Boom and Bust in Whiskey

We heard on Monday about the fantastic growth that whiskey has enjoyed across the world in the past several years. The growth has been so rapid that it’s put considerable strain on inventories, no small problem in an industry where the product must age for years before it’s marketable. Some have even declared a “whiskey crisis” in larger markets, as supply proves insufficient to meet demand. While part of the alarm may be savvy marketing, the supply crunch is real.

Or, at least, it was. Export of Scotch fell sharply in 2015, down 11% in the US and an alarming 41% in Singapore, another large market. Diageo put its £1 billion whiskey capacity expansion project on hold. While many new distilleries are still opening, the industry seems significantly more cautious now than it was a few years ago.

It turns out that these wild swings in fortune are nothing new in the whiskey business. Indeed, the industry seems to follow 10-20 year cycles. The product has all the features of difficult to forecast, boom and bust markets: very long lead times, fickle consumption, and a collectability dynamic that exacerbates shortages.

The last big demand boom came in the late 1960s and 1970s. As now, the market got very tight and people invested a lot of money in new distilleries. The result was a “whiskey loch”—a lake of whiskey flowing from the new investment. Unfortunately, the lock hit the market several years down the road, when demand had cooled. Whiskey sold in grocery stores for the same price as the cheapest vodka, which doesn’t carry the cost of aging. As a result, many of the newly built distilleries closed. This reduction in capacity arguably has a lot to do with the current spike in prices.

The question is whether whiskey’s growth today is merely another boom before the inevitable bust or a structural upward shift in demand. Optimists point to the opening up of Asian markets to whiskey consumption. Asian consumers have developed a taste for whiskey, particularly high-end, prestigious Scotch. In the last boom, Asian consumption was negligible. But pessimists say that a lot of the growth comes from a faddish trend for whiskey—great for the industry in the short term, but disastrous if investment chases it.

Diageo’s discipline in their investment plan hopefully augurs for a more rational approach in the future.