Sector Insight: Whisky - Whisky forced to regroup

The sector is striving for a younger appeal, as it struggles to hang on to its older core market.

THE BACKGROUND

The whisky sector is in decline, with sales predicted to continue to fall at an annual rate of 9% over the next five years. Last week, Scotch whisky producer Glenmorangie posted losses of almost £4m for the nine months to 31 December 2005, though this included compensation payments to distributors following its £300m sale to Louis Vuitton Moet Hennessy in October 2004. However, some categories are growing, with distillers boosting market share through super-premium brands and importing US offerings, such as Jack Daniel's, to appeal to younger drinkers.

The whisky sector is a deceptively complex market, which can be broken down into three main areas of production: US whiskey, comprising mainly bourbon, rye and Tennessee variants; Irish whiskey; and Scotch whisky.

Broadly speaking, the Scotch whisky market comprises malt whisky, which is distilled by a single Scottish distillery, using malted barley as the only grain ingredient, and blended whisky, which is made from a mixture of malt whisky and grain whisky, imparting a lighter flavour. The Irish whiskey category is similar.

US bourbons are made from at least 51% (usually about 70%) corn or maize, with the remainder accounted for by wheat and/or rye and malted barley. Tennessee whisky is similar and rye whisky is, as its name suggests, made from at least 51% rye.

Despite efforts to broaden the appeal of a 'wee dram', Scotch whisky is suffering, as younger drinkers are shunning it in favour of lager, wine and white spirits.

Its strong, intense flavour means it has generally been favoured by older drinkers. Scotch whisky drinking is skewed strongly to an ABC1, male demographic, with consumption of malts, not surprisingly, at its peak in Scotland.

Volume sales in the sector as a whole have declined 16% since 2001, falling to a value of £2.65bn this year, according to Mintel. Between 2001 and 2005, sales of blended Scotch, which accounts for the lion's share of the whole whisky sector, declined by 6%, with the sharpest drop among its core market - the over-55s; one in three members of this group is a whisky drinker.

Some whisky manufacturers have tried to lure younger drinkers, who enjoy the cocktail culture, into the sector by encouraging them to mix the spirit.

Traditionally, whisky's core market in the UK has been the over-45s, with a strong male bias. As such, the aging demographic of the UK population should fuel growth. The bad news for the distilleries, though, is that the biggest fall in whisky drinkers since the start of the decade has come from this very group.

However, not all areas of the whisky market are in decline. Imported whiskeys, mainly from the US, hold most appeal for the under-25s because they offer a milder, sweeter taste. Their volume sales are growing by about 7% a year, having reached almost 10m litres.

In addition, as with many other food and drink sectors, the emphasis in the sector is on moving upmarket, reflected in the growth of smaller malt, deluxe and imported offerings. Unfortunately, these luxury brands account for only a very small share of the overall market.

Malt Scotch whisky, which has benefited from shoppers trading up, is an expanding market, accounting for 14% of whisky sales.

The image of Scotch produced in small, privately-owned rural distilleries in the outreaches of Scotland is somewhat outdated, though, as global drinks firms now dominate the market. Diageo and Edrington contest the market-leading position through their Bell's and The Famous Grouse brands respectively.

However, the fastest-growing brand in the sector as a whole is Brown-Forman's Jack Daniel's Tennessee whiskey, which has benefited from heavy promotion and its appeal to a younger market.

Diageo's other whisky brands include Johnnie Walker and J&B, both of which are strong overseas performers, although Bell's sells better in the UK. Among the company's malt whiskies, which it produces at 29 distilleries in Scotland, are Cardhu, Talisker, Dalwhinnie, Cragganmore and Lagavulin.

In August last year the company bought The Old Bushmills Distillery Company from Pernod Ricard for £200m, bringing the Bushmills Irish whiskey brand into its portfolio.

It also launched Bulleit Original Bourbon in the UK in response to the rise in bourbon consumption among younger, trendier drinkers. It is predominantly distributed in top-end bars to take on Jack Daniel's. Other activity included the introduction of J&B-6 degsC, a lighter whisky designed for mixing and aimed at the 25- to 35-year-old market.

Edrington's brands include The Macallan and Highland Park. Its strategy has been to concentrate on premium international brands, and as a result, it has sold some of its distilleries. To appeal to younger drinkers it has actively been promoting Ginger Grouse, a mix of The Famous Grouse whisky, ginger ale, ice and lemon.

