Scotch Whiskey the Olde Distillerie:

Scotch Whiskey

The Olde Distillerie: Expanding World Markets

The Olde Distillerie is a small, independent producer of Scotch Whiskey based in Dumfrieshire, South-west Scotland. Once a top-producer and distributor of their line of products, sales are currently experiencing a downturn in sales. The Distillerie has relied primarily on the UK market to sustain profitability. However, recently, this market has been stagnant, at best. The Olde Distillerie has asked Global Market Research to examine the possibility of utilizing overseas markets in order to restore the company to profitability.

The Olde Distillerie produces a product line of six single malt whiskies that matured in oak barrels. The aging process takes between five to fifteen years, dependent up on the product being produced. This proprietary process gives the whiskies a distinctive taste and flavour that are the key to marketing and sales to various clientele. For example, Torhousemuir Tawny represents a strong "peaty" flavour that is popular amongst the older segment of the target market. Monreith Malt appeals to a younger demographic group, ranging from 18- to 30-year-olds. All of their products appeal to a specific target market that is distinct from the other market segments.

The Distillerie has no control over profit margins made by their retailers. All of their products vary in price according to the age and type (flavour) of the whiskey. Distillation processes also play into the price of the whiskies as well. Retailers control the final markup, and therefore the ultimate price of the final price to the consumer. Some charge a higher mark up than others. Comparative pricing to the mail order price will be used for comparison in this study. This reflects the lowest price at which the whiskey is available. The following reflects mail order prices for all six products.

Whisky Name

Distillery Shop retail price

Auchland Moor

Monreith Malt

Torhousemuir Tawny

Skein-Duh

Garlieston Grain

Aulde Lang Syne

As one can see, Olde Distillerie Whiskeys are in the mid to upper range of the market, in terms of price. Profits vary dependent upon the means and length of the ageing process. More expensive varieties are accepted to be the highest profit, based on price alone. However, there are indirect costs, such as storage space that will affect the profitability of the product, but that are not a part of this analysis.

Accounting analyses have revealed that the mail order methods of distribution is the highest profit method. This distribution method results in profits upwards of 70% per bottle on the highest priced brands. Utilizing independent retail outlets can reduce the profit level to around 30% per bottle.

Promotion:

Currently, the only advertising avenues being pursued are in the form of a promotional leaflet/flyer that is inserted into the colour supplement of Sunday Papers such as the Sunday Times, the Sunday Telegraph, the Observer, and the Mail on Sunday. Other promotion is Point of Sale (POS) at the distillery or at the retail outlet.

Distribution and Sales:

Currently, 15% of total sales are through the Visitor Shop attached to the distillery. This shop also stocks a variety of Scottish themed products such as crystal whisky tumblers made by Waterford, Wedgewood, and tartan scarves, hats, and other value-added products. Approximately 75% of the sales are through selected "up-market retail outlets located in major metropolitan areas such as Glasgow, Edinburgh, Manchester, York, Chester, Stratford-on-Avon, Oxford, and London. A portion of these retail sales are through duty free outlets in major UK airports, such as Heathrow. Only 10% of the sales are via mail order, representing sales directly from the distillery to the customer.

Part I: Market Environment

Scotch Whiskey was legally defined in the UK in 1989, when it was determined that Scotch Whiskey much meet several criteria in order to fall into this category (Scotch Whiskey Association, n.d.). This act helped to narrow the range of products that could be labeled and marketed as Scotch whiskey. All of the Olde Distillerie's products fall within the guidelines that help to define official Scotch Whiskey. There are several different categories of Scotch Whiskey. Single malt, Single grain Scotch Whiskey, Blended Scotch Whiskey, Blended Malt Scotch Whiskey, and Blended Grain Scotch Whiskey (Scotch Whiskey Association, n.d.).

There are over 2,500 brands of Scotch Whiskey sold on a global basis (Scotch Whiskey Association, n.d.). However, only approximately 200 are available to the home market. A majority are sold only locally, or to private clubs (Scotch Whiskey Association, n.d.). By law, whiskey's must age at least three years in order to be sold as Scotch whiskeys (Scotch Whiskey Association, n.d.). All of the Olde Distillerie's products fall with the older aged. whiskeys on the market.

