The State of the Bourbon Union

To say “the state of bourbon is strong” is an understatement. The state of bourbon in 2016 is, especially to long-time observers, astonishing.

To understand why, consider where bourbon was 25 years ago.

Back in 1991, American whiskey sales were flat and that was an improvement. Sales had finally bottomed out after a brutal 20-year decline, during which bourbon lost half of its volume and comparable market share.

By 1991, the bleeding had stopped. Instead, sales from year to year were up 1 or 2 percent one year, down a similar amount the next, essentially flat.

Outside of the South, young Americans were drinking everything but bourbon. Without the traditional ‘Bourbon Belt,’ bourbon might have gone extinct.

Moving Out

After receiving so much bad news for so long, the industry had given up on bourbon. Consolidation had just about eliminated the bourbon-only companies. Every company still standing had valuable assets outside the whiskey category and that’s where they put their attention and resources. To keep their remaining bourbon business profitable, they stopped investing in it. People kept buying bourbon, old people mostly, soon to leave the market for good.

Although Jack Daniel’s did better than most during the doldrums, parent company Brown-Forman was investing in Italian wines and diversifying into china and leather goods. The company’s bourbons were dead (Old Forester) or dying (Early Times).

Glenmore, another company built on bourbon, was earning its money from distribution deals for products they didn’t make, such as Amaretto di Saronno and Remy Martin Cognac.

Jim Beam was late in transitioning from a bourbon company into a full-portfolio distilled spirits producer. They did it in one fell swoop by buying a hobbled National Distillers, primarily to snag the Fireball of its day, DeKuyper Peachtree Schnapps. In 1991, Beam added a basket of high volume, low margin brands from Seagram, such as Ronrico rum. That made them third in U.S. sales, pushing Seagram down to fourth. Jim Beam bourbon was still their biggest seller, as was Jack Daniel’s at Brown-Forman, but both companies were frantically growing the rest of their stable to stay ahead of bourbon’s decline.

In 1991, there was one bright star on bourbon’s horizon: exports. Japan’s whisky market had long been dominated by scotch and locally-made scotch clones. Suddenly, young Japanese were rejecting their elder’s drink (as American youth had done two decades before) and embracing American whiskey instead.

Starting in Tokyo`s fashionable Roppongi District, young salarymen crowded into ‘bourbon bars’ and gladly paid $15 to $20 for a drink of Kentucky’s finest. Whiskey that gathered dust at $10 a bottle here was fetching $200 there. That’s why I. W. Harper bourbon’s sudden popularity in Japan led to it being taken off the U.S. market. (Diageo finally reintroduced it here in 2015.)

Japanese companies were even buying into bourbon makers, at bargain prices, and creating new bourbon products primarily for the Japanese market (e.g., Blanton’s Single Barrel). The legendary A. H. Hirsch Reserve bourbon was created for the Japanese market too. It wasn’t just Japan; by 1991 bourbon was growing in Great Britain, Germany, Australia, even places like Thailand.

A rickhouse at Jack Daniel. The distiller is constructing major additions to its facility.

Going All In

Fast forward to today. From a base of practically nothing 25 years ago, exports of U.S. spirits have grown to more than $1.5 billion annually (this and all following sales numbers are from DISCUS). 70 percent of that is American whiskey (most of the rest is rum). Leading brands Jack Daniel’s and Jim Beam today sell half of their bottles outside the U.S.

Bourbon’s biggest export market is Canada. Mexico is ninth. Great Britain, the home of Scotch whisky, is second. Brits spend about $200 million a year on bourbon. In Australia (#4), bourbon is the best-selling distilled spirit of any kind. Most of these markets are maturing, but Singapore, at #10, has seen its bourbon consumption grow by more than 500 percent in the last ten years.

No one is quite sure why.

Explanations for this sudden explosion are mostly guesses and largely unsatisfying. “Mad Men” wasn’t that popular. And it’s not like bourbon is a new product, suddenly bursting into American consciousness. Twenty-five years ago most drinkers knew what bourbon was, they just didn’t drink it. The liquid itself hasn’t changed. Bourbon is still bourbon.

The export markets everyone talks about, India and China, the mega-markets that will change everything, aren’t even on the radar yet.

