What Is The Fair Price Of Whisky?

by Oliver Klimek on March 16, 2012

Many whisky lovers complain that the prices for their favourite tipple are often too high, and I myself have joined this choir on various occasions. But to know if a price is too high we must first know what price is fair.

I do not intend to turn this into a paper suitable for a business studies seminar by caclulating whisky prices from scratch (I did something along those lines for El-Cheapo bottom shelf whisky a while ago). Instead I want to take a phenomenological approach by looking at prices how they are and drawing conclusions from that. But of course it helps to know the main factors that determine the price of a whisky:

  1. Production costs – Malted barley, water, casks, energy, labour, bottling.
  2. Secondary costs – Administration, marketing, investments etc. all have to be paid for, so the bottle price has to reflect this.
  3. Profit margin
  4. Value of age

The value of age is probably the hardest to grasp, but it is obvious that old whisky has to have a higher intrinsic value than young whisky. In twenty years you can sell two batches of 10 yo but only one batch of 20 yo, so if you don’t want to lose money, you have to sell the 20 yo more expensive than the 10 yo. Inflation factors in as well as does the loss by evaporation.

A Look At Whisky Prices

I have compiled a table with the UK retail prices of a selection of Scotch single malt brands that offer a decent sized age statement range. International pricing will always include distortions caused by taxes, duties or regional allocation, so a look at the inland market should give a more objective look at things. Prices (in GBP) are the mean value of Master of Malt and The Whisky Exchange with special offers ignored.

Important note: All prices are adjusted to 40% ABV. Obviously it would be unfair to compare the retail price of a 48% whisky to a 40% bottling. As you can get less bottles from a cask at higher strength you need to sell that whisky for a higher price in order to earn the same amount of money. So I corrected all prices with a factor of 40%/ABV resulting in prices for ‘virtual 40%’ bottles

  10 yo 12 yo
15 yo
16 yo
18 yo
21 yo
25 yo
30 yo
40 yo
Bowmore 28,45 26,59 43,67   64,03 128,16 203,63    
Glendronach   29,07 34,38   43,15 57,46      
Glenfarclas 28,11 32,19 34,91     55,86 87,08 114,77 255,24
Glenlivet   25,37 32,59 31,52 36,23 92,98 179,53    
Glenfiddich   25,97 31,92   38,81 83,49   238 1982,38
Highland Park   24,67   41,97 53,77 77,04 110,6 163,83 674,95
Springbank 27,47 29,48 38,06   64,51        
Tomatin   27,12 34,21   42,04 89,23 74,37 106,09 396,27

Prices pretty much clog together at the younger ages and begin to rise exponentially over 18 years. The first diagram is cut off at £1000 to allow a better view at the lower prices. This exponential growth is not really a suprise because it is largely due to inflation, but the rate of growth is quite different between the various brands.

Fair Pricing vs. Supply/Demand Pricing

We have to assume here that all whisky prices are profitable for the distilleries. Glenfiddich and Glenlivet offer very reasonably priced bottles from 12 to 18 years, obviously due to scale effects as the two biggest distilleries. Smaller brands like Springbank, Glenfarclas or Glendronach have to demand a bit more at the lower end of the age range. But things turn around at higher ages. Glenfarclas and Tomatin have very affordable old bottlings while other distilleries charge significantly more. The Glenfiddich 40 yo costs almost eight times as much as the Glenfarclas 40 yo.

Looking at the table, now what is a fair price? My definition of a fair whisky price is a price derived from proper calculation, one that covers your cost and adds a reasonable margin of profit on top.

The 10 and 12 year olds are the work horses of the single malt brands, they get people interested in the distillery and they are selling the most bottles. The fact that the prices don’t differ too much shows that fair pricing can be assumed here. Anything below or around £30 for a 12 yo is certainly not a rip-off.

For a 15 yo £35 seems fair and £40 to £45 for a 18 yo, at higher ABVs a few quid more can be paid, of course.

The reason why prices drift apart at higher ages is the change from cost covering prices to supply vs. demand prices. In other words, brands try to figure out the maximum they can charge for a bottle while still selling all of their stock. Of course this is a valid move, after all they distill whisky to earn money. Looking a bit closer, these huge differences in prices suddenly become less enigmatic.

For example take Glenfiddich and Tomatin. Glenfiddich is the leading global single malt brand with bottles in virtually any supermarket in the world, their customer base consists of millions of people. While not exactly being a small distillery either, Tomatin is a far smaller brand with a significantly smaller customer base.

