Liquid Gold? Only if you drink it
This week we were asked by a journalist for comment on the commodification of Scotch Whisky - and how we felt about whisky being talked about as a lucrative investment opportunity. Of course, we took the opportunity to comment seriously and spent some time discussing what we could reply with. If we’re honest, it took us ages to arrive at our final titbit. It was a veritable can of worms. Every time we tried to articulate ourselves it turned into a bit of rant. And like all good rants, the only way to get out of rantville is to get to the end of the rant road. So after sending over our little one liner in the hope that we’ll get the Woven point of view across in the national press without getting ourselves sued, we expanded our thoughts a bit for the purposes of a journal post. Et Voila!
First things first.
Let’s be clear; We don’t like ranting, we try to maintain a zen like aura of calm in the studio. We’re positive people, optimists and we try to see the very best in every person and situation that we come across. In our experience, fits of rage and words written in anger rarely do anyone any good and when we fall out we try and smooth it over within the hour over a dram of emotional intelligence and a chaser of perspective. However, this is an issue we feel passionately about, and we’re hugely inspired by the brave and actual good old fashioned journalism with a capital J that of the likes of Blair Bowman have done on the issue and in his wake others now follow. About time too. What’s happening now in whisky writer world is long overdue, and we salute those who courageously took an issue that loads and loads of people within the industry were talking about in private and put it out into the open. Dave Broom did this with the ‘Japanese Whisky Problem’ and the upshot some time later was that the problem is now out in the open and possibly en route to being fixed. Consumers were not aware of what was going on, and they’re still not - but the future looks way less shady for the consumer. We wish we could say the same on the matters below.
Why this issue gets us so fired up is because first and foremost we are whisky lovers. Loads of our friends are whisky lovers. But even non whisky loving friends are asking us about investing in whisky, and that is scary. This isn’t a small problem. It is potentially massive.
We remember coming into the industry knowing not a lot about how it worked, and for the most part we drifted through the industry under a belief that the things you read in a mission to learn about the industry and how it worked can be trusted. Whisky is an honourable drink, in our blood lines anyway, and as drinkers there’s enough to navigate simply trying to understand the complexities of the category already, without unscrupulous ‘bad actors’ intentionally deceiving people in order to defraud them.
So you get the idea. Here’s some writing on the subject of the increasing commodification of whisky, the world of investment in it in particular.
At this point I will say that there are some reputable players out there. The distilleries release stocks into the market in good faith. They don't want their stocks becoming embroiled in these cask schemes - although I personally do point to the luxury releases as partly creating the hype that fuels this cask investment issue. They're connected. And None of this is aimed at auction sites who provide a platform for passionate collectors to trade their pride and joy. It's aimed at the commercial outfits that have entered the market and are acting in bad faith to take advantage of a situation that has unfolded within the industry. It's aimed to raise awareness of the shady companies deploying elaborate techniques to bamboozle would be investors and without technically breaking the law, swindle them.
What’s caused the situation to start with?
How has whisky become a high performing alternative asset class? How has it’s liquid gold status permeated the head space of even non drinkers? Is it all the work of auction houses and brokers? No. In truth, it is partly a product of the distilleries themselves - and the premiumisation agenda within whisky companies is perhaps unintentionally fuelling the shift from whisky being a drink to be revered and simply enjoyed toward a luxury item to be collected or invested in. Premiumisation is EVERYWHERE in booze, as the global model shifts from high volume, low margin global brands to meet the needs of modern drinkers, tightening government health board regulations and the like. We are now being told to drink less but better. And the drinks companies are never short of routes for you to do so. However, the elastic band between value and price at the top end of the market is well and truly broken and we worry about the long term consequences for the category and the consumer. Obviously, a whisky is worth whatever someone will pay for it. That’s an unavoidable truth. But what if they’re being duped or ripped off? Or what if the reason they’re paying so much money for it is because they know that someone else will pay more for it in time? Whisky IS the perfect investment - often limited release, and if you assume that at least one person drinks the bottle they buy, then the remaining items in that release become more rarer. Scarcity fuels hype. Hype fuels prices. Prices fuel greed. Greed wreaks havoc.
This whole situation is in part due to the shift from collecting being an underground, fairly harmless hobby pursuit of whisky enthusiasts to a much hyped investment pursuit fuelled by the internet, auction sites and an ever increasing number of special releases from distilleries looking to add lustre to their brands. The advent of the internet gave rise to a secondary marketplace for releases. Brands became frustrated watching releases get snapped up and ‘flipped’ on the secondary market at inflated prices often just minutes after selling out so they put their prices up. This raised prices right across the historic bottling market and this act created a set of statistics that made whisky look like a brilliant alternative investment. I mean, the numbers don’t lie. It is!
Not all collections or collectors are bad.
In any sphere be it football shirts, trainers, watches, even airline memorabilia... there are collectors. And some of them monetize the hobby. Fusing commercial goals with your passion is something we can relate to at Woven and there’s nothing wrong with that if it’s done fairly and in good faith. And so we don’t have a problem with the idea of collectable whiskies (though it would be brilliant if people just drank the stuff). Where the problem comes is if people use whiskies reputation as a solid investment, paired with the complexities of ownership to hood wink would be investors.
