Scotch whisky boom

Home to the world's greatest concentration of whisky distilleries, Scotland has over 100 producers of the spirit to thank for pouring 2.7 billion pounds ($4.4 billion) into the national economy. The industry is currently experiencing a boom that the Scotch Whisky Association, an organization which promotes and protects the interests of the industry, refers to as a renaissance.

"We have around 107 distilleries operating in Scotland today, which is 20 more than we saw a decade ago," says Campbell Evans, Director of Government and Consumer Affairs at the Scotch Whisky Association (SWA). "We have seen enormous investment of roughly 1 billion pounds in the last two or three years and this is because we are seeing record exports at the moment."

Although traditional markets like the United States and France are still Scotch whisky's biggest buyers, consumers in Asia and Latin America are responsible for the industry's current growth. This is a welcome development for companies like Diageo, which, with 28 malt distilleries, is the world's largest single producer of Scotch whisky. The company has made significant investments to expand its production based on its confidence in emerging markets.

"It's not just China and India. Markets like Vietnam are coming through, as well as important markets in Latin America like Mexico and Brazil," says the company's Corporate Relations Director, Ken Robertson, adding that Diageo recently unveiled a new 40-million-pound distillery. "In the last five years we'll have invested something like 600 million pounds in Scotland in our production facilities."

An aspirational drink

So why are countries like China, Korea, India and Venezuela become increasingly thirsty for Scotch? According to Campbell Evans from the SWA, it has a lot to do with the spirit's well-to-do image.

"In many markets around the world, Scotch whisky is an aspirational drink and that's certainly true across much of Asia, where older whiskies tend to be favored," he explains. "In China, being able to drink 12-year-old Scotch whisky as well as buying Mercedes Benz are very important parts of the growing middle class."

It isn't just large companies like Diageo, whose Johnnie Walker brand is the number one selling Scotch whisky in the world, that are enjoying the spirit's so-called rebirth. Located near Glasgow, the Glengoyne distillery is owned by the family-run business Ian Macleod Distillers. The company's annual sales grew by over 30 percent in 2010, in spite of a recession that has hurt the UK economy badly.

"We've had a real advantage in the whisky industry in the fact that we're net exporters. Over 90 percent of the Scotch whisky that's produced is exported," the company's marketing director, Iain Weir says. "We sell to many markets around the world, as well as at many different price points. I think because of that, we've been able to create a nice balance through what's been a choppy recession in a number of markets."

UK market on the rocks?

The picture isn't entirely rosy for the Scotch whisky industry, however. Unlike in emerging markets where a more youthful audience is showing increasing interest in the spirit, in the UK the consumer base has matured.

"In the UK, the market for Scotch has been in decline for a number of years. One of the challenges we have as an industry is: how do we bring younger people back to Scotch whisky in this market when over the last few years spirits like vodka and gin and wine have been the products that young people prefer,” explains Diageo's Ken Robertson. “So the UK and indeed Scotland is a market that will require a lot of focus and attention over the next few years."

The whisky industry is already acting on this problem by attempting to alter young people's perception that Scotch is a non-versatile drink for older generations.

"There are a number of initiatives in the industry to bring a younger audience back to Scotch whisky, with increased emphasis on cocktails and mixability, which has obviously been a great advantage to vodka," says Iain Weir. "I think you could argue for a time that Scotch put barriers up to entry and said 'look, you either drink it on its own or with a wee bit of water -- we might allow a bit of ice.' But now we're saying 'no, drink whisky the way you enjoy it, if you want to add a mixer, that's up to you.'"

Predicting the future

Beyond attracting younger consumers, an even greater challenge lies at the core of the industry. Although by law the minimum maturation period for Scotch whisky is three years, in practice this number is much greater. Companies must therefore accurately predict demand for their products at least a decade in advance.

"How do you cope with lead times of anything up to 12, 15, 25 years ahead? That has never been an exact science and it's probably unlikely that it will ever be," emphasizes Ken Robertson. "But we're in a technology age now. We have computers, so we can map what's happening in economies, model economic behavior and look at consumer trends much more accurately than we could 20, 30 years ago."

A distillery's ability to predict future demand for its product isn't just crucial for that individual company. While single malt whisky sales are seeing strong growth, blended whisky still accounts for 90 percent of all Scotch sold. To make this drink, a distillery will blend together as many as 50 individual whiskies from different distilleries. Although they are ultimately competitors, distilleries actually rely on each other for stock to create their secret-recipe blends.

"Scotch whisky lies at the heart of the economy of Scotland," Campbell Evans explains. "We represent 20 percent of all Scottish exports. And we employ around 40,000 people. That number actually belies the importance of some of those jobs.

"If you tour the Highlands, for instance, you will find villages which might have five distilleries. Not only does that village live on the employment directly within those distilleries, but the people who work in the shops, hotels, the post office, the bars and so on are all employed because of the ongoing success of Scotch whisky in that village."

Author: Laura Schweiger
Editor: Sam Edmonds