If Glenfiddich did their homework in market research properly, they may have found out that the number of potential customers actually willing to shell out £2000 for a bottle of their 40 yo more or less matches their stock, so the price tag is not too surprising. Why charge £400 for something you could also sell five times more expensive?

If Tomatin put such a price tag on their 40 yo, most bottles would sit on the shelves like lead, simply because there are not enough Tomatin fans with such deep pockets. The fact that they are able to offer it for £400 clearly shows that they still make profit with it anyway. Just not quite as much as Glenfiddich. And Glenfarclas sell their 40 yo even cheaper, and they still will make a profit. Is this the fair price for a 40 yo? Honestly, I don’t know. But it probably is not too far away.

Conclusions

As long as there are distilleries that offer fairly priced whisky (like those I listed last week), I don’t feel too bad about some brands trying to push the limits. But apart from the standard range, many brands offer fancy premiumized bottlings at sometimes ridiculous prices (Octomore 5 yo for £100 comes to mind…). And the more of those beasts are succesful on the market, the higher the risk those fair distilleries may jump on the glitzy bandwagon too.

The significance of independent bottlers cannot be undrestimated in this respect, especially for older whiskies. Often their bottlings are the only affordable option for many to try some oldies that would be way too expensive as original bottlings.

As a final note I should add that pricing considerations for startup distilleries obey different rules and so I did not take them into account here.

{ 10 comments… read them below or add one }

Dirk March 17, 2012 at 1:01 am

Interesting!
Another way to see, where fair ends und rip off starts, is to take a look at the development of prices over time. Whisky.de provides data back to the year 1994, which i used to produce a little excel-sheet. Some results of this investigation are contrary to the “mainstream” opinion about whisky prices. Taking inflation into account, most of the entry-level whiskies (10y or 12y) are getting cheaper and cheaper over time. Most of the older expressions didn´t change their real prices over the last 15 years. Less than 10% of the whiskies wear a rip off price label.
Might be interesting to compare these prices again in one or two years. To me it feels like we are leaving the times of fairly priced whisky in the near future.

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Oliver Klimek March 17, 2012 at 6:07 pm

Tracking prices over time certainly is an interesting idea, but I haven’t ventured on that route yet. Sometimes prices may actually go down if producers see that the original price tag was too optimistic.

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Billy March 17, 2012 at 11:01 am

Another thing to remember when it comes to pricing is the fact that production is years in the past, and the amount of whisky each producer has is based on how much they produced back then – each company’s stocks at various different ages will also influence the prices. For example, as Glenlivet and Glenfiddich sell so much whisky at the younger end of the age range, you may find that they have comparatively small amounts of aging stock. Similarly, the folks at Tomatin may have relatively large amounts, as they used to have very high levels of production but have in recent times not been putting out much in the way of young malt (although I assume large amounts have gone to blending over the years).

Many companies seem to be feeling the pinch when it comes to keeping up with current demand – moves to NAS bottlings, drops in strength, discontinuing of lines, etc. Until we get over the current back-end shortages the laws of supply and demand are going to keep rearing their heads, even in those brands who don’t have supply issues (why sell your whisky lots cheaper when other companies are pushing up prices?). Whisky has been, in the main, very reasonably priced over the last decade so it doesn’t surprise me that we’re seeing prices going up, especially as the demand for limited bottlings goes up as the category gains in popularity.

Remember – a fair price is what people are willing to pay, and most companies are good at working out that price, based on how much stock they have to sell.

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Gal Granov גל גרנוב (@galg) March 18, 2012 at 1:25 pm

very interesting Oliver.

it’s true that when’s there demand prices will be higher.
but i also find it vexing, and try to refrain from distilleries which sell their 20+ bottles at such a premium.
i may be alone (not a single GF bottle in my collection). but i hope others will join. voting with your feet, we call it

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kallaskander March 19, 2012 at 10:12 am

Hi there,

interesting indeed Oliver.

I wonder if there is a master plan behind the whisky policies of distilleries at all.

Honest do we beleive that in any given distillery some master mind is planning how many cask mut be made an stored today to have umteen bottles of 20yo 25 yo 30 yo and so forth in 20 25 and 30 years time?

I find that hard to believe. What we see are the aftermath of the last crisis of 1983 and I strongly doubt that we will have the variety of long matured whiskies we have to day in 30 years time. Not with the boom going on like this.

To have stocks of a 30 yo in 2042 a distillery has to store casks today. How many? And then there is the 15yo of 2027 – how man casks of that stock? And the 15 you of 2028 … and so on.

Warehouses are build all over Scotland but I doubt that there is so much planning for higher age bottlings on a large scale. It is hard to imagine that the warehouses that exist today will not overflow with casks for whisky ranges for years yet to come and keeping up the variety that is today. This makes me believe that availability and demand have the greatest influence.