Independent bottlers including Berry Bros & Rudd, Compass Box Whisky, Whisky Galore and the Scottish Malt Whisky Society operate on a small scale in the market by buying whisky casks. They mature, bottle and sometimes blend the drink themselves. Their products are aimed at connoisseurs and sometimes include limited editions or vintage offerings.

The off-trade is the dominant outlet for whisky, accounting for almost 80% of volume sales. The proportion in terms of value sales is lower, where it is closer to 50% because of the higher price per litre in the on-trade.

Imported whiskies tend to sell in greater proportion through the on-trade than blended and malt Scotch whiskies, which remain more likely to be consumed at home.

Whisky has a strong gift-purchase standing, with up to a third of sales taking place in the run-up to Christmas. In keeping with the strong male bias of the drink, Father's Day is also a key selling period.

While some consumers have been converted to whisky's distinctive, acquired taste, others remain reluctant. According to TGI, 14% of consumers say they have never tried it and are unlikely to, 11% have tried it once but found it too strong, and 9% have tried it several times but did not like it.

The dilemma for whisky producers is that as they seek to make the drink more appealing to younger consumers they risk alienating their core, older audience, which they are already struggling to maintain.

Though the value of deluxe, malt and imported whiskies will continue to grow, over the next five years the blended whisky market is expected to continue its decline at about 9% a year to reach £829m in 2011. The total market will fall to £2.03bn in the same period.

WHISKY BRANDS BY SALES AND MARKET SHARE, 2005

On-trade Off-trade Total % of total
(pounds m) (pounds m) (pounds m) sales
1 Bell's 380 130 510 19.0
2 The Famous Grouse 370 110 480 17.9
3 Jack Daniel's 238 28 266 9.9
4 Grant's 190 70 260 9.7
5 Teacher's 39 56 95 3.5
6 Jameson 42 29 71 2.6
7 Glenfiddich 30 31 61 2.3
8 Glenmorangie 30 30 60 2.2
9 Whyte & Mackay 15 32 47 1.8
10 High Commissioner n/a 16 16 0.6
Others 39 327 366 13.6
Own-label n/a 450 450 16.8
Total 1373 1309 2682 100.0

Source: Mintel



WHISKY BRANDS BY ADSPEND (£000)

2005 2003 2001
1 Jack Daniel's 5089 3416 1707
2 Jameson 1929 483 247
3 The Famous Grouse 1909 1746 2047
4 Glenmorangie 760 1083 919
5 Bell's 712 2516 2032
6 Glenfiddich 628 1720 966
7 Jim Beam 366 n/a n/a
8 Teacher's 341 n/a n/a
9 Glenfiddich Special Reserve 253 n/a n/a
10 Chivas Regal 250 n/a n/a
Others 2079 3771 4740
Total 14,316 14,735 12,592

Source: Nielsen Media Research/Mintel

ANALYST COMMENT - KEVIN BAKER, ANALYST, CANADEAN

Despite the growth of vodka, whisky remains Britain's leading spirits category, accounting for more than a third of all spirits sales in the UK.

Scotch accounts for 84% of the market, although its volumes have declined in recent years, under pressure from US and Irish brands.

US whiskey is the fastest-growing category, accounting for one in every 10 bottles sold. Its success can be attributed to Jack Daniel's, which represents 90% of all US whiskey sales in the UK, having posted average annual growth of more than 10% over the past five years.

Scotch's relatively lacklustre performance has been offset by the deluxe market, driven by Johnnie Walker Black Label and Chivas Regal, and malt whisky, both of which have seen healthy growth.

Malts account for 11% of all Scotch sales. Glenfiddich and Glenmorangie lead the market, with a combined share of more than 30%, but the category's emphasis on authenticity, individuality and discovery means it contains a plethora of brands, none of which has more than a 5% share.

Irish whiskey has seen strong growth of about 5%. Jameson is the category leader, with more than two-thirds of all sales, although Bushmills posted double-digit growth in 2005.

Bell's remains the market leader in the whisky sector, but volumes have fallen steadily and The Famous Grouse is poised to take its place.

In many ways, the sector has bucked the trend for white spirits. The success of deluxe Scotch and malt whisky has paid dividends in terms of both volumes and margins, while the seemingly unstoppable success of Jack Daniel's proves the sector can successfully target the 18- to 24-year-old market.