Russell I. (ed.) Whisky. Technology, Production and Marketing

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Product, Promotion, and Place, Price (Figure 10.1). This chapter explores these

four variables and shows how firms practising marketing use these tools to

influence sales and pursue long-term profitability. It will also become clear that

each of the ‘Ps’ is in reality a collection of instruments.

Emphasis in these definitions is put on the management process to achieve a

desired end result. Without a proacti ve effort in terms of time, effort, skill and

dedication the marketing process will just not happen, and achieving any set

of objectives will be hit and miss. Market ing demands engagement, and is best

carried out with passion, imagination and flair tempered with discipline.

Marketers need a sense of what levers to pull in order to capture the custom

of the consumers they are targeting. Successful entrepreneurs usually have an

ingrained understanding and appre ciation of marketing, but even if marketing

is not a science it can be taught and most certainly learnt through practice.

Those who practise marketing shou ld not be afraid of error, because very often

the best lessons are gleaned from failed experiments.

Marketing books have become popular, and can be found in many book-

stores. They sport catchy headlines such as The Customer is King, How Brand X

Conquered the Market for Widgets, Understanding the Psyche of the Consumer, etc.

Such books, along with many others, have a whole raft of topical messages to

deliver. The subjects covered are varied, and offer good guides for those who

want to grasp the essentials of best practice. They often include useful lessons

in marketing from leading practitioners in the field. However, for all market-

ers there is nothing that can replace learning through the experience gained

from real business situations.

The origins of demand

Historical development

It is quite likely that distilled spirits in Scotland were an import from Ireland

during the Middle Ages, brought over by missionary monks. The Scottish

Exchequer Rolls for 1494 hold the first written reference to the product, noting

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Figure 10.1

The four Ps. (Acknowledgments: E. Jerome McC arthy and Philip Kotler.)

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that Friar Cor had used ‘eight bolls of malt wherewith to make aqua vitae’. The

product that became known as whisky, from the Gaelic uisge baugh (‘water of

life’), has helped to make Scotland famous around the world. In the early days

the distilling of Scotch whisky was a cottage industry and a natural comple-

ment to the traditional farming that supported life in the Highlands. The

government soon woke up to the opportunity of usin g the popularity of the

product as a means to raise taxes, and the Excise Act of 1664 fixed duty at 2s

and 8d per pint of aqua vitae. As a comp lement to this decision by the Scottish

Parliament, the Excise Officer made his appearance. From the eighteenth cen-

tury onwards there was an emergence of demand on a significant scale for the

water of life, but it took a very long time for the industry to settle down and

achieve the transition from the freewheeling days of illicit distilling to the

modern, regulated industry, with its strict licensing of producers.

One of the key forerunners in the development of the mo dern-day industry

was The Distillers Company, which that was formed on 1 May 1877 as an

amalgamation of six Lowland distilleries, all of which produced grain whisky.

This was a key milestone in the development of the industry, as it moved it

beyond the craft indus try stage into a business run much more along com-

mercial lines. Indeed, the advent of grain whisky distil ling provided the tech-

nology that allowed producers to achieve two objectives: first, they managed

to produce a whisky very economically, and secondly, producers now had a

quality of spirit offerin g a lighter and usually more consistent taste than tradi-

tional malt whiskies. A new profession emerged, known as blending, along

with a new type of whisky that could be mixed to good effect with the tradi-

tional malt distillates. Leading blenders would soon launch their own brands,

offering consistency of product with a distinct cost advantage. Gradually the

blending houses were able to build consumer franchises for their brands. The

names that emerged at that time, such as Johnnie Walker, are today amongst

the leading brands in the industry.

Demand in the United Kingdom for Scotch whisky gradually grew through-

out the nineteenth century. The companies that were best able to meet this

demand were the houses that controlled the supply of the grain whisky. This

had become the main ingredient in the end product that consumers now

demanded, with malt whisky already playing a subsidiary role. Brands that

were unscrupulous with their consumers would include as much as 90 per

cent grain whisky, offering doubtful quality. Selling a matured product was

yet to become the norm, with consumers still accustomed to drinking whiskies

that were bottled straight after distillation – just as vodka is today. In these

early days of the modern industry it can be supposed that product quality was

varied, but demand grew nonetheless.

With a growing industry, more and more players were being attracted into

the market to meet the rising demand. For historians it is probably not a great

surprise that before the end of the Victorian era the industry had entered a real

crisis. Indeed, the growth in popularity with consumers had led to a boom in the

production of all types of whisky, which caused a glut in the market at approach

of the turn of the century. In 1898, with the bankruptcy of Pattisons, there was a

collapse in confidence in the market. However, from the ashes of this crisis there

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emerged a number of players who managed to survive. These companie s, of

which fi ve are the most famous – Haig, Dewar, Buchanan, Walker and Mackie –

were leaders in the development of the industry at the dawn of the twentieth

century. Scotch whisky was about to spread its wings and build demand, start-

ing mainly in the English-speaking nations of the world.