Bourbon couldn’t attract sophisticated and well-heeled consumers with its high end because it had no high end. It does now.

Unlike scotch, which is entirely export-driven, bourbon’s biggest market has always been the U.S. Sales volume at home stayed more or less flat until the end of the century, with growth coming almost exclusively from exports. For the next ten years, domestic growth increased at an average annual rate of about 2 percent. Skipping the financial crisis year of 2009, the average annual growth rate jumped to more than 5 percent over the last five years. U.S. sales were at about 13 million cases fifteen years ago. They’re at 20 million today.

That’s huge, a dramatic change of fortune, but it’s only about 10 percent of the U.S. distilled spirits market. Vodka is still America’s most popular spirit. There is plenty of room to grow.

Volume growth only tells part of the story. Over the last fifteen years, the fastest-growing segment of the American whiskey market has been the expensive stuff, the top of the line. That’s healthy for the overall industry because that’s where the best profits are. If the most profitable piece of your business is also the fastest growing, that’s a good thing. It pays for a lot of innovation and investment.

Since 2000, the value of the American whiskey market in the U.S. has been growing at an average annual rate of nearly 7 percent. Since 2009, it has been growing at nearly 8 percent per year.

Volume in the super-premium segment (750 ml bottles retailing for $25 or more) has grown from 300,000 cases in 2002 to more than 1,500,000 today. Revenue in that segment has grown from $60 million in 2002 to $350 million today.

Distilling giants Jim Beam and Jack Daniel sell half of their production overseas.

Keeping Up

Impossible to measure is unmet demand in the most recent five-year period, as such rapid growth exceeded everyone’s estimates and, consequently, everyone’s supply. You can’t sell what you don’t have. There is no way to know how much bourbon could have been sold last year or the year before if only more bourbon had been available.

With most products, manufacturers can respond to sudden increases in demand almost instantly. If the world wants more televisions, or mobile phones, or SUVs, the manufacturers just make more. Maybe there’s a lag, a bottleneck or two in the supply chain, which creates a shortage for a few months but at worst supply usually catches up with demand in a year or less.

Not so with bourbon, because of aging. The standard for a basic bourbon is 4 to 5 years in wood, but recall that the fastest and most profitable growth is in the top end, where ages are 8 years and up. Producers could sell everything at 5 years—and probably sell everything they made—but they would sacrifice the juiciest fruit. To reach the Promised Land, you have to leave barrels you could have sold in the warehouse. That’s hard.

Lately, companies have thrown caution to the wind on the production side. They’re pushing their current plants to the limit. Most are adding capacity. New players are entering the market. The new players come in two types, tiny producers who won’t impact overall volume but do excite and activate young consumers, and larger producers who, though still smaller than the majors individually, are collectively adding meaningful production capacity.

Indiana’s low-profile MGP Ingredients has prospered serving the NDP market.

Betting the Limit

What’s the risk? That tomorrow everybody starts drinking Pisco due to the sudden popularity of a Peruvian soap opera. Scenarios of that sort keep whiskey makers from sleeping through the night.

Sudden market shifts are a risk in any business but, again, the aging cycle makes whiskey unique. It takes about two years to build a new facility, figure another six years before there is enough product in the pipeline to start selling it. That’s eight years! Will bourbon sales still be this robust in 2024? Are you making too little, or too much? There is no way to know for sure.

Growth in the value of the U.S. bourbon market shows that bourbon has become something it never was before: classy. The scotch industry sells its expensive single malts, its Macallans, Glenmorangies, and Laphroaigs; even though they only represent about 7 percent of the scotch market, they elevate the whole category. Cognac producers do the same thing, selling down from the top of their range. Bourbon never had an upper range. It was the working man’s drink, a shot and a beer. Bourbon couldn’t attract sophisticated and well-heeled consumers with its high end because it had no high end.

It does now.

