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Over a barrel...

According to Alan Gray, Scotch whisky analyst at ING Barings, malt whisky accounts for just 3.4% of the total market for Scotch. Some might find that figure hard to believe, given the hype that surrounds single malts - the deluge of press releases, the number of books and articles on the subject and the maelstrom of innovation that swirls around it. In comparison, the silence coming from blended whisky can be a little spooky at times. Yet what the latter lacks in sex appeal, it makes up for in sheer volume. The industry is still driven by blends and, presumably, always will be. The blended market is 90% exports, which, so the Scotch Whisky Association (SWA) proudly proclaims, topped a billion bottles for the first time ever last year. Within the EU, shipments grew by over 10% to Greece, Germany and - the biggest market by volume - France. The most valuable market, Spain, appeared to stumble, although consumption is said to be holding up well despite the boom in dark rum, which threatens to be the next big thing'. The real excitement, however, has come from Asia, from countries like South Korea, where exports jumped 26.5% in volume and 20.5% in value, making the republic Scotch's fourth-most valuable foreign market. It is worth stressing that this is an export-led industry. The great untapped potential is clearly overseas, in countries where Scotch is still considered aspirational. But while the brand manager of The Famous Grouse might dream of the East and of swapping Sainsbury's for the streets of Seoul, the reality is never that straightforward. For a start, most Koreans believe that if it isn't at least 12 years old, it's not Scotch. Back in the UK, which accounts for the remaining 10% of the market, the margins on standard blends, which comprise 95% of the market, are nothing like those on de luxe or malt whiskies. How much Stewart's Cream of the Barley does Allied Domecq have to sell to make the same money it does on a single bottle of Laphroaig? The problem of low returns remains one of the big unresolved issues in the domestic market. The supermarkets and off-licence chains have their reasons for selling Scotch at rock-bottom prices, if not as an actual loss leader - though strictly speaking, you're not allowed to call it that. Like those special Champagne deals beloved by Oddbins, it is a way of drawing people in off the street. And though interest rates are nothing like they were, it presumably gives the retailer the chance to make something on the money markets in the two to three months before having to pay the supplier. It is also a way of trumpeting the notion that the superstore is the consumer's best friend and will not be beaten on price'. From the suppliers' point of view, selling whisky at below farm-gate prices in order to retail at 7.50 or less (in the case of tertiary brands) is much harder to justify. But if you are a producer with a warehouse full of three-year-old whisky and some spare capacity in the bottling hall, the temptations can prove irresistible, especially if the retailer is simultaneously squeezing you by the balls. If you were writing a paper on it, you would say that no one in their right mind would supply whisky at that price, because there's no profit in it,' admits Gray. But if you have a lot of excess stocks, maybe not, and I guess everyone does their accounting differently.' What's happened is that Scotch whisky is clearly a battleground in these shops,' says Brian Megson, chief executive of Kyndal, the world's biggest supplier of own-label Scotch. We're caught up in a tremendously big fight and margins are very, very low - if they exist at all.' The hope is that the lean years will be drawing to a close soon, once the cutbacks in production begin to filter through to the marketplace three years down the line. After the worst fall in demand for 17 years, the flow of spirit from the stills was dramatically reduced in 1999 and 2000, followed by a lesser cut last year. As a result, Gray believes the industry is now broadly back in balance. The big uncertainty is knowing exactly where that supply and demand equation should kick in,' says Kyndal's marketing director, Glen Gribbon. Who knows whether that would be in bulk or cased private label business, but the historical evidence is that there should be a hardening of prices as supply and demand come into line, despite the fact that the retailers are becoming ever stronger,' he says. So far, among the old-label and cheapest-on-display sector - which accounts for around 40% of the UK market - it is still a case of wait and see. But there may be signs that some brands are moving in the right direction. If hard evidence is difficult to come by, there is at least a feeling that a modest price hike for certain blends is on the agenda. If you talk about brand-owning companies,' says Richard Watling, Scotch whisky director at Diageo, there are more people talking about what I'd call "value-creation" than there have been for quite a number of years.' He puts this down to management changes at firms like William Grant and Kyndal, which are now having to upgrade and improve and search for ways of getting greater value to their brands'.

Price hikes ahead?

