The brands investing in the long-term health of their distilleries

9th April, 2020 by Tom Bruce-Gardyne

Distilleries are the lifeblood of the spirits industry and investing in their future is crucial for brands’ growth and longevity. The Spirits Business speaks to insiders to find out where money is being well spent.

The Macallan’s new distillery

*This feature was originally published in the January 2020 issue of The Spirits Business

Last August, when Pernod Ricard announced the location of its latest malt whisky distillery, it raised eyebrows. It probably left one or two diehard Scotch drinkers spluttering into their drams and wondering if nothing’s sacred. The French spirits giant had picked the Sichuan province in China, 5,000 miles east of Scotland, for its new US$150 million distillery. It will be the first of its kind on this scale built by an international group in China when it fires up its stills in 2021.

Further proof that malt whisky and Scotch are no longer synonymous came in November, with news that Inner Mongolia is now joining the party. A new distillery is to be built there in a joint venture between the Mengtai Group and Scottish‐based Valentine International, whose managing director, David Valentine MBE, feels he is on the cusp of something big. “I believe this is just the start and that we haven’t yet scratched the surface,” he asserts.

On the face of it, the story seems eerily familiar. It sounds like yet another western manufacturing industry relocating to Asia in pursuit of lower labour costs and fewer regulations. Only it’s not – at least not according to Valentine. “In my view, Scotland’s provenance as ‘the home of whisky’ will never dull, but will bring benefits to our whisky sector for many years to come,” he says. “The growth of distilleries around the world can only add to the promotion of Scotland’s whisky industry globally, and new distilleries, whether in China or elsewhere, will do best by associating with Scotland as part of their marketing story.”

Rather than cannibalise sales, many in the Scotch whisky industry believe it will help educate Chinese consumers about whisky, and point them towards Scotland. As Scott McCroskie, Edrington CEO, says: “It is such a big market there is room for local and international whisky.” Indeed, the latter accounts for less than 1% of the total Chinese spirits market. There is also the example of Japanese whisky, which has happily coexisted with Scotch for almost a century.

One Scottish firm that has been surfing the world whisky boom is Forsyth’s, the coppersmith and still‐maker in Speyside. “By far our biggest overseas involvement is in the Far East, and we’ve built 14 turnkey distilleries in Japan in the past five years,” says chairman Richard Forsyth, whose firm opened an office in Hong Kong in 2018. “There are now some sizeable distilleries like Kavalan in Taiwan,” he continues. “They came to us 14 years ago and we built them a one‐ million‐litre plant. They expanded and have now got the biggest malt distillery in the Far East, which can produce 8.5m litres a year. That’s a lot of whisky.”

That figure would put Kavalan in the top 10 of Scottish malt distilleries. Above that are eight distilleries able to produce 10m litres or more per year, led by Macallan on 15m and Glenlivet on 21m. Macallan is not quite there yet. “We’re doing more than the old plant could have done, and our aim is to gradually increase to full capacity,” says McCroskie, while Glenlivet tends to be coy on such matters. As its master distiller, Alan Winchester, told The Spirits Business in 2016: “My car can do 150mph, but I don’t drive it at that speed.”

In Scotland, this latest distillery‐building boom kicked off in 2007 with the first of the new ‘super distilleries’, Diageo’s Roseisle and William Grant’s Ailsa Bay, followed by Pernod’s Dalmunach in 2015. All three were to supply whisky for blending, while the big single malt distilleries also grew, most recently Macallan, which doubled its capacity in 2018. Edrington could have achieved that for a fraction of the £140m it spent on creating a spectacular brand home.

In 2012, Diageo announced it was investing £1 billion in Scotch whisky production including one or possibly two new super distilleries, only to shelve the plan a few years later. Meanwhile, around 40 boutique distilleries have sprung up in Scotland over the past decade, and more will surely follow. “Growth in Scotland has levelled off, but hasn’t waned,” says Forsyth.

McCroskie says: “The landscape today is looking a bit more volatile and uncertain than it has for a while, with tariffs, Brexit and the macro environment. “I believe in the medium term we will see more investment in the category, but it’ll be a little bit quieter until some of the big question marks are removed.”

Glass act: Bombay Sapphire’s Laverstoke Mill distillery and visitor centre

Glass act: Bombay Sapphire’s Laverstoke Mill distillery and visitor centre

INVESTMENT ON THE UP

Concerns over Brexit may explain why Northern Ireland’s Quiet Man Distillery has been put on ice, reckons Pete Mulryan, founder of Blackwater Distillery. Elsewhere in Ireland he believes whiskey investment is “still on the up. Most of the big guys have a finger in the pie, and there are quite a few small players too. I was at Whiskey Live in Dublin,and the number of companies who are allegedly building distilleries or planning them is enormous. Having said that, there’s a huge gap between wanting to do something and pulling it off.”

Stephen Teeling, who co‐founded Dublin’s Teeling Whiskey Distillery in 2015, adds: “There are no shortage of projects.” However, he fears many whiskey start‐ups don’t fully understand long‐term production planning or how crucial exports will be. “There’s no way a local market is going to be able to sustain all of these distilleries,” he says. Presumably the big companies get this, the likes of William Grant & Sons, which recently invested €25m in grain whiskey at Tullamore Dew, having spent €60m on reopening the distillery in 2014. Other international players include: Proximo, which bought Bushmills from Diageo in 2014; Beam Suntory, which acquired Slane whiskey a year later; Sazerac, which took over Paddy’s in 2016; and Diageo, which re‐entered the ring with its Roe & Co distillery in Dublin in 2019.

None have the scale to seriously challenge Jameson. “I don’t think any one person’s going to take them down, but you already see their market share in decline, and that’s just going to go one way,” says Mulryan.

As the Irish whiskey market premiumises, Teeling believes it is also segmenting, which is helping his brand, which was on track to sell a million bottles last year, from a distillery producing 1.2m litres per year. There is space to expand, though not quite to the level of Irish Distillers, whose annual production is around 50m litres, Teeling says.

In the US, the number of whiskey distilleries in Kentucky has jumped from 19 to 68 in the past decade, while warehouse stocks have risen from 5m barrels to more than 8m during the same period, according to the Kentucky Distillers Association. Last July, Beam Suntory signalled its faith in small batch Bourbon with its new US$60m Fred B Noe Craft Distillery, which will begin production in early 2021. American whiskey has maintained strong domestic growth since 2010 and was on course to smash through the 25m‐case barrier last year, but exports have been battered by tariffs. In the year to last June, EU volumes were down by 21%.

Jean‐Marc Lambert, Bacardi’s senior VP global operations, sounds unfazed: “We take a 20‐year perspective of growth, and Bourbon is a big area of investment for us. We finished our investment in the Angel’s Envy distillery in Louisville two years ago, and we’re continuing to invest heavily in ageing warehouses.” Asked about the impact trade wars and Brexit have had on big investment decisions, he says: “Our advantage is that we’re a family business. When I talk to the board about working capital, I keep the ageing inventory separate. The board encourages me to do that because they understand it’s an investment for the future.”

Forsyth adds: “What amazes me is it’s not only whisky. Rum’s doing well and so is Tequila.” His firm recently built stills for Campari’s Wray & Nephew in Jamaica, and has also made 10 small pot stills for Patrón Tequila in Mexico. “Long may it continue.”

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