It’s fair to say that the Scottish whisky industry is enjoying one of its greatest periods of growth and investment in recent times.
Currently there are no fewer than122 active distilleries spread across Scotland. Twenty three of these have opened since 2013, with ten in 2017 alone, including the re-opening of Bladnoch.
Moreover, the appetite to open malt distilleries shows no signs of abating with a further twenty or so planned or projected over the coming years.
Single malt whisky distilling is set to return to Edinburgh for the first time in almost a century after planning permission was granted for the Port of Leith Distillery, the first vertical distillery in Scotland and Holyrood Park Distillery, which plans to transform the Engine Shed near Holyrood Park into a distillery. John Crabbie & Co also recently announced plans to invest £7m to build a distillery at Graham Street in Leith.
The industry is not just seeing investment in new distilleries either, with Macallan recently launching their new £140m distillery and visitor experience in May and Diageo announcing plans to invest £150m in upgrading its 12 distillery visitor centres as well as building a brand home for Johnnie Walker in Edinburgh.
There was also the unexpected and welcomed news of the re-opening of three long-closed iconic distilleries which were never expected to return to production; Port Ellen on Islay, Brora in Sutherland and Rosebank in Falkirk.
This is in stark contrast to earlier years, when only nine new distilleries were built over the 25 year period from 1987 to 2012 and there were 55 distillery closures between 1980 and 2002 as the industry went through a tough period of rationalisation.
Whisky tourism is helping to put Scotland at the cutting edge of the global boom in food and drink tourism.
A new Hebridean Whisky Trail, which incorporates a 115-mile journey to Torabhaig and Talisker distilleries on Skye, twinned with the Isle of Raasay and Isle of Harris distilleries, launched this week and is a welcomed new addition for whisky enthusiast and is important to Scotland’s economy and rural communities.
According to figures recently released by the Scotch Whisky Association, whisky tourism grew to record levels last year with almost 1.9 million visits to Scotch whisky visitor centres in 2017, up 11.4% on the previous year and a rise of a remarkable 45% since 2010. Tourist spend was also up to £60.9m last year, an increase of 15.6%.
Marc Crothall, Chief Executive of Scottish Tourism Alliance said
“These figures not only highlight the perfect blend of whisky and tourism as being a major international draw for visitors to Scotland but underline how important it is that we as an industry continue work together to create and deliver these original, authentic and memorable experiences for each visitor to the country. This is the primary focus of the Tourism 2020 strategy and the recently launched Food Tourism Strategy which will see the Scottish Tourism Alliance and Scotland Food & Drink form a strategic partnership in putting Scotland top of the list at a global food destination. The continued investment in distilleries, many of whom are STA Members in their capacity as visitor attractions, has been key to creating these types of experiences for visitors and serves as an important reminder of the economic impact that investment in the tourism industry can bring to Scotland”.
Whilst the UK market (which accounts for 6.7% of industry sales) continues to shrink, mainly due to the performance of blended whiskies, exports of our single malt returned to growth last year.
The industry has most certainly benefited from the recent falls in the value of the pound.
According to recent figures published by the SWA, volume is up by 1.6% to 1.2 billion bottles and value has increased by 8.9%, with sales reaching £4.36bn. Scotch Whisky now accounts for 20% of all UK food and drink exports and over 40,000 jobs!
The Largest export destinations for Scotch in 2017 – defined by value:
1. USA – £922m
2. France – £433m
3. Singapore – £291m
4. Germany – £184m
5. Spain – £175m
There is no shortage of challenges ahead for Scotch Whisky industry, from increased competition from other spirits such as rum and gin and constantly changing fashion within drink, to the high level of duty in the UK at discriminatory rates to name a few.
The implications of Brexit remain unclear, but is highly likely to be disruptive. The industry is already busy preparing for logistical and transport challenges ahead, with contingency plans for alternative storage and routes in case delays at the border affects costs or sales.
The terms under which Britain will leave the EU must be made clear as soon as possible to allow the industry to prepare. The future of prized geographical indications (GIs), which are protected under EU law, is essential in safeguarding the quality and reputation of Scotch Whisky as it ensures that imitation brands cannot falsely claim to be such products.
