Two events in the past week have underscored both the promise and the fragility of Ireland’s whiskey boom. Irish Distillers Ltd (IDL) has announced they are considering building a new distillery complex to supplement the existing distillery in Midleton. This would be the first new distillery built by IDL in almost a half century.
This proposed addition comes on the heels of several other expansions that have seen the company, since 2012, roughly double its production capacity at its flagship Midleton distillery with a net investment of over €250 million. IDL is home to leading Irish whiskey brand Jameson, along with such well-known brands as Green Spot, Redbreast, Powers and Midleton.
Concurrently with IDL’s announcement, the Irish government tabled a proposal in the Irish Parliament, Public Health (Alcohol) Bill, which would sharply curtail the ability of Irish distillers to advertise in public. The restrictions are so broad that they could prevent distillers from posting directions and “way finding signs” to their facilities, especially in cities and many provincial towns.
The Irish Whiskey Association (IWA) took exception to the proposed regulations, noting that, “some of the measures included in the Alcohol Bill are excessive, impractical, disproportionate, and in some cases, just ludicrous.”
According to the IWA, there are currently 13 whiskey distillery visitor centers in Ireland and another 13 are scheduled to open over the next several years. In 2017, a total of 814,000 tourists visited Irish distilleries, an increase of 11% over the previous year.
Roughly 90% of the visitors are foreign tourists. With an average expenditure of around $50 per person, whiskey tourism represents a $400 million segment to the whiskey and Irish tourism sectors.
According to William Lavelle, head of the IWA, Irish whiskey distilleries,
Are an integral part of Ireland’s tourism offering, particularly in parts of the country with a less well-established tourism footfall. Yet the Public Health (Alcohol) Bill will severely contain the advertising and promotion of Irish whiskey distillery visitor centers.
He went on to add:
It is ludicrous to think that at a time when the Irish government is promoting Ireland’s Hidden Heartlands, the Tullamore D.E.W. visitor center won’t be allowed to erect named signs in their home town.
Over the course of the last three decades, the Irish whiskey industry has had a dramatic turnaround. From near oblivion in the 1980s, the industry has come roaring back. From two distilleries in 1985, the sector now boasts over 30 distilleries either producing, under construction or permitted.
It’s estimated that by 2025, Ireland could have more than 50 operating distilleries, and that every county in the country would have at least one functioning distillery.
Growth in production has been equally impressive. Between 1985 and 2016, production of Irish whiskey grew from less than 200,000 9-liter cases to around 8.7 million 9-liter cases. Irish whiskey is now exported to more than 130 countries around the world, and is available in every major beverage market worldwide.
On the other hand, while the Irish whiskey industry has taken credit for the revival of Irish whiskey, the reality is more complex. Notwithstanding the fact that Irish whiskey is now exported to more than 130 countries, exports to the US account for around 45% of those sales.
Moreover, roughly 6 million cases, or 70% of Irish whiskey production, is accounted for by IDL, with the overwhelming majority of those sales consisting of Jameson whiskey.
As impressive as the growth of the Irish whiskey industry has been, to a large extent that growth has been largely the result of IDL’s success in promoting Jameson whiskey around the world, especially in the US. That doesn’t make the success of Irish whiskey any less, but it does mean that success is based on a much narrower base and is therefore a lot more fragile.
Every major international whiskey company is now represented in the pantheon of Irish whiskey brands. Like IDL before them, these Irish whiskey brands will be able to take advantage of their parent company’s broad international distribution net, not to mention their corporate parent’s marketing expertise and deep pockets.
Moreover, unlike the Scotch whisky industry, where international beverage companies ended up with a portfolio of distilleries and their brands, in Ireland it’s likely that those companies will stick to a single distillery and associated brands.
Regardless of the demand for Irish whiskey, road to market still matters and having it, courtesy of a powerful internationally distributed parent, is still a significant advantage. Just ask any of the myriad Irish whiskey startups struggling to obtain international distribution for their products.
Even if they have existing roads to market they can exploit, those companies will be playing catch-up to IDL’s and its parent, Pernod Ricard, already impressive growth.
IDL has roughly a 70% market share of the global Irish whiskey market. Add in the other top 3 Irish whiskey producers, Bushmills, Cooley/Kilbeggan and Tullamore D.E.W., and the market share of the four largest producers grows to between 85% and 90% of the global Irish whiskey market.
IDL has made it very clear that it intends to keep ramping up production and to fight tenaciously to defend its market share.
Bushmills is in the process of an expansion that will roughly double its capacity, although there have been rumors of late that the extent of that expansion may be rolled back a bit. The other major producers are all cranking up their production as well, in the expectation that they will see market share gains as their own output increases.
The Great Northern Distillery, organized by John Teeling in 2015, and whose impact has not yet been felt, has a capacity of over 4 million cases a year or about half of current Irish whiskey sales.
Moreover, every other major whiskey producing region in the world is also busily cranking up its production at double digit rates. The world is heading for a veritable flood of whiskey over the next several decades. Great news for the industry, if the consumer demand is there, but a disaster if all that production ends up feeding a lake of surplus whiskey.
Irish whiskey production capacity is slated to grow at a faster rate than the overall growth, however impressive, of the global Irish whiskey market. Finding room for all of Ireland’s new whiskey startups is going to be a challenge, especially if those startups are expecting to rely on overseas sales to drive their growth.
Ultimately, the success of Jameson will pave the road, somewhat, for the other Irish whiskey producers. Having tried Ireland’s leading whiskey brand, some portion of those new consumers will be tempted to expand their horizons and explore other Irish whiskey offerings.
Whether those new consumers will grow fast enough to absorb all the new offerings of Irish whiskey in the pipeline remains to be seen. There is a market share war brewing in the Irish whiskey industry, and that struggle will only intensify over time.
