Via ConvergEx's Nicholas Colas,
American consumers may have pocketed most of their gas savings thus far, but there are two discretionary items where they aren’t holding back spending: bourbon and Tennessee whiskey. U.S. revenues for both spirits climbed by 9.6% last year, or 46.7% over the past five years, to $2.7 billion in 2014. More importantly, higher end brands continue to drive this growth. A stronger dollar in the back half of 2014 didn’t stop foreigners from enjoying American whiskey either: exports grew to a record of $1.02 billion.
So what’s contributing to this surge in demand? We reached out to distillers in the industry, who attributed it to the cocktail culture, improving quality, and an influx of craft/small distilleries. Domestic and foreign consumers value bourbon’s authenticity and American heritage, while product innovation with flavored whiskeys helped expand the consumer base to younger adults and women. Although a shortage of charred white oak barrels challenges the expansion of production for established distilleries and new entrants, the industry continues to grow and is a boon for Kentucky in particular. Bourbon serves as the second most important manufacturing industry in the state in terms of jobs and its employment multiplier. Overall, the American whiskey market is a positive economic indicator in terms of consumer spending, Kentucky’s local economy, and the export industry.
Note from Nick: Here is a “Feel Good Friday” fun fact: Frank Sinatra was buried with a few of his favorite things, including a bottle of his beloved Jack Daniels. And although “Old blue eyes” has never gone out of fashion, bourbon has certainly had its ups and downs over the years. Today Jessica looks at the resurgence of the consummate American brown liquor and what it tells us about spending habits, consumer marketing and the Kentucky economy.
The spirits industry grabbed U.S. market share away from beer for a fifth straight year in 2014. Beer lost a 0.5% share of total U.S. alcohol revenue to spirits – the former’s fell to 47.8%, while the latter’s rose to 35.2% according to the Distilled Spirits Council of the United States (DISCUS). Wine was unchanged at 17%. This contrasts the two years encompassing the bulk of the recession, when spirits and wine gave up share to the cheaper alcoholic beverage: beer. Since 1999, however, spirits are up to 7% of U.S. market share compared to a gain of 1.2% for wine and an 8.2% loss for beer.
Bourbon and Tennessee whiskey are major drivers of this trend. In 2014, distillers sold over 19 million 9-liter cases of bourbon and Tennessee whiskey in the U.S., earning $2.7 billion in revenue. That represents a 28.5% increase in volume and a 46.7% rise in sales over the past five years. So what’s generating this surge in demand? We reached out to distillers in the industry for their take. Here are their observations along with our color:
“Premiumization”: An improving economy continues to help fuel sales of higher end bourbons as the quality improves, new products are introduced, and more craft/small distillers come to market. DISCUS reported that there are now over 700 small distillers compared to just shy of 100 in 2010. Our contacts said consumers are seeking craft spirits that are local, organic and authentic; they value quality over quantity. Bourbon fits this profile since it can’t contain additives.
A breakdown of categories reflects these consumer preferences. Data from DISCUS shows revenues of “High-End Premium” ($18-30 per barrel at retail) and “Super Premium” (+$30) brands grew 45% and 137% respectively from 2009 to 2014. By comparison, “Value” (less than $12 per bottle at retail) and “Premium” ($12-$18) brands lagged, up 18% and 34%.
New Products: Our contacts said their average customer is a male between the ages of 28 and 45. However, the advent of flavored whiskeys has broadened the consumer base by attracting younger adults and women. This helped the spirit become more relevant to millennials, as opposed to being viewed as their “grandpa’s drink”.
Cocktail culture: Mixology trends also helped spur demand for American whiskey. As indicated in our interviews, bourbon evolved from a straight consumer product into a cocktail culture offering as bartenders branched out from vodka, for example, and got creative with other spirits. This showed people other ways of consuming bourbon, such as renewing interest in classic whiskey cocktails from decades past. Some contacts referred to this as the “Mad Men effect”.
Additionally, they said greater adoption in the culinary world exposed bourbon to a different demographic by introducing the spirit’s taste through food pairings. This is particularly popular among the sustainable and locally sourced food crowd. Thus, two of their major promotional efforts involve master classes and dinners as a means to explain bourbon and other whiskeys to new cohorts of buyers.
Education: Our contacts reiterated the most important key to bourbon’s relatively recent popularity stems from education. In 1964, Congress passed a resolution that declared bourbon to be a “distinctive product of the United States”. Now federal laws require distillers to produce the spirit in the U.S. in order to attain the bourbon classification. Consumers value this heritage, but bourbon was long perceived as less sophisticated than other spirits. Distillers continue to change this thinking as they educate people on the aging and manufacturing process. One interviewee said, “People may not have realized how great of a product we have in our own backyard”.
