This article was initially published in the October issue of Global Drinks Intel magazine. For details on how to subscribe, click here.
Premium brown spirits are now deeply embedded in the luxury lifestyle space — and this could just insulate the category from the economic difficulties ahead. Richard Woodard reports.
Cast an eye over the headline figures from results season for the major multinational brand owners, and it’s clear that premium brown spirits are in a pretty good place in the second half of 2022 — despite the ongoing impact of a difficult geopolitical and macroeconomic environment.
Taking Scotch whisky in isolation, Diageo’s results for the 12 months to the end of June were marked by a 29% sales surge for its Scotch brands, which account for 25% of total turnover. Standouts included the performances of blends Buchanan’s (sales up 39%) and Old Parr (+59%), but once again Johnnie Walker led the charge; Sales up 34% by value, 24% by volume and breaking through the GBP2bn and 21m-case barriers. As an indication of the ongoing trend of premiumisation, Johnnie Walker Red Label’s sales rose 20%, but higher up the value chain, Black Label jumped 40% and Blue Label +60%.
Elsewhere, Pernod Ricard’s Scotch business, Chivas Brothers, echoed the performance: sales increased 25% [over the same timescale], with trends in emerging markets (+34%) outstripping mature (+16%). Highlights included not only the promising destinations of Brazil (+56%) and India (+43%) but also established markets such as Spain (+41%) and South Korea (+35%).
Such impressive sales growth helps fund investment in the production expansion necessary to meet likely future demand. Chivas Brothers had already signalled its determination to do so, announcing earlier this year a GBP88m [then-US$108m] expansion of strategic malt distilleries Aberlour and Miltonduff. The programme centres around the installation of Mechanical Vapour Recompression (MVR) distillation technology, following a pilot study at the group’s Glentauchers malt distillery last year, which resulted in claimed energy reductions of 90% on a single pot still.
Subsequently, Chivas will roll out MVR at its largest distillery, the Strathclyde grain plant in Glasgow, which could save almost 9,800 tonnes of carbon dioxide in the process. MVR will also be installed at the much smaller Allt-A-Bhainne malt distillery in 2023, with two further MVRs coming to Glentauchers this autumn, making it the company’s lowest-energy distillery.
Rising costs put the squeeze on relationships with consumers
Given the current energy prices picture, Pernod Ricard's investment may prove timely. As companies face dizzying rises in costs — not just for energy, but for raw materials and transportation — consumers are seeing their disposable incomes shrink. That’s a potentially hazardous trading environment for affordable luxury products, such as aged whiskies, Cognacs and rums.
“We've already seen a sharp rise in the cost of raw materials and energy, and have absorbed a large part of the additional costs to limit the impact on the end consumer,” says William Ploquin-Maurell, export business director at Spirit France Diffusion. “We want to participate in the global efforts to maintain a sustainable business relationship with our customers. However, we are forced to pass on part of these additional costs post-COVID and in a changing geopolitical context. This context is forcing all players to review their strategies.”
As a major player in the relatively small categories of Armagnac and Calvados, Spirit France Diffusion is able, at least, to utilise its scale to optimise cost management. Cost increases are felt most keenly at lower, more competitive price points, while the premium-and-above segments are less exposed to their effects.
“The rising costs have a bigger impact on lower-priced items, where margins are tighter, than they do on more premium items, where the liquid cost is a higher proportion of the total cost than materials, production or freight,” explains Julie Christie, brand & marketing manager at MacDuff International.
Double-digit price increases are now the norm
Throughout brown spirits, however, pricing conversations with trade partners have been transformed over the past 12 months. “Whereas before we would have challenging discussions with customers on 2% or 3% price increases, now double-digit increases are the norm, and no one bats an eyelid,” says Christie. “The cost increases on Scotch are so massive that absorbing them is simply not an option if we want to keep the doors open. Energy and cereals are the two biggest costs in making whisky, and we've seen 50% to 100% increases in costs. Add onto that all the other materials, from casks to dry goods to freight, and the impact is huge.”