Those with market share will fight aggressively to keep it. Those with little, will have a hard time expanding it. In the spirits industry no one ever gets promoted for losing market share, regardless of whether revenues and profits are still growing.
There is a second issue that may become problematic for the Irish whiskey industry. Irish whiskey is significantly out of step with the global whisky market. At a time when most whisky producers are emphasizing the premiumization of their core catalogs, most Irish whiskey producers are still, to a large extent, offering entry level expressions.
Roughly 85%, or more, of Irish whiskey are blends, and most of those are entry level expressions priced under $50. There are certainly premium expressions of Irish whiskey, but the bulk of sales are represented by entry level liquids.
That’s hardly a surprise. The revival of the Irish whiskey industry is not that old. There is a shortage of very mature liquids. Only three producers, IDL, Bushmills and Cooley, have been around long enough to develop sufficient inventories of mature liquids to permit a premiumization strategy.
Virtually every other producer who offers premium whiskeys had to source their stocks from one of those producers. Even then, there is a limit to the amount of premium liquids available.
That raises another issue that may become a problem for the Irish whiskey industry. There are simply too many cases where producers are offering the same whiskey under different labels. See for example, Exploring The World of Irish Whiskey
True, maturation strategies and cask finishing can create some differences, as can different blending formulas. Every whiskey has a distinct DNA, however, and while those techniques can create some difference in taste and aroma, a liquid’s DNA will eventually come through.
As more proprietary stocks are matured, and as each distillery’s distinct style becomes more apparent, this will become less of an issue. In time it will disappear. That eventuality is still a decade or so away, however. There is no easy solution for the lack of mature liquids or the fact that what is available is coming from a relatively narrow base of producers.
For now, the novelty of Irish whiskey to many consumers, and the fact that on a global basis its market penetration is still relatively small, means that the lack of mature liquids, or the relative similarity of what mature whiskeys are available, has not yet become a major issue.
At some point, however, it is likely that international consumers will look to Irish whiskey producers to offer the same types of premiumized expressions that characterize other whisky markets. The more time the Irish whiskey industry has until it must make that transition, the less likely it is to be caught short when consumer demand changes.
Significantly, the interest in premium and collectible expressions of Irish whiskey has already been growing. The Celtic Whiskey Shop, Ireland’s largest specialist retailer of Irish whiskey, has recently announced that:
November 12th will mark the launch of CelticWhiskeyAuction.com, an online auction site that has been created by Ireland’s leading Irish whiskey experts for whiskey enthusiasts, collectors and aficionados alike.
Celtic Whiskey Auction will predominately feature Irish whiskey … and promises to bring plenty of rare, collectable and unusual bottling’s.
The point of the above is not to detract from the very real success that the Irish whiskey industry has had. The increase in Irish whiskey production, demand and worldwide sales is indisputable and impressive.
That success, however, is built on a narrow base and there are significant obstacles that the industry will have to overcome. It will need to find room for all the new entrants in the Irish whiskey market, to mature enough stocks to meet demand for premium expressions and to expand its overall share of the global whiskey market in the face of tenacious competition.
In other words, the success of the Irish whiskey industry notwithstanding, that success is still fragile and for many new distilleries, under the right circumstances, could very quickly start to unravel.
Which brings up the Irish government’s schizophrenic attitude toward the Irish whiskey industry. On the one hand, Dublin wants to encourage new distilleries and whiskey related tourism, seeing it as an important driver of rural development and a source of significant growth for the economy. It also likes the hundreds of million of euros that the industry dumps into the government’s coffers.
On the other hand, the Irish government has imposed one of the highest tax rates on spirits in the EU, and taken a variety of steps to discourage the consumption of whiskey and other spirits. The Public Health Act recently tabled, being the most recent example.
It is as if Dublin wants the lucrative tax revenue that the industry generates, the promise of rural jobs and development it can create, not to mention that tourism dollars and visitors it encourages, while at the same time preferring that no one actually drinks the stuff.
For many, new craft whiskey, distilleries and tourism may well turn out to be the lifeblood that keeps them going. Many of the new start up distilleries will be challenged to obtain broad, international distribution. That means encouraging visitors, especially foreign tourists, and more importantly, promoting distillery visitor center sales of their products, will be critical to their long-term survival.
That’s going to be difficult if the Irish government is inadvertently making it difficult for these distilleries to promote themselves to tourists, while at the same time taxing their products at among the highest rates in the EU.
Paradoxically, to its credit, the Irish government recently relaxed the rules for distillery sales, making it easier for producers to sell their products in distillery gift stores and tasting rooms even while, at the same time, it is proposing to make it harder for distilleries to advertise such opportunities.
There is something fundamentally illogical with the fact that Irish whiskey is more expensive in Ireland than it is in any of its major international markets.
One thing that the Irish government should seriously consider is dramatically lowering the alcohol excise taxes on the first 100,000 liters of production from each producer. This is something that Dublin could do with very little financial ramification. At the moment, this would affect only about one million liters of production out of a total of around 80 million liters, barely more than one percent.
The start up distilleries that this policy would help are barely selling anything right now, so they aren’t paying much in taxes anyway. A policy that would significantly reduce excise taxes on alcohol on the first 100,000 liters of production would be a huge incentive for new craft distilleries. It would allow them to offer their wares to distillery visitors at attractive prices and could provide the difference between financial success and failure.
The comeback of the Irish whiskey industry has been impressive. Its success notwithstanding, the finish line is still a long way off. History has shown that it’s a bad idea to count out the Irish, their whiskey producers included. It would be a good idea, however, if their government didn’t keep shooting the industry in the foot.