Production

The price is right?

The price of a malt whisky has to cover a wide range of costs,many of which are variable and unpredictable.Ian Wisniewski tries to add them all up
By Ian Wisniewski
Savouring the character of a malt whisky can be a complete experience in itself, although the price inevitably provides a context.However, the retail price reflects numerous factors, including the cost of distilling and aging, glassware, labels, distribution, excise duty and vat, not to mention the retailer’s profit margin.As many of these costs are also variable, doing the sums is hardly a straightforward formula, with the price of malted barley, gas, electricity, casks, glassware and distribution, for example,having risen significantly.And while the industry is used to accommodating some ups and downs from year to year, it’s currently a case of dealing with a cumulative, on-going effect.“Every year we face a different challenge but normally the following year you can sort it out.However, it’s not often you get two years one after the other when you’ve got huge cost increases.We’ve never seen such high costs for two consecutive years,”says Douglas Cruickshank of Chivas Brothers.One key factor is the price of malted barley, up from around £90 a tonne in 2006 to £200 a tonne in 2007.Distilling malted barley also highlights the price of oil, in order to run the boiler for example, which heats water to the required temperature for mashing,and produces steam to heat the stills.“The production process in general uses a lot of oil so it’s a big cost, and there was a substantial rise during the past 12 to 18 months.Fortunately the price is coming down by quite a bit,”says Isle of Arran’s Euan Mitchell.In addition to the price, oil also has to be delivered, along with other supplies, and for island distilleries this means an additional leg of the journey by ferry.“Transport costs have risen due to the rising price of oil, which means that getting barley to the island and shipping malt whisky from the island is very expensive, so we must ensure we always have a full load going across.There’s a great benefit to being where we are, but there are added costs as well,”says Euan Mitchell.In addition to the cost of producing new make spirit there’s also the question of maintaining the equipment and distillery buildings.“We constantly go around the distillery doing property checks to see that everything is okay, and from the checks we then produce a schedule of work which is planned over the next five years, as maintenance doesn’t stop.“Estimating the cost of something programmed in to be completed in five year’s time, at times like this, when prices are going through the roof, can be a real complication.We will ask for a solid quote two years in advance of the works being scheduled to take place, then add five per cent on to that price for the next two years,”says Springbank’s Stuart Robertson.The expense of repairing or replacing equipment, such as the stills, also highlights the rising price of copper.“During the past 18 months copper has doubled in price, peaking in June of this year,though is now starting to fall away again.I’m sure a lot of my customers are looking at metal prices as much as I am.The London Metal Exchange is always quoted in dollars, so the exchange rate with sterling is another factor to bear in mind, which means it can get very complex for a coppersmith,”says Richard Forsyth of Forsyths.As the time between placing an order for copper and the delivery date is a significant period, a company such as Forsyths needs to maintain a stock of copper.This means ordering in advance,and paying the current prices.“We tend to carry a stock of tube and sheet copper,and we like to hold this in case a repair comes in,and we can only base our costs on the price that we bought the copper at.Plate and tube mills build up a stock and charge whatever it cost at the time, so we’re still experiencing higher prices, which won’t come down until all the higher-priced copper is used up.We may not see this until early 2009,”adds Richard Forsyth.Another factor is that repairs and replacements are undertaken during a distillery’s silent season in the summer.As this is a strictly limited window of opportunity, everything must be ready in advance.“When buying copper for the silent season we need manufacturing time. If it’s a pot still it will take 10-12 weeks to get the copper, and six to eight weeks to prepare it, so we’re always working ahead,”adds Richard Forsyth.Laying down stock for aging represents a vast amount of capital, with casks a significant additional cost.The price of sherry casks for example is typically rising about five to 10 per cent per annum.However, the amount of sherry casks arriving each year is minimal compared to bourbon barrels, which have shown far steeper price rises.And the exchange rate hasn’t helped either.“The collapse of the pound against the dollar, from around $2 to $1.50, means the price of bourbon barrels has gone up in the last six months, so it’s made a huge difference,”says Cruickshank.But some aspects of maturation entail less significant costs.“In general once casks are in the maturation warehouses they can lie for a number of years without a huge amount of attention paid to them, though they obviously need to be checked for example that they’re not leaking.“Samples are drawn to ensure we’re getting the anticipated maturation characteristics,and when our master blender David Stewart selects casks for a vatting the warehousemen find these casks and bring them out,”says William Grant & Son’s Bill White.Meanwhile, with many distilleries increasing production levels this may require additional aging warehouses to be constructed.But existing warehouses also require maintenance, as well as “Upgrading to comply with ever tightening regulations concerning fire prevention and electrical installations,”adds Bill White.The process of bottling and distributing mature malt whisky entails various cost factors, which have also been increasing.“The price of glass has gone up pretty significantly in the past couple of years, as has everything else, including capsules, corks and paper.There are signs that prices are plateauing, so I’m hoping we won’t see the same kind of price increases we’ve seen during the past few years,”says John Glaser of Compass Box.Stuart Robertson adds,“The costs of bottling and packaging products have risen by about 15 per cent during the last year and distributing finished products from the bottling hall to customers have gone up by about 20 per cent.“Shipping abroad has actually gone up so much that we have to check prices each week.As a result, the cost of packaging and freight is now a more significant factor in our overall cost base.” Needless to say, there are plenty of issues for every company to think about.An obvious way to counter rising production costs is to increase retail prices.But in the midst of a credit crunch, achieving sales targets at the current prices (let alone anything higher) may already prove to be a significant challenge.FACT BOX: EXCISE DUTY
• Amajor component of retail prices is excise duty and vat,which
together typically account for 77 per cent of the UK retail price of a
bottle of Scotch whisky bottled at 40 per cent ABV.
• The current rate of excise duty on Scotch whisky,announced in
the March 2008 budget,saw a six per cent increase above
inflation.An inflation-linked tax escalator,which removes the
Treasury’s flexibility to set excise on an annual basis to reflect
changing market circumstances,was also announced.This means
further duty rises of two per cent above inflation every year up to
and including 2013.The accumulative burden of the duty
changes is expected to reach an increase of over 30 per cent tax
on Scotch whisky by 2013.
• Meanwhile,a further eight per cent increase in excise duty was
announced on November 24,2008.After industry lobbying,this
was reduced to a four per cent increase on November 26.
Additionally,a temporary reduction in the rate of vat,from 17.5
per cent to 15 per cent,in line with the EU minimum,is effective
from December 1,2008-January1,2010 (when the rate will revert
to 17.5 per cent).Taking into account the vat cut,the overall tax
burden on Scotch whisky effectively remains unchanged.
• Given the dramatic change in economic conditions since the
budget,The Scotch Whisky Association is calling on the Treasury
to overhaul the excise duty system.