A majority of the whiskey bought and sold is for consumption. However, there is a small market for whiskey speculators. This is, whiskey bought with the intention of selling it later at a profit. Whiskey bought as an investment represents a small sector of the market (Scotch Whiskey Association, n.d.). The type of bottling is a factor that can influence the collectability of a particular type of whiskey. Olde Distillerie whiskey is among the class of whiskey that is excellent for this type of market. Yet, this niche market has not been explored.

In addition to a "Collector's" market, a "whiskey exchange" also exists that operates just as any other commodities market (Scotch Whiskey Association, n.d.). There is no officially recognized list of buying and selling prices for whiskey of various types and ages (Scotch Whiskey Association, n.d.). However, the buyer's market determines the fair market price. Olde Distillerie whiskey has a unique flavour and typically does well on the exchange. It is typically classed among the higher priced whiskeys. Olde Distillerie's price on the exchange in evidence that it is clearly positioned among the higher priced whiskeys on the market.

Whiskey could be considered a highly competitive niche market. With approximately 2,500 different brands of Scotch whiskey and the regional nature of production, this market appeals to whiskey connoisseurs around the world. On a local level, the market is saturated. Scotch whiskey is a staple in the UK, especially around the holidays. Certain brands of Scotch Whiskey have tapped the global market, particularly in the U.S. And in Canada. However, this is largely an untapped marketing resource. Scotch Whiskey, even of poor quality, typically commands a high price in these established global markets. This indicates that a demand exists, but that the supply is currently limited. This is the basis for Olde Distillerie's plan to explore untapped global markets in order to prop up lagging sales.

The top ten world whisky markets by volume in 2005 were:

Scotch Whiskey 2004

Scotch Whiskey 2005

Scotch Malt Whiskey 2004

Scotch Malt Whiskey 2005

Greece

France

Spain

US

Taiwan

US

France

Spain

UK

Trinidad & Tobago

UK

Sweden

Taiwan

Bahrein

Thailand

Antigua

Italy

Portugal

South Korea

Italy

Spain

Saint Lucia

Greece

Spain

Germany

UK

Venezuela

Switzerland

Canada

Cyprus

Brazil

Canada

Japan

Venezuela

Germany

Greece

Sweden

Source: (Ludo, 2006)

One of the most interesting facets of this list is that the UK ranks third or below. This indicates that there is a considerably larger market outside of the UK. France is one of the largest markets, but there are also Asian, North American and other European markets that hold promise. The international whiskey market is led by India and the global whiskey market accounts for 130 million cases sold per year ("

Research and Markets: The Global Market for Whiskey").

Part 2: Competitive Market and Attractiveness

Whiskey relies on a traditional market, but is attempting to attract a younger crowd in order to assure continued sales and the older population diminishes ("

Research and Markets: The Global Market for Whiskey"). The whiskey market is subdivided into sectors. The largest sector is the Scotch whiskey sector. There are currently two higher-end premium brands that dominate the world market, with combined sales of approximately 7 million cases ("

Research and Markets: The Global Market for Whiskey"). There are also 17 lower priced "average" brands that average sales of 1 million cases per year ("

Research and Markets: The Global Market for Whiskey"). Although local sales have been slowing for the Olde Distillerie, global sales continue to climb. This is a marketing avenue that holds considerable potential.

The global market holds particular possibilities for the Olde Distillerie because it is already priced among the "premium" brands in the UK. The Olde Distillerie holds promise to become a global leader in the premium category of Scotch whiskeys. This is the area in which this study will concentrate, entrance into the global market among the premium brands.

