It’s an odd time to be a craft distiller. Whilst the share prices of PLC distillers crater as their sales return to pre-pandemic levels, at the other end of the market the new crop of craft producers are still in ramp-up mode, generally less than ten years old, many are barely bottling the casks they’ve been laying down.
They emerge enthusiastically into a very confused scene, one of uneven sales prospects and knee-jerk reactions from the PLC brand owners.
A Market Coming Back to Earth
Seasoned followers of the industry understand that this slowdown was inevitable following the sales expansion through the 2010s, topped off by the post-pandemic blow-off top. The number of distilleries producing whisky in Scotland has increased by around 25% over the last decade, adding pressure to the normal cycle.
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READ THE STORYThe expansion in the number of whisky makers has been relatively gradual, despite the way it has been portrayed, but it still adds to the number of producers on the domestic sales scene.
Prestige Brands and the Craft Reality
Single malt sales are now bifurcating. The largest whisky brands are now members of the world of ‘Prestige’, their bottles sold globally and jointly marketed with supercars and watches. These are the sort of products you’ll see heavily promoted in large airport travel retail and in Asian shopping malls.
Some whisky companies have long had Directors of Prestige. This is a far cry from the average craft producer who is likely to be the Director of Everything, including making spirit in a cold shed. It will be many years of brand development before the most ambitious of the new distillers will get anywhere near to travel retail.
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Despite the significant drawdowns in sales, the worldwide market means that the peaks and troughs of the whisky sales cycle are less extreme than in the past. It is the nature of sales to be focused on the short-term, so even a cyclical downturn spooks the industry and this one comes with some added concerns.
The Headwinds of 2025
The headwinds of 2025 are numerous: US Tariffs have undermined sales to one of the primary markets for Scotch whisky. Talk of weight loss jabs reduced appetites, and the abstinence of Gen Y combines with cost-of-living fears.
There are business responses to each of these issues, but they sometimes demand sharp changes of tack, changes that PLCs are not well paced to make, given their scale: Tariffs may necessitate a switch to different markets, perhaps local markets are easier to navigate, with shorter distribution networks, less duty paid volume in storage?
Will weight loss drugs and generational trends really be the end of alcohol? Alcohol always comes through in the end, let’s remind ourselves of how unsuccessful enforced prohibition has been throughout history. It’s a waiting game.
What Happens When Distilling Slows
Stock that would be bottled stays in the warehouse, so the balance sheet grows stronger as cash flow is hit. It’s no surprise that many established brands have reduced production; some have even stopped distilling altogether. Given the recent rise in costs, there is now no tolerance for overproduction. The least tolerant of all will be those with the highest costs. Many production staff have been laid off, temporarily, we hope.
The 2024 and ‘25 spirit, which hasn’t been made, will feed through to future-aged stock. Some brands will have very limited releases of 10-year-old in 2035, and 18-year-old in 2043. As with any unforeseen event, there are absurdities; apparently, there are empty casks filling warehouses to keep up storage contracts.
Despite these macro issues hitting the PLC distillers, some of the smaller and newer distillers – those who are less exposed to the market – are still doing very well. And they’re slightly concerned about it. Those with a robust plan, amenable markets, and the lowest production costs will continue to attract the necessary far-sighted investors.
We have to remember that this is where long-term capital goes to rest and accumulate reliable value over time. Backers must have the wisdom to bet against the many narratives listed above and take a view on their long-term impact on this product, which is always, in part, an investment.
Finding Advantage in a Downturn
How can distillers, big and small, give themselves the best fighting chance? It goes without saying that every distiller should strive for the most cost-effective production, maximising the amount of spirit they can produce for the capital at hand.
The cost of making new spirit is close to all-time highs, although the cost of grain is reducing as production falls. Our energy costs are amongst the most expensive in the world, so the more efficient the process, the more stock can be laid down to appreciate in the warehouse.
Smaller producers are proportionally less exposed to costs, although they don’t enjoy economies of scale. Large capital expenditures in heat recovery tech are outside their abilities. Running additional shift patterns to sweat the assets is a good option – using the same equipment more efficiently and perhaps utilising the boiler more effectively. Higher gravity washes can be run, spirit cut points tweaked, and more cost-effective fuel options can be investigated. Everything should be under review.
Visitor Experience as a Revenue Stream
Another way that the new distillers can excel is in the visitor experience. The tourism market is not aligned with whisky consumption. Generation Y still go on holiday. Many of the new craft distilleries of the last ten years have been built with visitors in mind; their production halls are not the bland factories of those of many legacy distillers. If they pitch their offer well, they have as much ability to generate income as the largest brand. Income from visitors is an option against relying on spirit sales.
Strong locations have an advantage here; those who are located in busy cities and whisky heritage regions can benefit most. Visitor centres are all working towards bringing in a higher income from every visitor, rather than maximising visitor numbers. New experiences are important; it is time for tours to go beyond the textbook tour that whisky geeks will have experienced over and over. Perhaps a distillery visit should be more Fringe than Festival.
A Long-Term Business in a Cyclical Industry
Every crisis is an opportunity for someone, and as in any downturn, there are plenty of investors ready to buy in. It’s an open secret that a number of the new craft distilleries are changing hands. But investors must be patient. It’s a generational business, and those who have been in it for generations already know they’ll survive a downturn and better times will return.