In the run up to the First World War, pressure was increasing to introduce

measures to define quality standards in the industry. A benefit of establishing

tighter rules of the game would eventually be to improve the product’s repu-

tation with consumers, who had grown accustomed to finding products of

varying quality. The Immature Spirits (Restrictions) Act was passed on 19 May

1915, making it compulsory to keep spirit in bond for two years, with the

period extended to three years in May 1916. This new legislation was one of

the key building blocks that would pave the way to better quality products

and, in turn, greater demand. This new legislation led to the demise of the

cheaper, immature whiskies that at that stage still accounted for the bulk of

consumer demand. After the First World War demand was red uced, as the

more expensive whiskies now being marketed were beyond the reach of the

mass market.

There was another major barrier to the development of demand during the

first part of the twentieth century. In the home market, as in other countries, a

movement emerged against the consumption of alcohol as a significant num-

ber of people blamed alcoh ol for creatin g social disorder in certain sections of

the community. This was aside from any im pact excessive drinking was hav-

ing on health standards overall. The temperance movement, as it was called,

began to take hold on both sides of the Atlantic, resulting in a period where the

consumption of all forms of alcohol was banned in the USA. This ‘Prohibition’

era did not last very long, as the benefits that its supporters were looking for

did not materialize and popular opinion moved firmly in favour of restoring

consumer freedom of choice. However, before the period of restrictions had

drawn to a close the trend against alcohol had spread to other corners of the

globe, and continued to cast a cloud over the industry’s efforts to market its

products right up to the advent of the Second World War.

As markets reopened in the 1930s, the industry’s fortunes were able slowly

to start to recover. This recovery was driven largely by exports. In 1937, for the

first time in the industry’s history, the export market was larger than the home

trade. By this stage there was also a clear pattern emerging in terms of leading

brands that commanded the loyalty of consumers at home and abroad. Names

such as Haig, Dewar’s and Johnnie Walker were now well established as the

most popular choices, and were leaders in the market . Apart from a strong

consumer following, these brands shared another thing in common; they were

all owned by the same organization – the Distillers Company Limited (DCL).

The DCL was all-powerful in the industry, and enjoyed a quasi-monopoly

status. Indeed the company, through a series of amalgamations, had collected

a portfolio of leading brands. With such a portfolio of products the DCL had a

tight grip on the market, and was able to set prices and thereby define the

returns available to all players. The DC L set the agenda in terms of the way the

product was marketed, and most of the credit for establishing the foundations

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of Scotch whisky marketing goes to the efforts of the peop le around the world

who worked in the company, or as its agents and distributors, building its

brands. Other companies were generally followers, and their chance of making

a mark would have to wait until after the war years.

Winning and losing consumers

The Second World War also had a particular impact on the fortunes of the

industry. American GIs streamed thr ough the continent of Europe in the

defence of the Allies, and these soldiers brought with them their consumer

habits – one of whic h was the fashion for drinking whisky. Films of the time

showed the heroes relaxing with a glass of whisky, and helped to spread the

image of a fashionable alcoholic beverage. An immediate consequence of the

war, however, was to curtail production of whisky in Scotland, and this reduc-

tion in supply was to have ben eficial consequences in the years after the war.

Indeed as the world emerged from the horror of the fighting to turn to the task

of rebuilding peace and prosperity, the demand for Scotch was about to grow

against a backdrop of tight availability. A real product shortage was created,

and this kept prices firm and helped underwrite the sense of exclusivity of the

beverage. Scotch was to become in peacetime the aspirational alcoholic drink

sought after by many.

During the post-war era the industry started to see the emergence of the

USA as the main market for Scotch whisky as it took on fashion-drink status

throughout the USA. With a flourishing market across the Atlantic the indus-

try entered its real take-off phase – a phase that was to propel it to the ranks of

the leading international spirit of choice for drinkers around the world.

Demand for Scotch whisky grew annually at close to double-digit percentages

in the three decades after the end of the war up to 1970. These were the glory

days for an industry that grew from a volume of 10 million cases sold in 1950

to over 51 million cases in 1970, driven by strong export growth. However, the

growth levels the industry had grown accustomed to co uld not continue inde-

finitely, and more challenging times lay ahead. Indeed history was about to

repeat itself, and the industry was on the verge of creating the largest hang-

over it could possibly imagine. Faced with a plateauing world demand, pro-

ducers continued to maintain output as if growth was still in the offing and, by

failing to curtail production, huge excess es of stock were accumulate d. The

problem gradually built up during the 1970s, and by the mid-1980s the dam

finally burst when prices in the industry collapsed severely as a result of the

high volumes of cheap whisky that were flooding the market. Damage to the

reputation and image of Scotch whisky was a consequence of the glut that

allowed low-priced generic brands to take hold in the market.

