A very expensive drop of Scotch
Simon Nixon tours the distilleries of Speyside and takes the opportunity to ask whether
the Indian billionaire Vijay Mallya was wise to spend £525 million on Whyte & Mackay
Driving through the pretty towns of Speyside, as I did last week, it’s hard to believe you’re at the centre of a booming global industry. As the road follows the course of the river into the Highlands, you can spot the chimneys of the distilleries every few miles. But they’re mostly small-scale and they still retain the look and feel of a cottage industry. At the picturesque Strathisla near Keith, with its traditional pagoda-style malting towers, pretty girls in kilts greet you at the visitor centre. At Glenlivet, I was given a guided tour by a former excise man whose job it once was to police the distillery. There’s tartan everywhere, of course, and cheesy bagpipe CDs in the sou venir shops to go with all the whisky paraphernalia.
But this quaintness is largely for show, for the benefit of the tourists who turn up each summer in their tens of thousands to follow the brown-signed whisky heritage trail.
These distilleries are not like French chateaux, painstakingly turning out their vintages each year. Only 5 per cent of Scotch production is bottled as single malts. Instead, these are highly efficient manufacturing opera tions, belonging to one or other of the giant international groups that control the global market for Scotch. The spirits they produce are blended with other whiskies to create international brands such as Johnny Walker, Chivas Regal and Ballantine’s. This is an industry that has just celebrated its best ever year, with exports breaking the £2.5 billion mark for the first time.
Proof that these are good times for Scotch came last week when Vijay Mallya, a flamboyant Indian billionaire, paid a glass-dropping £525 million for Whyte & Mackay, the owner of 14 distilleries including Jura and Dalmore — more than double what its previous owners, Vivian Imerman and Robert Tchenguiz, had paid five years earlier. With his long hair, flashy jewellery and taste for fast cars, Mallya is a world away from the dour Scot you might expect to own a distillery business. But then so too is Christian Porta, the suave French chief executive of Chivas Brothers, part of the Pernod Ricard group, who last week showed me around his Scotch whisky empire. In fact, it is entirely appropriate that foreign ers are increasingly dominating the Scotch whisky industry. After all, it is foreigners who are driving its growth.
Here in Britain, Scotch suffers from a fuddy-duddy image. It may still account for 30 per cent of our spirits market, but it is in long-term decline. The lads and ladettes that terrorise provincial high streets on a Friday night prefer to tank themselves up with lager and vodka. At the smarter end of the market, the trend is towards fancy cocktails, which usually involve white spirits. Whatever it is that Prince Harry and his chums have been drinking before they fall out of Boujis at 3am, it’s a fair bet it’s not 18-year-old single malts with a splash of water. More fools them.
But in many parts of the world, Scotch drinking is a mark of sophistication — and as the world gets richer, people are drinking more of it. The two biggest Scotch markets are, curiously, the US and France, both of which are still growing. Indeed, the French drink four times as much Scotch as brandy. The biggest consumers of Scotch per head are, bizarrely, the Greeks. In Venezuela, the world’s seventh biggest Scotch market and the place where I first acquired my own taste for the stuff, Johnny Walker Black Label occupies a similar place to champagne in Britain: it is served at the best parties and smartest weddings, usually over ice in a tall glass, for some reason always wrapped in a paper napkin. Meanwhile, in Asia, tycoons show their respect for their business partners by presenting each other with bottles of Royal Sovereign, a blend of 50-year-old whiskies that retails at $1,000 a bottle. Even so, some people wondered whether Mr Mallya had tucked into the Royal Sovereign before signing the deal for Whyte & Mackay. The rest of the industry certainly needed several drams to steady themselves after learning how much he had paid. The global market grew by a pleasing 4 per cent last year, which in the context of an industry this size means a lot of extra whisky, but that’s hardly evidence of an out-and-out boom. Other industries such as luxury goods and financial services that are exposed to the same trends — rapid economic development and the growth of a global, wealthy middle class are growing faster. But Mallya does have a couple of things going in his favour.
First, he’s buying a business with huge stocks of whiskies maturing in its warehouses. That’s important in an industry where whisky must be aged for at least three years in oak barrels before it can call itself Scotch. The best whiskies must be matured a lot longer. Chivas Regal, the fastest-growing spirits brand in China, contains malts aged at least 12 years. Scotland’s distilleries are working flat out. The distilleries I visited last week were operating round the clock, and Chivas Brothers has reopened two that were in mothballs. Mallya is to reopen one as well. Diageo, the giant UK drinks group, is about to invest £100 million to build the first major new distillery for 30 years. Yet none of this whisky will be ready to drink for years. As a result, stocks to meet current demand are low. Producers are reported to be rationing supplies of some whiskies. The price of single malts has soared 80 per cent in the last year, boosting the value of existing stocks.
The second reason why Mallya can feel confident about the future is that he holds the key to what may become one of the world’s most important whisky markets. India is currently a huge spirits market of 120 million litres a year — from which Western spirits are almost completely barred. Tariffs on imported spirits are as high as 525 per cent in some states. As a result, genuine Scotch has only a 1 per cent market share. The EU has been trying for years to force India to open its market; earlier this year it asked the World Trade Organisation to intervene. Ironically one of the biggest barriers is Mallya himself, whose domestic molasses-based whisky brands dominate the market. Now that he owns such a large piece of the Scotch market, the hope is that he will use his political influence — he is also a member of India’s upper house — to lobby for lower tariffs.
Still, canny Scots who’ve been in and around the industry a long time refuse to get carried away by the excitement of the newcomers. The industry has seen booms come and go before. Like any business that depends on long-range forecasting, there is always a risk of producing too much ahead of a boom that never comes. After all, who can forecast what the market will be like in 12 years’ time? Sales of Scotch boomed in the late 19th century when the phylloxera beetle wiped out the French wine and brandy industry, only to slump when the vines recovered. That led to a glut of Scotch and the closure of many distilleries. The last decade has been tough too. Until this year’s record exports, the previous peak had been in 1997 when sales to emerging markets soared, just as they are doing today. Many expected the boom to continue and built up stocks accordingly. But then the Asian currency crisis hit, followed by the Russian default, the dotcom crash and global stock-market downturn. Again, distilleries were closed.
For Mallya and Porta, the risk is that they misjudge the market and produce too much. Drinking fashions can change quickly. The global economy could run aground again. The markets for all this whisky they are producing may never materialise. But it will be years before they find out whether they have forecast accurately. And even if they get it wrong, the beauty of Scotch is that it won’t matter too much, providing they are able to take the long view. The Scotch can sit there in its barrels in those vast warehouses scattered across the country, silently ageing, waiting to work its magic when the next boom comes round.
Simon Nixon is executive editor of breakingviews.