Cultural Aspects of Scotch Whiskey

Wood barrel aging is what sets whiskey apart from clear grain alcohols, such as vodka or gin. This aging process gives the whiskey its amber hues and imparts a variety of flavours and aromatic effects. Scotch whiskey has a long history dating back to the ancient Picts (Beverage Testing Institute, 2007). Since that time, whiskey has been an integral part of Gaelic culture. Prior to the 1700s, as long as Scottish Kings Ruled, homemade whiskey was considered to be a farm commodity (Beverage Testing Institute, 2007). However, the Act of Union in 1707 that combined England, Wales, and Scotland into the United Kingdom had a profound effect on the production of Scotch Whiskey (Beverage Testing Institute, 2007). The English government levied heavy taxes on Scottish whiskey, while lowering taxes on English gin (Beverage Testing Institute, 2007). This resulted in a boom in illegal stills across the country. Many present-day producers have their origins in these illegal operations. In 1823, the Excise Act reduced taxes on Scotch Whiskey to a level where it was once again a viable legal industry (Beverage Testing Institute, 2007).

Scotch whiskey was ingrained in the culture of Scotland. Whether they are malted, blended, or single grain concoctions, they are a part of Scottish history that is slowly becoming adopted by others around the globe. The whiskey market experiences periods of boom followed by periods of bust. The market has not been one of the most historically stable. The Scotch whiskey market is one of the most volatile in the world. Events such as high excise taxes and prohibition result in dramatic fluctuations in the market. Distilleries come and go quickly in this business. This atmosphere makes it imperative for the Olde Distillerie to find a way to improve the stagnant market conditions that it is currently facing.

Proposed Markets

Several markets have been proposed as potential points of expansion for the Olde Distillerie lines. All of these are possibilities for the future. However, due to capital funding issues, the distillery will concentrate on entry into only one new market at a time. Several aspects will determine the likelihood of success in each of the potential countries chosen. For instance, excise taxes and cultural aspects surrounding alcohol consumption will play a role in the success or failure of the endeavor. Candidates have been narrowed down to four contenders. They are Sweden, Italy, Czech Republic, and Eire. The merits and disadvantages of entry into each of these countries will be discussed.

Sweden

One key factor that places the attention of Scotch Whiskey producers on Sweden is that in 2003, Denmark halved its duty on Scotch (Lyons, 2003). This made whiskey cheaper to buy in Copenhagen that is was in Edinburgh (Lyons, 2003). Danes import 9.3 million pound sterling of Scotch a year. The Danes cut the tax by nearly 3.25 pound sterling (35 kroner)(Lyons, 2003). One of the key reasons for this move was an attempt to recover lost revenue due to cross-border shopping in Germany. This move made tax on a bottle of Scotch 4.11 pound sterling in Sweden, as compared to 5.48 pound sterling in the UK (Lyons).

One of the key points to consider regarding this tax cut by Sweden is the effect that it will have on various price levels of whiskey. This tax cut would have the greatest impact on the lower priced bottles. It could not be expected to have the same impact on higher priced brands. The Olde Distillerie is placed among the higher priced brands. Their customers are not as price sensitive as lower priced whiskies. They do not compete based on price, but rather on the quality and distinctiveness of their product. This lowering of the Swedish tax rate will be more likely to spark higher market entry by lower priced brands. It will not have the same impact on medium to higher-priced brands.

In January of 2004, Denmark and Sweden were required to remove its import restrictions for personal consumption (Lyons, 2003). This is another boost that removes a key barrier that prevented entry into the market in the past. Requirements lowering import restrictions across the EU offer opportunities to expand to a number of countries in the EU. This will create a more even market across the EU and presents many attractive opportunities for expansion into the EU. Sweden may be a good jumping off point for the rest of the EU market in the future.

Sweden ahs a total estimated population of approximately 9 million people (FedEx, 2007, "Sweden"). As a member of the EU, bilateral agreements exist, but products still require paperwork documenting the country of origin. Sweden does not have a preferential duty agreement with Scotland, which means that no special duty discounts apply (FedEx, 2007, "Sweden"). Products from Scotland are subject to the same tariffs as a majority of the countries with which Sweden conducts business. The key rules and regulations regarding imports to Sweden are the rules and regulations that govern imports from other EU nations. Sweden has a simplified customs procedure that uses one piece of paper to cover all of the customs requirements (FedEx, 2007, "Sweden"). Sweden is an easy country into which to import based on bureaucratic simplicity.

