's had topped €200.  Today they have both lost a third of that value.

Such a heady pace proved unsustainable, and with the latest half-year figures down 18% in value, 2024 is likely to come in at around £4.5bn

The consumer had stamped on the brakes in the face of inflation, economic uncertainty and what was widely described as a deceleration on the premiumisation growth path that would be resumed once "normality" was restored.

But investors feared there was a disconnect between what was happening in the market and what distillers were saying. Demand for prestige Cognac was collapsing, so why was premium Scotch not affected?

Throughout 2023 share prices drifted down and then in November Diageo was forced to issue its now notorious profits warning and saw its shares crash by 14% in a day. It had got the Latin American market wrong, with far too much premium product in the pipeline, especially in Mexico and Brazil, where downtrading was rife.

Since then, shareholders have been seeking clues about whether consumers were in permanent revolt about steadily increasing prices or whether 2023 was simply a bump in the road.

The suspension on the premiumisation bandwagon has been given a big jolt but it will continue to roll (albeit more slowly) because too much has been invested in the strategy for it to fail. As distillers face rising costs, they need to drive demand for higher margin expressions

While the US remains by far the most valuable export for Scotch, the premiumisation focus is rapidly shifting to Asia, especially India, the largest market for all whiskies and one with the most exciting demographics. India's vast population of 1.4 billion has a median age below 30, while in the US and China this metric is closer to 40. According to UN data, this delivers some 15 to 20 million legal drinking age prospects per year

The working age population is expanding and is expected to add 283m more middle-class consumers by 2030. Thus, IWSR forecasts premium-and-above blended Scotch volumes will grow at a compound annual rate of 13% up to 2027, and premium-plus malt Scotch by 19% a year.

Diageo and Pernod Ricard have built new distilleries in India and China to produce premium whiskies crafted to local tastes.

Pernod Ricard is doubling down on its premiumisation strategy and plans to treble its revenues from its portfolio in India, already its second largest market, within the next 10 years. Much of that will be derived from Scotch.

The driving force is its whiskies which are being backed by two new premium expressions, Royal Stag Double Dark Peaty Whisky and Blenders Pride Four Elements Premium Whisky.

Not to be outdone, Diageo last year unloaded a raft of commodity local brands and first shipments of its Godowan Indian single malt, which retails on the sub-continent for about £40, are now available in the Middle East, Britain and America. The target market is wealthy Indian expatriates wanting a reminder of home and at the same time keen promote its products to an ever-widening global audience.

Meanwhile the gloom overhanging the Chinese consumer for the past 18 months could begin to dissipate as Beijing has just given the economy an enormous fiscal boost to restore confidence. China's market for Scotch offers similar prospects as India over the medium term and much the same factors are at play in other South East Asian markets such as Thailand and Vietnam.