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28/09/2018

Whisky Investment: Getting Into the Spirit (City AM Column)

by Richard Ellis - Spirits Buyer

This week we will break from the world of wine investment and look into a relatively new opportunity: investing in Spirits.

In recent years, the Premium Spirits market has experienced unprecedented demand and exhibited extremely attractive investment performance – and the Scotch Whisky market has led the gains. While headlines tend to refer to new record prices for old vintages of the biggest names – brands such as The Macallan, Glenfarclas etc – in fact the compelling underlying market dynamics mean that the attractive performance has been, and continues to be, seen much more broadly across the space. Spirits as an investment area has graduated from a very small-scale, esoteric space towards becoming a legitimate alternative asset class.

Whisky (or Whiskey, if it is from the US or Ireland) is produced all over the world and subject to many production rules and regulations from their requisite domestic markets. Most whiskies can be put into one of two categories: Single Malt (i.e. produced in a copper still in a single distillery) or Blended (a mixture of single grain whisky, for volume, and one or more single malts, for taste). There are ‘vintage’ whiskies – named for the year in which they were distilled – and ‘age-statement’ whiskies, such as 12-year-old or 18-year-old, which are named for the youngest whisky in the blend. Then there are a plethora of other factors: single cask, first-fill, and cask-finish being just some of the added complexities.

By far the biggest volume producer of quality is Scotland, but growing competition in the Premium space is increasingly coming from Japan and the USA. In fact, Japanese whisky has seen some of the biggest and most exciting growth over the past decade with names such as Karuizawa, Taketsuru and Yamazaki joining the most sought-after Scottish Single Malt brands.

In such a complex market, caution is required. This is not a question of buying the most expensive bottle in your off-license and hoping it increases in value. As with wine, in order to take advantage of the full potential of the market, highly specialist knowledge, first-class sourcing and distribution capability is required given the underlying complexity of the product.

Current market dynamics have been driven by a number of factors. Firstly, the demand pool is growing: 2017 represented the highest ever exports of Scotch whisky, and Asia in particular is exhibiting sustainable, consumption-driven demand for premium spirits. As with fine wine, the broader theme of growth in High Net Worth is also a key driver.

Furthermore, there is a natural inability for the supply side of the equation to keep pace: the very nature of slow production and maturation of whisky and other spirits means that bottles which are consumed cannot be replaced quickly enough with product of the same quality.

These dynamics have generally led to attractive gains for those who have invested in whisky and other spirits during the last 5-10 years. However conditions continue to be favourable for further value appreciation, with the maturing marketplace presenting an ongoing opportunity on this front.

The premium spirits market is a long way from reaching equilibrium, with the primary market (distilleries) struggling to keep up with increased global demand, and the secondary market remaining sufficiently embryonic that sophisticated specialist investors are well placed to cherry-pick from stocks across the age and price spectrum.