Whiskey would be under few agricultural or food safety laws, other than those governing general production techniques. However, import duties for products entering Sweden are based on the final value of the product. If no value is given, the customs value is based on cost, insurance, and freight (FedEx, 2007, "Sweden"). The usual tax rate is 25% of the final value of the product (FedEx, 2007, "Sweden"). In the case of Olde Distillerie whiskeys, they are at the upper end of final sales price. This means that they would be subject to a higher tax rate under a value-based tax scheme.

Excise taxes only apply to imports from non-EU countries, therefore they would not apply to Olde Distillerie Whiskey. In addition to the value-added tax, Sweden also has a "watch tax" which is bawd on the time the item entered the country. This tax could be avoided if special shipping arrangements are made. This may help to offset high value-based taxes in Sweden, but the taxes levied could still be high. The value added tax rate in Sweden makes it an unattractive prospect for a first market expansion.

Scotch whiskey is a Scottish cultural icon. One of the key components of a successful marketing campaign will involve introducing a portion of Scottish culture into Swedish culture without making it appear to be a cultural anomaly. It might help that in 2002 a Swedish whiskey distiller, Mackmyra, released a single malt whiskey onto the market (Barrow, 2006). This whiskey will have a decidedly Swedish feel, as the casks will be made from Swedish Oaks (Barrow, 2006). This distillery opening indicates that there is a market for whiskey in Sweden. It is also a good indication that there are few cultural barriers that will get in the way of introducing Scotch Whiskey onto the Swedish market.

Italy

Italy is traditionally associated with wine production and consumption. Italians are proud of their wines, often producing types that will only be sold exclusively in Italy (McKean, 2006). However, that is not to say that this is the only drink in Italy. Campari recently entered a deal to purchase a whiskey distillery in Morayshire, Scotland that produces Glen Grant (KcKean, 2006). This move demonstrates that whiskey may soon take its place in Italian culture. One the most difficult aspects of entrance into the Italian culture is the ability to break the Italian wine mindset.

Breaking into the Italian market is not that difficult from a cultural standpoint. Italy was the sixth largest consumer of Scotch Malt Whiskey in 2004 and the fifth largest consumer of Scotch whiskey in 2005 (Ludo, 2006). This at least means that the Italian market is open to the idea of Scotch Whiskey. Italians welcome discriminating tastes and typically do not base buying decisions on price. This is exactly the market that the Olde Distillerie depends on for its sales. All of the Olde Distillerie products are in the pricier end of the market. They would fit well into the luxury end of the Italian market.

Glen Grant is the major competitor in the Italian market. Although Italy is among the top whiskey markets in the world, it has never been a priority for producers ("Pssst...Wanna buy Glen Grant?"). This is largely because of the unrivaled popularity of Italian wines in the country. It is difficult to compete with a cultural icon. This may represent a major barrier to establishing a market for Olde Distillerie Scotch whiskeys in Italy.

The European Union allows for movement of goods between Italy and the United Kingdom under their general rules and restrictions. Under General Preferential Tariff (GPT), duty-free entry is allowed for direct importation of goods from member states on eligible goods (FedEx, 2007, "Italy"). The dutiable value of products entering Italy is based on the final sales value of the product. Alcohol is subject to an excise tax based on value. The value added tax rate in Italy is 20%.

Italy also has countervailing taxes that are added to goods that may offer competition to Italian goods. This tax is meant to prevent lower-priced foreign goods from entering into a price competition with locally produced goods. Italian goods are also subject to a watch duty rate based on the time of customs processing (FedEx, 2007, "Italy"). The value added tax rate is 5% lower than that of Sweden, but this is offset by the addition of countervailing taxes. There is no clear tax advantage to choosing Italy a starting point of the global launch of the Olde Distillery products.

