20130908 BH Report: Scotch Whisky

1. BH Report: Scotch Whisky
2013/9/8

2. Context
•I think I was about 12 when I had my first sip of Scotch - I saw a tiny 50ml bottle of Macallan 12 years old in a random discount store. Despite having absolutely no prior knowledge about it, I bought it for ¥500 and tried it secretly at home (maybe because it has such a beautiful color). Ever since, I have been a fan
•Scotch is by no means an "everyday drink", but it is something I see everywhere, and I feel like I am seeing more and more of it lately. This is especially true for lesser known single malt whisky
This was particularly confusing to me because on one hand, I see media coverage stating that people are deserting hard liquors (including Scotch) and moving more toward lighter drinks, or even non- alcoholic beverages
•In this report, I intend to answer following key questions:
–Is Scotch Whisky production/stock getting bigger, or is it shrinking
–Who is consuming Scotch ?
–What's the major 'trend' [in particular, in the US] ?

3. Summary of findings
•Each year, roughly 1.8 billion bottles worth of Scotch is produced – this is equivalent of ~350 bottles per Scottish population
–This represents roughly 1/6th of the stock
•Cyclicality exists, but both stock and production have been on upward trajectory for the past 20-30 years
•Only ~30% of the 'consumption' comes from whisky older than 10 years; roughly half of the consumption is from 3-4 years old whisky, which are mostly sold as lower priced blended whisky
•Past decline in UK consumption (-2.2% CAGR in '80-'11) has been offset by growing export (1.1% CAGR) resulting in net growth (0.8% CAGR)
–Export represents ~93% of consumption today
•Scotch is exported to large number of countries and top export countries span Americas, Europe and Asia- top 20 countries account for ~77%
•Even among the top 20 countries, there is large variance in terms of the level of penetration and the average quality/price of each bottle E.g.,
–France (largest importer) consumes more per population than US (2nd largest), but consumes lower priced bottles
•Scotch Whisky overall sales volume in US has been flat, but price increase has driven market growth in the last 10 years
•Price increase driven by the combination of shift toward more premium/single malt whisky (driving ~57% of price increase) and inflation (~43%)
Scotch Whisky production/stock
Trends in the US
Consumption/
Export

4. Agenda
•Whisky production and stock
•Consumption/ Export
•Trends in the US

5. Whisky production has been on the rise in long term,
though cyclical...
0.0
0.5
1.0
1.5
2.5
2.0
2006
2005
2004
2003
2002
2001
1999
1998
1997
1996
2000
1994
1993
2011
2010
1995
2009
2008
1992
1991
1990
1989
2007
1987
1986
1985
1984
1988
1982
1981
1980
Annual production of Scotch whisky1 (billion 70cl bottles2)
1983
This is equivalent of
~350 bottles per
Scottish population
1. Includes both malt & grain whisky
2. Estimate conversion from LPA (Litres of Pure Alcohol) assuming average 40% strength
Source: Scotch Whisky Association

6. ... and stock has been increasing for the past 25 years
12
10
8
6
4
2
0
1988
1987
1986
1985
1984
1983
1982
1981
1980
Year end stock of Scotch whisky1 (billion 70cl bottles2)
1992
1998
1997
1996
1995
1994
1993
+1.2%
-3.3%
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1991
1990
1989
This is equivalent of
~2,200 bottles per
Scottish population
1. Includes both malt & grain whisky
2. Estimate conversion from LPA (Litres of Pure Alcohol) assuming average 40% strength
Source: Scotch Whisky Association

7. Back-up: Breakdown of stock/consumption by vintage
8%
12%
14%
13%
16%
11+
6-10
5
4
3
2
1
16%
2011 year end stock
<1
15%
6%
Breakdown of stock by vintage
(2011 year end)
Breakdown of consumption by vintage
(2011)
11+
6-10
5
4
3
2
1
2011 consumption
29%
7%
13%
20%
28%
2% 1%
• Roughly ~16% (1/6th)
gets added to stock
each year
• Only ~15% of the stock
is above the age of 10
• Hardly no consumption
for age 1-2 (consistent
with the law requiring
Scotch to be at least 3
years old)
• Roughly half of
consumption from age
3-4
=> Mostly lower-priced
blended whisky
• ~30% from age 11+
=> Premium blended +
single malt
Source: Scotch Whisky Association

8. Agenda
•Whisky production and stock
•Consumption/ Export
•Trends in the US

9. Declining UK consumption is offset by growing export;
resulting in net consumption growth
0.25
1.25
0.75
0.00
1.50
0.50
1.00
1987
+0.8%
1986
1985
1984
1983
1982
1981
1980
Consumption of Scotch whisky1 (billion 70cl bottles2)
Export
UK consumption
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
1988
2003
2004
2005
2006
2007
2002
2009
2010
2011
1990
1989
2008
'80-'11
CAGR
+1.1%
-2.2%
1. Includes both malt & grain whisky
2. Estimate conversion from LPA (Litres of Pure Alcohol) assuming average 40% strength
Source: Scotch Whisky Association
~83% export ~93% export