In such an environment, it follows that companies should strategically focus on higher-priced products, where margins are typically fatter and rising costs are more easily absorbed. At Cognac Frapin, communications manager Thomas Soret confirms that the cost of everything from glass for bottles to wood for casks and gas for distillation has risen.
“We had to think about our pricing strategy and we increased our prices in a reasonable way for all our markets,” he says, before adding an important caveat: “Our customers are less sensitive to pricing variation due to [our] position in high-end Cognacs.”
Nowhere is this more evident than in the latest incarnation of Frapin's Plume Frapin, a luxury expression dedicated to French Renaissance writer, physician and humanist [and son of Anne-Catherine Frapin] François Rabelais. A blend of about 20 eaux-de-vie created by master blender Patrice Piveteau and housed in a carafe decorated with golden calligraphy, Plume retails in the UK at around GBP2,500 ($2,885), with 500 numbered bottles available globally. Plume combines Grande Champagne eaux-de-vie that have been maturing in Frapin’s Paradis cellar for decades — an indication of the limitations that ageing requirements typically place on premiumisation for Cognac and other brown spirits, according to Christie.
“In the whisky industry, you always need to have a long-term vision, as no matter how creative you are at marketing, every product needs to be aged and matured to some extent," she says. "The key to growing in the premium segment is investing in stock now for the future. Growth in Asia is driving continued demand for premium Scotch, so the challenge now is securing enough stock to supply demand.”
Increased focus on Global Travel Retail
Premium-and-above products have traditionally found a loyal and lucrative consumer base in GTR. As the channel continues to recover from the worst effects of the pandemic, brand owners are reactivating marketing efforts in airports and beyond.
MacDuff International has traditionally sourced a large proportion of its sales from GTR, including the Nordics, the Middle East, South America and the Far East. Christie describes the channel as “vital” to the business, reporting that its order books are currently at record levels, even without the full recovery of the Nordics or the Middle East to pre-pandemic levels.
As the prospects for GTR in Greater China remain uncertain, the company has shifted its sights elsewhere in the region. “Our South East Asia travel retail sales are improving much more than any movement in China/Hainan," says Christie. "We will need to continue focusing on SEA in the short term as any return to normality in China is very difficult to predict.”
Higher price point goal
Despite the obvious pressures, consumer demand for premium-and-above brown spirits remains undiminished. In turn, this is leading brand owners to find ever more innovative ways to target higher price points.
At Spirit France Diffusion, Ploquin-Maurell highlights the “surprising and disruptive” innovations that have resulted from cross-category projects — such as Père Magloire VSOP single malt Scotch and Père Magloire VSOP smoky Islay Scotch; two new expressions of Père Magloire Calvados, both finished in ex-whisky barrels. Production regulations dictate that neither can be called Calvados, so they are labelled as Eau-de-Vie de Cidre instead.
At the extreme end of the spectrum sits The Macallan Horizon, a project from the Edrington-owned single malt’s partnership with luxury carmaker Bentley Motors. The prototype, developed by both companies’ design teams and unveiled in August, has an eye-catching horizontal — not vertical – bottle design, with no flat base on which to rest the glass and aluminium decanter. The packaging, designed "to echo the six pillars of The Macallan", uses six elements — oak, copper, aluminium, leather, glass and whisky — with a focus on recycled or ethically-sourced materials, such as copper from old whisky stills and oak from used casks.
Perhaps the most groundbreaking aspect of The Macallan Horizon is its launch marketing, which teases with some, but by no means all, of the iteration's details. Even though the whisky going into Horizon has been finalised, further information — including the price — won’t be divulged until early 2023.
A whisky launch without any whisky? Such an iconoclastic concept says much about how deeply premium brown spirits have penetrated the luxury lifestyle space in 2022. This positioning could be hugely beneficial in protecting the category from economic difficulties to come.
This article was initially published in the October issue of Global Drinks Intel magazine. For details on how to subscribe, click here.
