Whisky Business

At the Glenmorangie distillery near Tain in the Scottish highlands, the distillers explain that their name means "valley of tranquillity" in Gaelic. Lately, however, Glenmorangie has echoed with the noise of builders and fitters enlarging the distillery. The family-controlled business has expanded three times since 1977, when it first doubled output to meet growing world demand. Production doubled again in 1990, and with the completion of the latest extension, the makers of the world's third best-selling malt whisky — meaning it's made from malted barley, unlike the grain whisky that makes up the bulk of most blended Scotch — will have the capacity to produce around 13 million bottles a year. "We've come a long way since 1960, when we sold maybe 70 bottles of malt whisky worldwide," says distillery manager Graham Eunson. "Last year we shipped over 8 million bottles — and the new capacity says we're confident we can sell a lot more."

Glenmorangie, which last week announced increased U.K. market share and a 12% rise in pre-tax profit, is not the only distiller in high spirits these days. Despite a sluggish global economy, 2001 was a banner year for the Scotch whisky industry, with exports exceeding 1 billion bottles for the first time ever. "The world's love affair with whisky is far from over," says Ian Good, chairman of the Scotch Whisky Association and CEO of the Edrington Group, which makes Cutty Sark and The Famous Grouse whiskies. "It's still the world's No. 1 spirit, exported to over 200 markets."

Staying No. 1 will not be easy. Last year may have seen record export volume, but what matters most is export revenue. (Fluctuations in currency and the wholesale price of whisky can cause large swings in that.) Although sales improved in 2001, to $3.6 billion from $3.3 billion in 2000, they have yet to return to the $3.7 billion level reached in 1997 before Asia's financial tsunami cut consumption in that part of the world. Nor will they unless key markets like the U.S. — down 7.7% last year — rebound soon. Export volume for the first eight months of 2002 is down 6.5% from last year and Alan Gray, whisky analyst for ING Financial Markets, is predicting volume growth of only 1.8% per annum over the next five years as the industry grapples with volatile economies and stiff competition from other spirits. Although recurrent predictions that Scotch would be washed away by a tidal wave of vodka and other trendy tipples have clearly proved premature, the threat remains.

Can whisky fight back? It seems to be limbering up. Last year's partition of the Seagram drinks empire by Britain's Diageo and Pernod Ricard of France means that the big three — Diageo and Pernod Ricard, plus Allied Domecq — now account for 57% of global sales. Although global super brands like Diageo's J&B (the world's top-selling Scotch), Allied Domecq's Ballantine's and Pernod Ricard's Chivas Regal will inevitably kill off other whiskies, the upside of consolidation is that the industry now has players with the financial resources and distribution networks to develop new markets and keep Scotch atop the international drinks league.