Czech Republic

The Czech Republic was formed when the former Czechoslovakia split into the Czech Republic and Slovakia. They transitioned from a socialist republic to a capitalist market, opening many new opportunities for export and import. They have applied for admission into the EU and will be bound by the relevant agreements in the future. Therefore, any of the rules and regulations governing import and export within the EU apply to the Czech Republic (Fidrmuc & Fidrmuc, 2000). The Czech Republic is considered to be a developing nation.

At the current time, the Czech Republic bases its import tariffs on the rates that they will be allowed by EU status. They are basing their tariff rates on the TARIC Integrated Tariff of the European Community)(FedEx, 2007, "Czech Republic"). The Czech Republic values shipments based on (Cost-Insurance_Freight) prices. They are based on a percentage of the value as well (FedEx, 2007, "Czech Republic"). It does not use final value-based price schemes, as do Sweden and Italy. This results in a lower valuation for Olde Distillerie whiskeys. This tax scheme would allow the distillery to capture the luxury classification that they desire in the global market.

The Czech Republic has one of the strictest customs procedures in the world. As they are a fledgling capital market, they strictly control the flow of foreign goods into the country. Commodities are subject to certain quotas, which may restrict the potential market size for Scotch whiskeys in this country. Shipments that do not meet all of the customs requirements are frequently confiscated (FedEx, 2007, "Czech Republic"), which poses a significant risk of loss. This risk will have to be weighed against all of the other benefits of conducting business in this country.

One of the key advantages of entering the Czech Republic market is that there are 11 free trade zones established in several cities within the Czech Republic. However, certain restrictions apply to materials that can be exempted in these zones. Materials, components, and semi-finished products are exempted from customs duties and value added tax if they are used in manufacturing or processing of the final product (FedEx, 2007, "Czech Republic"). This means that Olde Distillerie whiskey would not be considered tax exempt, unless there is a possibility of partnering with a Czech company for final packaging, or some other part of the process. This cannot be ruled out as a possibility and further research into this prospect will have to be conducted.

Alcohol is subject to an excise tax that is determined by the type and volume of the product being imported (FedEx, 2007, "Czech Republic"). This could effect the types and packaging of the products to be shipped. It may be possible to ship in smaller quantities, if this will result in lower taxes for the products.

The value-added tax applies to all goods that enter the Czech Republic. The tax rate is generally 22%, with lower rate available for food and pharmaceuticals (FedEx, 2007, "Czech Republic"). Alcohol is not considered to be a food substance, therefore would be taxes at the 22% rate. When combined with an additional excise tax and countervailing tax, the combination of taxes makes it quite high. Quotas further curtail the ability to grow a successful market in the Czech Republic.

Alcohol of all types is an integral part of Czech culture. Beer is by far the drink of choice, followed by spirits and then wine (WHO, 2004). Over 30% of the male population and 13% of the female population is considered to be heavy drinkers (WHO, 2004). One of the key difficulties in marketing to this population will be the ability to persuade them to switch to Scotch Whiskey. The market in this country is expected to be small due to quotas and the overwhelming preference for beer. When one combines these cultural factors with the high taxes incurred, the Czech Republic is an undesirable candidate for expansion.

Eire

Whiskey is a cultural cousin to Scotland. Whiskey is a cultural staple and an integral part of Irish life. Eire is not a part of the UK, although there are many ties between them. Eire has been a member of the European Union since 1973, which allows free movement of goods to and from other member states, including the UK (FedEx, 2007, "Ireland").

Eire has the highest excise tax on Scotch Whiskey in the EU, followed by the UK (Lyons, 2003). This is largely to provide a competitive advantage to Eire brands. Eire uses a different valuation system when applying the VAT to imported goods. In a majority of cases, the tax is determined by the price paid by the buyer for the goods (invoice price) (FedEx, 2007, "Ireland"). This is known as the transaction value. However, when a relationship between the buyer and seller influences price, this method is not allowed for valuation (FedEx, 2007, "Ireland"). In this case a formula will be used to determine the tax base value. This formulas is the (Item Price/exchange Rate + transport charges) - any allowable discounts (FedEx, 2007, "Ireland"). Countervailing taxes may also apply, but not in every case (FedEx, 2007, "Ireland").