Worth £4bn in 2015, Scotch whisky generates one-quarter of UK food and drink exports. Over the past 30 years, global sales have grown 1.5 per cent per annum by volume and more than twice that by value.
Demand has deepened as it spreads, with 27 national markets now buying over half a million cases each year – up from 14 in 1985 – as Scotch’s steady growth sails past the sub-prime collapse in the US (the largest market by value), the Eurozone crisis (France is the largest by volume and second by value) and now the slowdown in China and the resulting crash for its commodity suppliers (Brazil has doubled its spending to 2 per cent of Scotch exports since 2005).
The unsung workhorse of this remarkable business is blended Scotch. Mixing up to 40 different malts with 60-70 per cent of a plainer grain whisky, this smoother drink accounts for nine bottles in every 10 sold worldwide.
Diageo thus offers one way to fortify a portfolio with some of Scotch’s long-term stability. The London-listed drinks giant owns leading blends, including Johnnie Walker, Talisker and Lagavulin. Diageo’s dominance in Scotch whisky has helped the stock comfortably outperform broader equity markets. But while Diageo now satisfies more than 40 per cent of Scotch demand worldwide, the spirit makes up less than a quarter of the company’s gross sales.
Investors wanting a pure play will not find any listed companies dedicated to Scotch, nor to any production of whisky. Private equity has recently seen a handful of buy-ins; Exponent bought the Loch Lomond distillery in 2014, and Australian entrepreneur David Prior bought the mothballed Bladnoch facility last July. But there have not as yet been any notable successes or exits to benchmark returns from investing in production.
What’s more, the recent boom in smaller start-ups – so-called “craft distilleries” – has now attracted the majors, with Diageo actively competing with private equity to provide finance through its Distil Ventures programme.
The simplest route to gaining exposure to Scotch’s long-term success therefore remains owning the whisky itself, and this is gaining interest from both funds and private investors.
For some, it means building a collection of rarer whiskies already bottled; consultancy Rare 101 says auction sales of single-malt bottles grew 25 per cent by value in the UK last year, if only to £9.6m.
However, this rise in whisky auctions by value lagged the growth in volume, with the average bottle’s sale price slipping over 2 per cent from 2014. Perhaps that’s to be expected; the bulk of auction sales are made through online sites where enthusiasts are looking for whiskies to drink rather than investors seeking price appreciation.
What then of maturing Scotch whisky, still in the barrel? Industry data for the last decade shows a 13.4 per cent compound annual growth rate for malt whisky held in bonded warehouses (with no VAT or duty) on its way to being sold for bottling at eight or 12 years.
Net returns are reduced by storage and insurance costs (around 5 per cent per year on new-make spirit, before it gains maturity value). But even when you strip out inflation net appreciation has been over 7 per cent per annum on a real returns basis – still hugely appealing against zero interest rates, negative bond yields and record-high asset prices.
To date, maturing Scotch has been uninvestable. Several smaller distillers run cask purchase schemes, inviting private individuals to buy a whole barrel of spirit, perhaps with some guarantee of a future buyback price.
But most come with a 10-year or longer lock-in period, and initial pricing – already including all storage fees upfront – sits close to final trade-sale valuations.
Rupert Patrick is co-founder and CEO of WhiskyInvestDirect