Euan Duncan, a partner at MacRoberts LLP, who advises on intellectual property and commercial contract matters and heads up their Food and Drink Sector tea(https://www.macroberts.com/food-drink/) comments:
“The geographical designation (i.e. PGI) of Scotch Whisky currently protected by European regulation is critical to the protection of Scotch Whisky in Europe and is and has been the fundamental basis upon which legal action has been taken against products claiming to be whisky or Scotch Whisky when they are not. The ability to continue to rely on this protection is yet to be agreed in terms of the withdrawal agreement. This, however, is no longer the only concern. With the increasing likelihood of a no-deal Brexit then even IP protections that have been agreed, for example, arrangements for European Trade Marks and Registered Community Designs with equivalent rights being granted in the UK would no longer be applicable if there is “no-deal”. If there is no equivalent protection in place at the date of departure the UK Government can, of course, establish these equivalent rights itself but it seems likely to be way down its list of priorities after security, trade arrangements, securing energy and food supplies etc. and therefore IP rights holders including those relating to Scotch Whisky may not have an enforceable right for a period of time”.
The impact that Minimum Unit Pricing of alcohol is yet to be determined. On one hand many well-known blends that sell for less that the £14 minimum price for a 70cl bottle (28 units at the proposed minimum 50p per unit) will see their price rise. On the other hand, other drinks producers will face much greater increases which could give a boost to blended sales.
As ever, along with challenges come opportunities!
Malt distilleries are becoming highly fashionable with belief in consumers growing for using premium products to enhance their social status. Distillers and other distributors are using product features such as heritage, age, authenticity and quality to distinguish their products from competitors and help build their brand amongst consumers.
Recent examples include Highland Scotch whisky distillery Ardnamurchan Distillery launching a scannable QR code for its bottles. The software, which is called Blockchain, provides importers and buyers with absolute certainty in what they are purchasing against a backdrop of increasing counterfeit spirits.
Award winning Islay distillery Kilchoman reported a 6.5% engagement rate among consumers from its recent Thinfilm-powered NFC mobile marketing campaign, where they replaced their conventional neck-tag booklets with interactive neck-tags allowing consumers to instantly launch unique digital experiences that communicated product details, taste profiles, brand messaging and distillery information.
The Scottish distilling industry is continually evolving and the market for whisky waste by-products is now worth an estimated £140m. It is now common practice for spent grains, a by-product of the malting process, to be converted into pellets and sold as protein rich animal feed. Other innovations include turning leftover barley grain into biomass fuel to significantly reduce fossil fuel demand and the integration of greener solutions into their packaging.
There are many uncertainties going forward and Brexit remains the main imponderable facing the industry. The industry must get on with their jobs of continuing to produce quality products to compete with other alcoholic drinks and imported spirits despite not knowing what post Brexit will look like.
A new trade deal with the EU will need to be agreed early so any new customs and border requirements can be dealt with. Advantageous trade deals with growing markets such as China, India and Brazil should be put in place to ensure the sector continues to prosper.
Whisky prices are likely to continue to grow as demand increases and exceeds supply, especially for rarer expressions. According to forecasts from Rare Whisky 101, one of the world’s leading authorities on rare whisky, the value of rare whisky will grow to an average price per bottle of £340, up from £328.56 the previous year, a significant increase given the predicted number of bottles to sell in 2018 will exceed 100,000 (just over 20,000 bottles were sold in 2013).
It is yet to be seen if there will be any acquisitions of small distilleries by the industry giants, or minority investments designed to hedge their bets for the future, only time will tell.
The creation of the Scottish Craft Distillers Association, now part of Scotland Food & Drink, set up to help promote collaboration between the craft distillers, should help encourage growth within craft distilling in Scotland. We may end up seeing some of the smaller independent distillers consolidate and merge their business operations to reduce cost and create economies of scale for purchasing cereals and other dry goods.
The whisky business can be pitilessly cyclical. However, whilst demand for the Scottish nectar continues to outstrip supply and distillers continue to innovate and expand their product range to entice new customers the future growth of the Scotch whisky industry is strong.
Although the industry faces a period of uncertainty, so too does most businesses in Britain. The main positive is the world-wide quality and reputation of Scotch Whisky. It remains a world-class product with world-wide reach and has shown time and again, its remarkable resilience and ability to remain the pre-eminent international spirit of choice.
By Graeme Dempster and Bruce Stevenson, Commercial Account Executives