Where it starts to get weird.
The hype has spilled from specialist bottlings into cask investment pyramid schemes run by savvy and in some cases shady middle men organisations- the headline quoted returns from the former fuelling the marketing materials for the latter - and the whole situation is hoovering up large swathes of bulk blending stocks that would have usually been made available to blenders. These stocks change hands multiple times in a short space of time driving the prices up well beyond anything that could be equated for fair value for the ever diminishing amount of liquid inside the cask.
For us, this has meant fierce competition for blending stocks from companies that aren’t looking to sell it as product, but use it as stocks to swindle amateur investors who know very little about what they’re buying. They make their returns via a pyramid scheme structure of resale and so the way they extract value is totally different from ours, as we sell it on as a product to be consumed at a fair price. As a whisky company that wants to make whisky for people to drink, share and enjoy - that’s annoying. But as whisky lovers and human beings who don’t like seeing people get conned or swindled - it’s alarming. Things like this are a step forward.
Should you invest in whisky? The old mantra was that you should only invest in whisky if you'd be happy to drink it should the worst happen to your investment. But with the advent of cask programs selling average stock at inflated prices, sadly even that litmus test might not even keep you safe.
The cask trading game is so opaque, so complex, that factors like how much whisky remains in the cask after so many years mean that people thinking they own a certain amount of litres may be in for a nasty surprise if they ever choose to bottle it, or eventually try to sell it. The people we’re now competing against have a completely different agenda - and seem to have infinite resources flowing from their pyramid scheme models which mean they’re paying miles over the odds for the casks and passing it on up the chain. Distiller’s and legitimate whisky brokers (there are some) are now in a dichotomy of cutting off the revenue streams involved in cask brokering or restricting the market, which may only make it worse. Brokering of casks is an essential part of the whisky industry's overall inventory management. Oversupply associated with the long term planning has historically been managed through brokering casks - but its changing now they know that they’re potentially fuelling something that could damage them and the category long term. There’s rumours Diageo will stop selling to brokers, and that will only drive the prices up more. Everyone’s trying to beat the market - and the market is in a bubble phase, That’s attracted eager investors and that’s brought in bad actors. It’s a perfect storm, trouble is brewing. It’s already here.
What’s the impact though?
The impact of all this is the worrying part for us. History tells us that the whisky industry goes through cycles of boom and bust - a product of the complexities involved with planning inventories a decade plus in advance. Supply is high right now - there’s 20 or so new distilleries in the past five years, and established distilleries are doubling capacity everywhere you look. The market is flooded and demand from consumers is roughly stable. It’s an obvious accident waiting to happen. The figures are being manipulated by savvy middlemen who are exploiting the current hype around whisky as an investment. But also, more and more stock is being snapped up with no intention of being used for anything other than an investment. It’s evaporating each year and changing hands multiple times. A lot of amateur investors are in the process of being scammed by professional bad actors. It’s as simple as that. And because the demand is there, the prices for special bottlings remain high - making them unobtainable for most people that would actually enjoy drinking them.
The whole thing is a house of cards - fuelled ultimately by commercial greed. There’s nobody in the system working to protect the consumer - quite the contrary. And that’s not what whisky should be about. It’s an industry built on trust, a certain reverence for prices that in some way reflect the quality - and the fallout if it all falls apart will damage the ordinary consumer’s perception of the category. That’s what we’re worried about. Scotch is in the position it is in globally because it’s built an excellent reputation for value and quality over many decades. Consumer trust is one of the things that allows Scotch to be the export that it is. The elastic band between liquid quality and the prices being paid is so stretched at the top end of the market, and in these cask investment schemes - that when it snaps a lot of people will feel the pain, and sadly, it’s likely to be small companies like us or the average consumer that suffer the most. History tells us that when the whisky market crashes due to situations like this the bigger players get bigger, small distilleries close or become absorbed into big companies. It’s not good for competition - the way the industry looks today (with 5 players owning around 85% of the industry) was because of the last big crash. It’s not good for competition, and as a result, not great for the consumer.
What we want to see
We want to see brands take a reality check at the very top end of the market and get control of their addiction to incessant premiumisation and inhumane, unjustifiable margins in the luxury space. We want to see regulation or accreditation in the cask investment area. The secondary market will always exist, and arguably regulate itself one way or another. But we need everyone involved to remember that the magic in whisky is the fact that it’s a drink and the value within the liquid gold is only unlocked when it is consumed and enjoyed. We need people to stop portraying whisky as a magic money tree. Whisky companies need to refocus on being whisky companies, reflecting the true sprit of the category, and the communities which give rise to the liquid.
Whisky used to be at the heart of the communities that made it, blenders built their brands by serving the tastes and needs of their customers, and were often at the heart of the communities in which they existed. Now, it is not as simple, the motivations are very different. And that was one of the things that made us want to create Woven - we want to represent a style of business that defines success in a much more broad way - recognising the interconnectedness of us all, and challenging the definition of individual success. If the future of whisky is a group of luxury obsessed companies looking to exploit the greed of high net worth individuals for their own benefit, underpinned by an unregulated secondary market looking to exploit those who wish to become high net worth individuals, again for their own benefit then it is bad for what we see as the true spirit of whisky, and everyone else in the chain.