There is Van Winkle, of course, but also the Buffalo Trace Antique Collection, Four Roses Limited Editions, the Parker’s Heritage Collection, limited Wild Turkey releases, Old Forester Birthday Bourbon, and others. They sell so fast they never touch a shelf. Stores use lotteries or waiting lists to allocate them. There is also an active clandestine secondary market where the above, as well as the remaining bottles of A. H. Hirsch, some Jeffersons, Michter’s, Willets, and others do a thriving business. Weller 12 got a reputation as ‘Van Winkle-like,’ and now it too sells on the secondary market for many times its shelf price, and is in perennial short supply at retail.

At the other end are flavored whiskeys. They’re very popular and sell for a premium even though they are cheap to make. Many are liqueurs and have a spirit base that is more vodka than whiskey. Whatever whiskey they contain is invariably young. Consumers are happy because they have a product that suits their taste and also lets them participate in the whiskey party. Producers are happy because they get relief from the tyranny of the aging cycle.

New owners, distilling at new facilities, have reinvented the Michter’s brand.

New Players

But readers of this publication don’t drink flavored whiskey. You care about those super-premiums, brands such as Michter’s.

Twenty-five years ago, Michter’s was in the dumpster, literally. The Pennsylvania company’s liabilities so far exceeded its assets that the owners simply walked away, leaving the distillery with unwanted whiskey in its warehouses. Even the trademark was abandoned. A few years later, a New York-based non-distiller producer (NDP) called Chatham Imports re-registered the trademark and rebuilt Michter’s as a top-end name, putting very good whiskey into fancy bottles and charging a pretty penny for it. They got so big they needed a more reliable supply, so they commissioned a distillery to produce for them under contract. No one knew who made it, no one knows now, but it doesn’t seem to matter because the whiskey is consistently excellent and the image is exactly what people want.

As they grew, Michter’s also recognized that industry production capacity was approaching its limits so they built a new distillery, from scratch. It’s a pretty big one. They filled their first barrels in the late summer of 2015.

In 1991, Even Kulsveen had a good business selling bourbon in fanciful ceramic decanters and other gift packaging almost entirely outside the U.S. He made neither the whiskey nor the ceramics, but was operating out of an old Kentucky bourbon distillery, one founded by his father-in-law. He already had a vision for its revival as Willett, both a bourbon producer and tourist destination, with an on-site inn and restaurant, and maybe a horse-drawn carriage to take visitors from the distillery to downtown and back.

The inn and carriage haven’t materialized yet but the tourist-friendly distillery has. Just about everything except the Willett family’s old column still is new, or was four years ago when they reopened and started to distill again.

Michter’s and Willett, as well as New Riff in Newport, Ky. (distilling for about a year), and a few others that recently started or are starting soon, might be called sub-majors. They’re smaller than the smallest of the majors, but not by much. The new distillery Diageo is erecting in Shelby County is in the same class. Nobody is building a new mega-distillery on the scale of Jack Daniels in Tennessee, but all of the capacity from new producers combined is like adding a new Jack Daniels to overall industry capacity.

Will it be enough, or too much? Only time will tell.

Overall industry capacity is important because NDPs today are more prevalent than ever. They have to get their whiskey from someone. They benefit when the distilleries are running below capacity.

Right now, only one distillery serves the NDP market exclusively, MGP of Indiana. Most of the others serve it as a small part of their overall business.

MGP is doing well. The Indiana distillery was close to collapse when MGP bought it in 2011 for $15 million. Today it is doing about $73 million a year in whiskey business alone. (The distillery also makes neutral spirits.)

Some NDPs are craft distilleries, using their NDP business to fund the house-made stuff. That’s the Willett model, although it took them over twenty years to realize the dream. Most would rather do it in less time. The explosion of small distilleries making whiskey and other distilled spirits has given the current boom a youthful energy and attracted many young consumers, but it hasn’t made a dent in sales figures. That may change in a few years as whiskey from the new sub-majors reaches the market.

Although use of the term ‘craft distillery’ is hotly debated, a few distillers do employ unique and innovative recipes and techniques to create original taste experiences. This part of the movement is closely aligned with craft cocktails and their makers. It’s worth watching.

American whiskey is healthy today because it is interacting with consumers in many different ways. Modern whiskey drinkers like its authenticity, but they also demand customization. “Give me an authentic experience, but give it to me my way,” might seem contradictory, but it’s the ability to roll with that kind of ambiguity that may be the key to bourbon’s long-term success.

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