So will these talks on value-creation' lead to higher-priced Scotch on the shelves this Christmas? Industry insiders appear doubtful and suggest that maybe that will happen next year. But whenever it does happen, price rises will be quite a shock for those consumers used to paying the same, if not less, for their favourite blend since the mid-Nineties. According to the Scotch Whisky Industry Review, you could buy a 70cl bottle of Bell's for 12.99 in 1998 from Victoria Wine, but if you had hung around for a couple years it would have cost you 1.50 less. Meanwhile, Teacher's Highland Cream sank to 10.79 in 2000, having been 11.89 two years before. Of course, there is every chance that our favourite blends will be on offer at some point this December. Although the industry knows it is a sin to price-promote during times of peak demand, and keeps promising to mend its ways, something gets lost in the festive spirit and the desperate rush to meet year-end targets. Cadbury's does not discount Easter eggs at Easter, nor do the record companies slash prices of their chart CDs at Christmas - at least not outside Tesco, and not if they can possibly help it. But back on the Scotch whisky shelves, the question on everyone's lips is, who will crack first? Will it be Bell's or will be it be Grouse? To be fair, things are much better than they used to be, and the issue of aggressive supplier-funded promotions in supermarkets is hardly one that affects only the Scotch whisky trade. But sadly for blends, the slow rate of repeat purchase would suggest that they suffer more from this than many other drinks. Sensible brands try to build into their standard retail price a sum of money to help pay for the twice-yearly promotion. The question is, what proportion of sales ping through the till at what price - the RSP or the special offer'? Allied Domecq believes it is on the right track with Teacher's, by focusing on its core market - men aged 45-plus. By lifestyle, the brand's target audience could be Mondeo Man's older brother, but what he lacks in glamour is repaid in loyalty. Like someone who has always smoked Benson & Hedges and has no intention of quitting now, Teacher Man knows what he likes and it would be a tough proposition for other brands seeking to poach him with crazy deals and fancy ads. This should mean less money blown on promotion, either on price or advertising, and therefore more to share between the retailer and the supplier - at least, that's the theory. Either way, Teacher's does not advertise, has no use for Jools Holland - unlike Bell's - and leaves the recruiting of new whisky drinkers to other brands. Quoting AC Nielsen for the UK off-trade, Allied Domecq says that Teacher's has grown 25% in volume and 19% in value in the year to June 2002. Both of these increases are by far and away the most significant in the blended market, with the brand significantly outperforming the market and key competitors,' claims senior brand director, Jeremy Hill. With the UK market fairly flat - up 2.4% in the off-trade and down 10% in the on-trade (AC Nielsen) - the news from Allied does sound a little surprising. Perhaps it got confused with South Korea,' muttered one competitor. Assuming the figures are correct, however, Teacher's clearly had some catching up to do, having been a million-case brand in the early Nineties. Listening to Watling, Bells' target consumer sounds remarkably similar, being a 40-plus, B, C1, C2 committed Scotch drinker'. Population studies tend to support such an approach, with the 45 to 59-year-old age group set to reach 12 million by 2006, a rise of over 10% on 1998, compared with a mere 0.4% increase for 15-29-year-olds. And like Hill, Watling believes there is plenty more to be done to achieve the maximum penetration within this greying sector of the market. Over at The Famous Grouse, marketing director Murray Calder believes that, saying "we're only going to speak to our existing consumer base" is managing a market for decline. I don't see it that way. I think there are big opportunities in the UK to rejuvenate the category - and I think The Famous Grouse is particularly well able to do that. The icon advertising campaign is extremely effective and is enjoyed by a wide range of ages. That builds up equity over time and gives us an opportunity to start speaking to a younger target audience. The question is, how do we convert that awareness into trial and adoption? That's the challenge.' In the on-trade, J&B has made brave efforts to strip Scotch of its pipe and slippers image and re-invent the drink as something cool and hip to be swigged through the night, as they do in Barcelona. But it seems the company's targeted campaign, aimed at a series of cities including Leeds, Edinburgh and Glasgow, only went so far. Whether it is an inherent prejudice against an old man's drink' that will take a generation to resolve, or the fact that no other Scotch brands followed J&B's initiative, it seems vodka has little to fear. At least, that was the conclusion from a completely unscientific poll of Glaswegian style bars I conducted recently. There is a place for super-trendy blended whiskies,' says Hill, but its role in the UK, at least, is somewhat limited, as the younger consumers, in the main, see blended whisky as very traditional and not very aspirational. This is evidenced by the recent attempts, and subsequent failure, to launch and establish a Scotch whisky-based PPS, and the recent introduction of a "de luxe" offering targeting younger consumers, which has had very limited success, despite significant investment. These two examples are indicative of the problems that Scotch faces in innovating young consumers.' In traditional pubs, the old brands and their ageing band of followers hold sway. It is not an area buzzing with innovation. As Jeff Brown, marketing director of Punch Taverns, puts it, To be perfectly honest, I can't remember when anyone tried to do anything different with Scotch whisky.' Maybe Kyndal, owner of Whyte & Mackay, and Burn Stewart, which has ambitious plans for its mid-priced Scottish Leader', can shake things up a little. Kyndal has access to Pubmaster through West LB, the German bank behind Kyndal's MBO last October, which also has a 40% stake in the 3,500-plus pub chain. Yet whatever side of the trade, the UK remains a tough market for blends. How much easier to be a malt with a strong consumer franchise and limited supply, able to cherry-pick those markets with the best returns. As Jonathan Driver, director of Classic Malts at Diageo, says, No one has ever told the world "Chivas is running out. Go buy now!'''

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