The news that Angostura is intending to buy Burn Stewart may strike many whisky drinkers as surprising. People forget Angostura is a huge rum distiller and its parent, CL Financial, is a Caribbean-based conglomerate whose interests include not just major rum producers (Angostura, Todhunter / Cruzan) but finance, sports, forestry and petrochemicals and that it already had a 28.3% stake in Burn Stewart.
Good timing? After all, wasn’t it Burn Stewart which had just announced its first pre-tax profit for four years? OK, it was only £12,000 and was mostly down to a cut in interest rates, but the firm was seeing an increase in shipments to South Korea, its bottled sales in the UK were growing, Scottish Leader was the third-biggest Scotch in South Africa, while Taiwan appeared to be coming back.
Burn Stewart had moved away from a reliance on bulk shipments and was focussing on bottled sales. Bravely, it had put its prices up and though this meant losing business in Europe the strategy appeared to be paying off.
But look again. That £12,000 profit was on £20.2m sales. I’m no financial wizard but that doesn’t seem too healthy. Those figures reveal the reality of life in the whisky industry at the moment. Burn Stewart were one of the firms supplying whisky to the commodity end of the market. Irony No1 is that Ian Bankier and his team turned in a profit after they turned their backs on this trade realising there’s no money to be made at this end of the business. You can’t make a profit when the industry is in overcapacity and your rivals are selling for less than you.
Today we are seeing the cheapest brand on display across Europe selling for below cost and you can bet it isn’t the supermarket taking the hit, it is the supplier who, in the vain belief this will give it leverage to get other brands on-shelf, will slash its margins in order to just sell some liquid. Burn Stewart has tried to extricate itself from this quagmire, but others are getting sucked deeper in.
The way margins are being slashed impacts the whole industry. The shelf price of blends and malts has tumbled, investment has been reduced and profits have fallen. Firms the size of Burn Stewart felt it most keenly in the past few years but big distillers aren’t immune. From a financial point of view is it really worthwhile to have a single malt brand when you can make as much if not more money selling a few more cases of a ready today, ready to drink product? When a business becomes unprofitable the ripples go all the way up. Irony No2 is that Scottish Leader was one of the few to have print ads in the UK last year.
The majority of whisky drinkers are interested in only one thing: how much the stuff costs. If Glen Miller costs less than Glen Close, that’s the brand they buy. Retailers aren’t stupid. They know the industry is still in over supply, they know the owner of Glen Close is willing to sell at less than the Glen Miller distiller so they play one off against the other. Soon everyone is drawn in. It won’t happen? Malts are already selling for less than blends in many European markets.
The fear now is that the market could be destabilised further according to how Pernod manages the Chivas surplus it has inherited. The short-term way is to flood the market with whisky, just get rid of the stuff at whatever price they can get. This would drive prices down further. The long-term solution (the path the industry feels Chivas will take) is to market the brands, creating sufficient demand to soak up the surplus.
I hope the Burn Stewart team is allowed to continue their strategy. This isn’t the end of them, but it does expose the Scotch industry’s current fragility. And yes, I promise to be in a happier frame of mind next issue.