Time will tell

Greetings
kallaskander

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Dirk March 19, 2012 at 6:23 pm

The boom that we see today leads to a very high production. But this boom won’t last forever. So we might see times during the next decades where whisky is out of fashion and sales are down. This could mean that the industry is producing way too much nowadays and that there will be plenty of long matured whisky in 30 years time.

But you are right: Time will tell.

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Pieter March 19, 2012 at 10:53 pm

It’s just a matter of time that whisky will get out of fashion.

Unfortunately whisky became very popular. So popular that there are not enough fresh ex-bourbon casks available. Because of this some distillers (so I’ve heard) refill their casks for 4 and even 5 times. Because these casks became so inactive they need to char them really intensive to get the last bits of flavour out of the wood. Or(/and) they can “save” their product with a certain finish. (and too often ex-wine casks are used, but these are still very available). There is a loss of quality either way tho.

That’s the the reason why well reputed whiskies (say Ardbeg 10, Talisker 10, … ) are getting weaker and weaker each year because there are probably more and more 4th fills and 5th fills in the mix.

Maintaining quality will result in expensive whisky. Other (and more mainstream, hence their lower pricing) bottlings will be weaker so they won’t appeal to people as much as today. So whisky will get out of fashion. (and they’ll have a whisky loch again, one that will exist of poor aged whisky this time)

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Gareth September 6, 2012 at 4:02 pm

Any thoughts on the fair price of a single shot bought over the bar? we divide the bottle price by 10 (approx) to give a price for 25ml

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Ol' Jas September 14, 2012 at 10:13 pm

I love the effort being made here, but I think the premise is fundamentally flawed. The blog author seems to realize this as he discusses why bottles sell for more than “fair” whisky price. This is the key comment in the article:
“My definition of a fair whisky price is a price derived from proper calculation, one that covers your cost and adds a reasonable margin of profit on top.”

Actually, that’s the definition of what a commodity’s price will ultimately be in a market with perfect competition, where one seller’s product is undistinguishable from the next seller’s. Some products are like that (think grain), but very few. Those are markets in which nobody advertises. My father grows corn and I can assure you he does not advertise. :) Advertising would not affect the price he could demand — it’s impossible for him to build any monopoly power.

Whisky (like most markets) is totally different. Let’s leave aside the complicated but fun questions about selling today at (say) 12YO v. aging to sell later at (say) 25YO — which could probably form somebody’s dissertation for a Econ master’s degree. Whisky sellers advertise (and package, and promote, etc.) their brands to (among other things) increase the brands’ value in consumers’ minds. Suddenly a bottle of The Macallan is worth $60 to your uncle. This has no relation to how much the bottle costs to produce. And keep in mind that nobody else can sell The Macallan (at least not as an OB). Sellers then capitalize on this enhanced value & their monopoly power to set prices that maximize overall profit. If this were an Econ class, I would now draw a supply & demand graph and calculate the areas of various triangles. :) The key idea, though, is that profit is maximized not when they sell a maximum number of bottles nor when they can the highest possible bottle price for a small number of bottles, but when they hit the “sweet spot” that gives them the most overall money.

Building on that, the sweet spot might mean they sell less than they have available. This might drive the subsequent calculation on much they hold back for long-aged bottles. But that would get really complicated and beyond what I can attempt to think about in a blog reply. :)

I will just add another fun point that’s probably irrelevant today: The costs don’t matter in the short term; they happened in the past and can’t be changed. All the seller can do is set prices and whatnot to maximize revenue today. (Long term, they can change production and whatnot, but that’s a real long term.) If the whisky market busts in the future, we might find that sellers are selling their bottles for less than it cost to make them. Unlikely, but possible. :)

This same whole line of thought applies to Gareth’s shot question. He can try to figure out a “fair” shot price based on the bottle price, but really we should expect the shot price to be the price that generates the most money for the bar according to the “sweet spot” concept.

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Oliver Klimek September 14, 2012 at 10:42 pm

I get your point, but I don’t think we are that far apart. It is a supply and demand thing in conjunction with differences in perceived value. The funny thing with whisky is that two different companies can offer essentially the same product for vastly different prices because one of them has a customer base that perceives its value to be higher than the other’s.

In a way, there is a parallel to your grain example. Two whiskies that may get the same average rating by a panel of experienced tasters (an approximation of ‘indistinguishable’, so to speak), say in a competiion or award, can be priced very differently BECAUSE of the advertising and marketing. When you do clever marketing and target the right group of people, you can ask more for the same product.

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