Scotch Whisky Learns The Law Of Price Elasticity

by Oliver Klimek on April 1, 2015

The Scotch Whisky sales statistics for 2014 is out today, as published by the Scotch Whisky Association. Total exports dropped by 7% in value globally. If you have been following the individual sales figures of big industry players like Diageo and Pernod Ricard this will hardly come as a surprise to you. 

The explanations of “weaker economic conditions and political volatility” for this decline given by the SWA are esentially the same as those given by the companies, which is no wonder since the SWA is largely dominated by them. Also the unfettered optimism about the future sounds very familiar. 

As could be expected, business with China was hit badly with a 23% decline. Exports to Singapore even fell by 39% in value. Singapore acts as a hub for whisky going to mainland China, so the drop here is attributed to the Chinese austerity measures as well by the SWA. Only India and Taiwan appear to buck the trend in Asia.

The 7% drop in revenue goes along with only a 3% drop in volume. This means that the average price paid for a bottle of whisky has dropped as well. But this should not be mistaken for a global price cut. As we know, whisky has become more expensive overall in recent years. Especially single malts and “premium” blends have been affected by rising prices while prices for entry level blends have remained largely stable. 

The explanation for the numbers is of course that more cheap and less expensive whisky is bought. Sales in Latin America demonstrate this very well with Mexico growing 5% by volume but falling 10% by value or Brazil with volumes flat and a decline of 20% by value.

While “weaker economic conditions and political volatility” may be a contributing factor for declines in emerging markets it may not be the only one. How do you explain a 9% drop in the US or an 18% drop in Germany? Total consumer spending has been growing continually in both countries since 2012 (USA, Germany), and by the way even in Brazil and Mexico.

Now could it possibly be that people simply don’t want to pay so much for their whisky anymore? Might they pick a cheaper bottle not because they cannot afford a more expensive one but because they think it is overpriced?

In economics there is the concept of price elastiticy of demand that shows how demand for a given good changes with changing price. Generally a rising price unsurprisingly results in a lower demand, but increased revenue may offset this. But if you overdo it, the demand may fall so much that you will earn less even with a higher price.

This is exactly what the whisky industry is currently experiencing in certain markets. People prefer to spend their money on other things that they feel give them a better value for their money.

 

{ 8 comments… read them below or add one }

Gal Granov (@galg) April 1, 2015 at 10:45 am

Let’s hope that whisky makes will read the bottom line, and reduce pricing for whiskies…

we’ve seen a steep rise in prices of whisky, especially Age statement whisky, while also new NAS is sometimes more expensive than previous age bearing versions…

Dalmorisation, Mortlachisation…

maybe the trend will reverse?

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Ol' Jas April 1, 2015 at 6:31 pm

I’m patiently waiting for Springbankification.

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Jeff April 1, 2015 at 12:59 pm

“The long-term fundamentals remain strong, with consumers in emerging markets wanting to buy Scotch whisky as a high-quality and authentic product with a strong reputation and clear provenance.” – SWA Chief Executive David Frost.

Yep, with every NAS-labeled product, you have the guarantee of a clear provenance that every drop was stored somewhere for some undisclosed, unimportant, amount of time and that, if you want to know what you’re actually paying for, you have our assurance that you’ll be called a hot-head who doesn’t know whisky. What, bourbon makers can do that too, but be more polite about it? Those North American numbers aren’t really much of a mystery, are they?

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UisgePunk April 1, 2015 at 5:35 pm

If the ‘experts in the industry’ are correct and there is a shortage of quality aged whisky product to sell, then wouldn’t that be reflected in higher sales volumes of lower priced younger whisky for less total revenue? How can you lower prices on higher quality aged product that doesn’t exist in sufficient quantities to sell at the volumes consumers are demanding? Auction values for even bland older whisky continue to rise. I know that I can rarely find the older whisky I prefer at affordable prices, yet I still want a sip of whisky to enjoy, so I taste as many as I can and buy a bottle of quality liquid when I find a good price to taste value. Or I gamble on an auction item. Hopefully when the worldwide new production currently being brought into being ages, we the consumers will all be rewarded!

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Mark @ Malt Review April 3, 2015 at 12:06 pm

Fascinating round-up and analysis.

This follows the 5% dip in UK sales, too: http://www.bbc.co.uk/news/uk-scotland-scotland-business-31854843 Much of that news was buried under the budget call for dropping the duty, but the underlying numbers aren’t too good for the domestic market. The five years previous had seen sales sliding by 12%, which was blamed on the duty escalator.

Interesting times… I wonder how much is down to price elasticity, as you say, or if it’s also worth factoring in the boom of spirits such as gin?

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Oliver Klimek April 3, 2015 at 2:18 pm

Price elasticity of a good is not a natural constant like the melting point of water, it is just an observation. So if people prefer gin because it is less pricey, this factors into the price elasticity for whisky.

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kian April 9, 2015 at 9:55 am

Having been into whisky for years I have decided to pretty much stop buying it now and get into craft beers instead.Simply had enough of the ridiculous prices being charged now.I am sure I will still pick up the odd bottle from time to time but the beer Industry is getting my hard earned cash from now on.There are some great breweries from all over the world making fantastic Stouts IPAs Black IPAs etc to explore….

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Ro April 27, 2015 at 10:48 pm

Great post, lovely dissection of what’s going on, enjoyable to read your analysis while in an epsom salt bath while drinking Alberta Springs 10yr rye whisky.

I was spending a lot on scotch. The price gouging made me feel like I was getting ripped off. No one likes to feel like they’ve been had.

I trained my palate and I can appreciate bourbon now, as well as a few canadian whiskys.

I’d say it was worth it, and I have found some real gems!

Keep up the great work SWA, it’s working just dandy.

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