10. Scotch exported to large number of countries;
top export countries spread across Americas/Europe/Asia
80
20
100
60
0
40
2011 Export
(bottles)
1.3 billion
%
Top 20
countries
~77% of
exported
bottles
Wide distribution of bottles per population & price per bottle
Country
# of bottles
imported
(million)
# of bottles
imported per
population
Value of import
($ million1)
Import price per
bottle
($)
France 205 3.1 857 4.2
USA 130 0.4 1,048 8.1
Spain 75 1.6 415 5.5
Singapore 63 12.2 509 8.1
India 56 0.0 84 1.5
Germany 50 0.6 239 4.8
South Africa 49 1.0 265 5.4
Brazil 47 0.2 159 3.4
Thailand 36 0.5 80 2.2
Mexico 32 0.3 129 4.0
South Korea 31 0.6 228 7.3
Venezuela 28 1.0 133 4.7
Australia 27 1.2 111 4.2
Japan 25 0.2 119 4.8
Taiwan 23 1.0 248 10.9
China 22 0.0 106 4.8
UAE 21 2.4 131 6.2
Greece 17 1.5 113 6.8
Poland 16 0.4 67 4.1
Italy 16 0.3 74 4.7
Top 20 969 5,116 5.3
World 1,264 6,756 5.3
% top 20 77% 76%
1. Assumed 1 GBP = 1.6 USD
Source: Scotch Whisky Association

11. Even within top 20 countries, the level of penetration and the average quality/price level vary
Import # of bottles per population
<0.4 bottle
0.4-1.0 bottle
>1.0 bottle
Uncommon
Common
USA
South Korea
Spain
Singapore
Taiwan
UAE
Greece
Japan
China
Italy
Germany
South Africa
Venezuela
India
Brazil
Mexico
Thailand
Poland
France
Australia
Import price per bottle ($)
>$5.5
$4.3- 5.5
<$4.3
Pricey
(more premium?)
Inexpensive
(less premium?)
Distribution of top 20 Scotch export countries by # of bottles per population and price per bottle
Source: Scotch Whisky Association
US, for example, tends toward more premium Scotch, but the penetration is not as high (room for further growth?)

12. Agenda
•Whisky production and stock
•Consumption/ Export
•Trends in the US

13. Within US, Scotch sales volume has been flat, but price
increase has driven market growth in the past 10 years...
0.5
1.5
1.0
2.0
0.0
1.7
1.5 1.5 1.5
1.8
1.6
1.5
1.4 1.4
1.3
US Scotch Supplier revenue ($B)
+3.6%
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
120 124 122 122 123 121 116 116 117 119
50
100
150
0
2004
2003
2002
# bottles sold in US (million 70cl bottles)
-0.1%
2011
2010
2009
2008
2007
2006
2005
14 15 13 13 14 11 12 12 13 11
0
5
10
15
20
Supplier price per bottle in US ($)
+3.8%
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
x
Source: Distilled Spirits Council of the United States

14. ... caused by the combination of the volume shift toward
more premium whisky & inflation
5 6 7
0
100
80
60
40
20
% of bottles sold in US
2012
25
33
35
2011
28
34
32
2010
30
35
31
2009
31
37
28
4
2008
31
36
29
4
2007
31
37
29
4
2006
31
37
28
3
2005
33
38
26
3
2004
34
38
25
3
2003
35
38
24
3
Value
Premium
High End Premium
Super Premium
Factor 1: Shift toward more
premium whisky Factor 2: General inflation
40
30
20
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Supplier price per bottle in US ($)
1.7%
1.6%
1.1%
1.9%
Value
Premium
High End Premium
Super Premium
Source: Distilled Spirits Council of the United States
57% 43%
(see next page for examples)

15. Back-up: Examples of brands and single malt vs. blended
Examples of brands
• VAT 69
• Passport
• Dewars White Label
• Johnnie Walker Red
• Johnnie Walker Black
• Chivas Regal
• Dewars 12
• Glenlivet 12
• Macallan 10
• Chivas 18
• Johnnie Walker Blue
Breakdown of single malt vs.
blended whisky
0
40
20
60
80
100
2006
Blended
Single Malt
88 87
12 14
89
2007
2008
2009
2010
2011
2012
83
15 17
88 86 85
91 90 91
9 10 9 11 12 13
% of bottles sold in US
2004
2005
2003
Value
Premium
High End
Premium
Super
Premium
Source: Distilled Spirits Council of the United States

16. Disclaimer
This document is provided for general information only and nothing contained in the material constitutes a recommendation for the purchase or sale of any security. Although the statements of fact in this report are obtained from sources that I consider reliable, I do not guarantee their accuracy and any such information may be incomplete or condensed. Views are subject to change on the basis of additional or new research, new facts or developments.