Moreover, this contact noted that distillers used to ship lower end/high volume labels to foreign countries a few decades ago. He said their job is to therefore show international markets that bourbon can be just as refined as any other spirit in the world, like single malts and cognac. The tide is turning as interest in American whiskey grows to other countries, especially as it spreads among cocktail bars from New York to other trend-setting cities, such as London and Paris. Progress with respect to trade-agreements also opened up markets.
Consequently, whiskeys account for 70% of total U.S. spirits exports – marking a record high for a fifth consecutive year – according to DISCUS. Bourbon and Tennessee whiskey, more specifically, crossed the $1 billion threshold in exports during 2014 for a second year in a row. Despite a stronger dollar in the latter half of the year, bourbon and Tennessee whiskey registered a record of $1.02 billion. The top five U.S. spirits export markets based on dollar value include: Canada, UK, Germany, Australia, and France.
Aside from the export industry, the largest benefactor from the bourbon boon is Kentucky’s economy, as it produces 95% of the world’s supply, according to the Kentucky Distillers’ Association. Here are a few data points from a 2014 study conducted by the University of Louisville in conjunction with the Kentucky Distillers’ Association and the Kentucky Agricultural Development Board that highlights the bourbon industry’s impact on the state:
Distilling contributes $3 billion in gross state product to Kentucky’s economy annually, up 67% from two-years prior. The study also notes that “Kentucky distillers have invested over $400 million in capital improvement projects since 2008” and plan to spend “another $630 million in projects over the next five years”. This “could support an average of 1,470 jobs in Kentucky through 2019”, representing about $43 million in total payroll.
The distilling industry sports an employment multiplier of 4.35: “the only manufacturing industry with both more jobs and a higher employment multiplier is animal (except poultry) slaughtering, rendering, and processing”. The bourbon industry employed 15,400 people as of 2013 compared to 8,690 in the previous year. To put this in perspective, distilling industry employment grew by 21% compared to a loss of 26% for Kentucky manufacturers since 2000. Kentucky’s unemployment rate as of March was 5.1%, under the national rate and the twenty-second lowest among other U.S. states.
The average salary for distillery employees is $91,188. Since 2012, their payrolls rose by 71% to $707 million. Kentucky craft distilleries alone “employ 127 people with salaries totaling over $4 million”. They also plan to expand after investing “about $30 million in land, buildings, and equipment since 2008” by investing an additional $25-$30 million over the next five years.
One fun statistic: the study points out that there were more barrels of whiskey aging in Kentucky during 2013 than there were residents (5.3 million versus 4.3). Nevertheless, talk of a bourbon shortage still persists. This has led collectors to accumulate and hoard bottles over the past couple of years. Try searching for certain super-premium or high-end premium bourbons and you’ll understand why, as you won’t be able to find them or will encounter dramatically higher prices. Companies can’t just produce more to meet supply in the near-term: whatever the distiller produced in the past is what’s available as bourbon must age for at least a few years. Most did not anticipate the current and growing levels of demand, resulting in price increases and rationing due to both the aging process and reality that barrels lose a significant amount of bourbon to evaporation each year it ages.
Even with efforts to ramp up production, companies are running into another problem: bourbon must mature in new, charred white oak barrels, which are in short supply. While demand increases from established distilleries and hundreds of new entrants, the lumber industry is still recovering from the housing crisis. As the Wall Street Journal reported, lumber production fell from 11.7 billion board feet in 2005 to 5.9 billion in 2009 compared to only 8.6 billion in 2014, according to the Hardwood Market Report. A few factors are at play here. The recession led to a decline in logging as many hardwood sawmills shutdown or contracted. Also, periods of cold, wet weather like in 2013 coupled with surging demand challenged existing loggers to harvest enough oak for cooperages to manufacture barrels.
So what do we make of all this? We’re always on the lookout for unconventional economic indicators, and the benefits from the explosive growth in the bourbon industry extend across borders and industries. Strong demand for bourbon, particularly among higher end brands, signals a healthy level of disposable income among American consumers who are forgoing cheaper beer in favor of more expensive liquor. Growing interest abroad is a boon to the export industry, which held up against a strengthening dollar in the second half of 2014; not many companies can say the same as of late. Fierce competition for barrels provides robust business to a segment, albeit small, of the logging industry after several difficult years. Lastly, the state of Kentucky can enjoy the benefits of an expanding industry flush with capital investment and job opportunities with big multiplier effects.
As for whether there is really a bourbon shortage, overall, you’ll certainly continue to see plenty of bourbons sitting on the shelves at your local liquor stores. But in the case of your favorite super-premium brands, you may want to stock up.