Can whisky be an attractive source of diversification in volatile environments? Rosanna Ivory, investment manager, abrdn, explores the possibility.
In an era of instant gratification, it’s fascinating to observe the growing popularity of whisky, a brown spirit carefully aged in wood over many years, even decades. Perhaps as an antidote to busy social media feeds, the legendary ‘wee dram’ has become very big business indeed.
As we approach Scotland’s traditional New Year’s Eve party, Hogmanay, it seems a good time to look at the growing appetite for premium spirits. Over the past ten years, investing in whisky – whether global spirits leaders or in slightly smaller, but similarly premium brands – has provided some attractive shareholder returns. It’s not hard to see why as the value of both the industry as a whole, as well as vintage bottles of the famous drink, continue to climb.
Whisky has incredibly strong provenance as not only the colour, but the smell and the taste immediately transport you to the wildness of Scotland or the ruggedness of Ireland. Some of the world’s most famous brands have often been honed over generations, creating a hugely devoted fanbase and conferring high levels of pricing power, which in turn translates into high profit margins. Once they’ve been purchased, rare whiskies tend to hold their value (and in some cases, even increase in value) meaning they have the potential to provide an attractive source of diversification in volatile environments. Though perhaps less so if one is tempted to open the bottle at Hogmanay. Even those bottles most likely ruined by sea water from the wreck of the SS Politician, made famous by the film Whisky Galore, trade well above £1000. Whisky has a heritage and a folklore of its own that has stood the test of time.
Trading up
‘Premiumisation’ has become a structural trend across spirits, particularly so with whisky, as consumers increasingly want to drink less, but better, and are trading up to single malt scotch. And this trend is just getting started. The European and US markets have been very happy hunting grounds for premium whisky customers, but recent research from Morgan Stanley suggests there’s further opportunity, forecasting that China’s whisky market is set to be worth 9 billion euros by 2030. In China, whisky is no longer synonymous with older generations: 52% of whisky volumes in the country are consumed by those under the age of 34, a group expected to see their earnings grow the fastest globally over the next decade. So, there are potentially significant, attractive, long-term growth opportunities and these numbers are only from the Chinese market.
With customers right across the globe, the spirits market should remain fairly resilient in a downturn, at least for as long as employment numbers hold up. As Diageo recently pointed out, the average US household spends $360 a year on spirits (or almost $1/day), which does not represent a significant proportion of consumer spend. As this works out at around 6-7 bottles a year per householder, the price of that bottle can rise without as much resistance as with a more necessary, regular purchase. Spirit manufacturers are less exposed to raw material inflation than most of their consumer staples counterparts, and with their premium pricing power, they can comfortably price ahead of any costs. This means that despite inflation, margins remain high. When inflation eases, whisky prices rarely go back down, as the customer’s expectation has been reset at the higher price.
It’s interesting to note that the ‘super-premium’ price segment of the market – the oldest and best-quality whiskies – continues to outperform the wider spirits category. As a result, those with premium portfolios, should be well positioned to benefit from the current high levels of interest in what the Gaels refer to as ‘uisge beath’ or water of life. So, once the Hogmanay party is over, it could be worth looking with a sober head at the possible investment opportunities of a ‘wee dram’.
[Main image: dylan-de-jonge-pe9T4ROjpzQ-unsplash]
