Chasing the Dram

The beer and wine industries have been growing stale; however, consumers are still lifting spirits.

You probably do not need to read the recent paper from the Medical Journal of Australia to realise that James Bond likes a drink. This study (entitled ‘Licence to swill’) charted consumption in the films and severely criticised his bingeing before fighting, car chases and the use of weapons. Indeed, it warns that the 6 ‘Vesper Martinis’ consumed in one film would have caused more damage than any of the villains chasing him.

Over the years he has set trends; however, his recent liking for beer owes more to the sponsorship deal with Heineken than the real world as beer consumption has flat-lined at best. Global brewers have engaged in a series of massive mergers to take out costs to keep profits ticking along, but it has been slightly counterproductive as consumers can barely tell the difference between the mass market brands. The same may be said of wine, where global consumption has plateaued for many years.

The trends are very much towards premiumisation and craft. Younger and wealthier consumers tend to look for more authenticity in their products hence the boom in start-ups of high taste, differentiated, local brewers and the decline of the mass market. Consumers are drinking less, but better.

There has been a move into spirits – such as gin, rum, tequila, vodka and whisky – where volumes continue to rise. There are two strands to this: demographics – younger people prefer them and populations in the emerging world are reaching drinking age; and growing wealth – a move from cheap local (sometimes illegal) alcohols to branded ones as part of their journey towards being middle class and living the western lifestyle.

Companies think this can grow further as premiumisation has arrived here as well and spirits fit well with younger global consumers who value differentiation, authenticity and taste. Such has been the boom that there are now 70 gin distilleries in Scotland, 55 in Yorkshire and Diageo’s gin sales have doubled in 5 years. The ingredients are relatively cheap, it is quick to produce, and sells for high prices so it is attractive to producers.

The king of spirits is, of course, Scotch whisky. Recent strong volume growth – up 50% in 25 years – masks a cyclicality which has followed the global economy and fashion. American baby boomers fell for vodka in the 1970s, the British discovered wine in the 1980s, and whilst the James Bond of the 1950s books usually drank whisky, in the newer films he drank vodka martini.

Here too, premiumisation and craft has helped. The industry has been dominated by blends since the 1800s when shopkeepers such as Johnnie Walker and the Chivas Brothers started, but the highest margins are now in premium ‘single malts’ where the product comes from a single distillery allowing huge variations in taste, from the smokiness of the barley to the type of cask used to mature it.


Patience is required to make whisky – it becomes better with time in the oak cask. It also becomes rarer. The spirit loses 2% of its volume every year through evaporation – the angel’s share. Some 20 million barrels are currently in warehouses getting more valuable by the day. Prices have been rising for regular whisky on the back of strong demand and the difficulty in raising short term supply, but the pricing of rare single malts has outstripped almost any other commodity, stock market, or art work in recent years with the rarest Macallan whiskies regularly achieving prices of over $1m a bottle.

There are undoubtedly risks for spirit producers over the next ten years. On the supply side, we have seen the boom in gin and existing whisky producers are adding capacity whilst new distilleries are springing up across the world. When it comes to demand, younger people are drinking less, and the loosening restrictions on cannabis in many places is offering an alternative to alcohol in the form of infused drinks. Price rises could be pushed too far, exacerbated by the US trade tariffs, which is surely the biggest risk in the short term. Finally, legislation (such as tighter drink driving limits, taxation and advertising regulations) could cause slower growth.

Faced with these, does the spirit industry risk overcapacity leading to a crash? Probably not. Despite the start-ups, the industry is far more concentrated these days so supply is better controlled. The financial strength of many of these companies allows them to pivot into new segments quickly – as seen with industry leader Diageo buying the non-alcoholic spirit brand Seedlip. The spirits market is backed by several strong structural drivers such as emerging markets becoming wealthier (whisky of all types is less than 1% of the Chinese spirit market) and the move from beers to spirits. Finally, the ability of the industry to create new products and segments is high, such as the almost infinite combinations into cocktails and the recent relaxation of rules on whisky casks to allow maturation in tequila and calvados barrels, creating new possible flavours.

More from investment Outlook 2020

  • The Dragon and The Tiger

    The emergence of China as an economic superpower has been the story of this century so far. As India becomes the most populous country by 2030, could it become the story of the next decade?

    Read more

  • Feed the World

    With the world set to add another two billion inhabitants in the next thirty years, how will we cope?

    Read more

  • Ghosts in the Machine

    Artificial Intelligence is starting to play a big role in our lives. What's next and what could go wrong?

    Read more

  • Banking on the Future

    British banking is celebrating its 1,000th birthday. Essentially it is still simple, but has never felt more complex or undergone such changes.

    Read more

  • The Invisible touch

    Physical payments are declining at an accelerating pace as consumers adopt a range of more convenient alternatives, from phones to biometrics.

    Read more

  • Chasing the Dram

    The beer and wine industries have been growing stale; however, consumers are still lifting spirits.

    Read more

  • The Empire and the Strike back

    10 years ago, Facebook was idealistic. Chasing advertising dollars has given them incredible financial and social power, but changes may be ahead.

    Read more

  • Together in Electric Dreams

    The 2020s will see the rapid electrification of the car industry. Could electric planes also take off?

    Read more

  • Life in The Fast Lane

    From voice to texts to music and now video, mobile communication is hitting light speed and learning new tricks.

    Read more

  • Recaptcha if you can

    An army of billions is teaching computers to ‘think'.

    Read more

IMPORTANT INFORMATION

Issued by Adam & Company Investment Management Limited (Adam), which is authorised and regulated by the Financial Conduct Authority. Adam is registered in Scotland number SC102144. Financial Services Firm Reference Number 141831. Registered Office: 25 St Andrew Square, Edinburgh EH2 1AF.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information on this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed.

Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable for or appropriate to your individual circumstances. The analysis contained within this webpage has been procured, and may have been acted upon, by Adam and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Adam nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

Become a Client


Great relationships begin with an introduction.
We would be delighted to welcome you to Adam.

adam xxl bac
Read more »