In fact, the failure to keep demand and supply in equilibrium was to have a

long-lasting impact on the industry as Scotch whisky moved down the path of

other consumer products and became commoditized. The worst of the effects

were felt in mature markets, where the low-priced products were able to make

large inroads in market share terms at the expense of the leading brands. As

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cheaper substitutes became available brands started to lose their pre-eminence

in consumers’ minds, and they gradually placed less value on higher-priced

products. In the USA the demand boom of the after-war era had taken the

industry to new heights, but the consumer following lost momentum as fashion

turned the consumer towards ot her substitute drinks. The cycle had turned,

and marketers were unable to keep the product’s leading image at the top of the

consumers’ set of preferred choices while other products were able to make

inroads and grow in popularity. However, efforts to build demand in other

parts of the world started to pay dividends, and the industry’s dependence

upon the USA declined along with its sales in its large st market.

The latter part of the twentieth century saw a new phase of the industry’s

development where a series of markets started to emerge closer to home, and

especially in Europe. Here drinkers were attracted by the im age and taste of the

product that had previously been the trend in the USA. In Asia the popularity

of Scotch whisky also grew as drinkers found, in the product’s quality and

image, values that are hallmarks of many luxury western-branded products.

For many of the newly acquired customers in these countries Scotch whisky

was a natural beverage accompaniment to social occasions with friends.

The other new element of change that came over the horizon (or more

precisely re-emerged from the long past history of the industry) was the emer-

gence of single malt whiskies. To those who could afford to experience the

best, the availability of relatively unknown and sought-after brands of single

malt heralded the start of a new trend. The result has been the emergence of a

new premium category within the industry, identified by products that have

their origins in the Highlands and Islands of Scotlan d. The folklore and mys-

tery surrounding these brands and their deep historic roots give these pro-

ducts a strong traditional background. This imagery, allied to the variety of

tastes, has won the loyalty of many new Scotch whisky lovers around the

globe. By taking the consumer into new territories in terms of taste and general

satisfaction, market ers have managed to create renewed appeal for the cate-

gory overall while at the same time moving the image onto a higher platform

in terms of perceived value.

The industry that has emerged from all these changes and cycles of demand

is thriving, and has firmly established a place at the top table in terms of

beverages of choice for drinkers around the world. At the beginning of the

new millennium, Scotch whisky is a leading category of choice in consumers

of spirits. Scotch whisky sales totalled 74 million cases in 2000 compared with

63 million cases in 1985, showing the resilience of demand for the category (see

Figure 10.2). One feature of the pattern of sales during recent history is the

rising importance of premium and malt whiskies as sub-categories to gether

representing 18 per cent of total volume demand in 2000. There has been a

steady switch of consumption towards the higher value added brands, and

premium whiskies, dominated by twelve-year-old Scotches, have led this

trend. Single malts have also played an important part in this trend of trading

up by consumers, almost doubling its share to 5 per cent over the same period.

The rise in popularity of these two premium categories has been at the expense

of standard brands, with low-priced products maintaining share overall.

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The leading brands that today dominate the category have developed strong

loyalty from their consumers; the result of years of building their reputations.

Alongside the major brands there are many niche products that cater for the

demands of the connoisseurs. Today consumers enjoy a diverse choice of

brands catering for all tastes and budgets. However, making choices may

not be easy for consumers who cannot always diffe rentiate between brands.

The power of persuasion through promotion can therefore exert a strong

influence on choices made, and a complex and sophisticated consumer mar-

keting industry has built up. The modern trade that is the Scotch whisky

industry is forever tuning into the consumer and trying to satisfy their

every demand profitably.

Current industry dynamics

This section discusses some of the tools that are used to build strong consumer

franchises, explores the main building blocks in making a marketing plan, and

describes the various approaches of companies in carving a niche for their

Chapter 10 Marketing Scotch whisky 315

Figure 10.2

Worldwide whisky sales (in ’000s 9-l cases) – domestic and duty free

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particular brands. Marketing theory continues to evolve, but at the heart of

any campaign to conquer the loyalty of consumers there lie some basic ele-

ments that will never change; an attempt is made here to pinpoint some of

these elements and focus on successful strategies to increase consumer

demand.

It is vital when looking at any market to be able to view the marketplace

through the eyes of the consumer . Consumers considering their choices in

alcoholic beverages mu st first narrow down the selection to three broad cate-

gories: beer, wines and spirits. In more recent times the choice has blurred, as

there are products that successfully transcend these traditional product cate-

gories. Some brands have re-segmented the market and proposed new expres-

sions of their products that are trying to cater for new modes of consumption –

for example, there is now a new class of ready-to-drink (RTD) or new-age

beverages that can be beer-, wine- or spirit-based, and sometimes are mixes

of all three basic forms of alcoholic drink. RTD products have been fuelling a

large part of the growth in consump tion in alcoholic drinks in the last few

years, especially in the western world. Their popularity with younger drinkers

is high – the consumer can chose a trusted brand in a format that fits well with

popular drinking modes. The success stories here have managed to offer an

alternative to the popular traditional offerings, such as draft beer or chilled

wine. The consumer is usually comforted by a well-known brand that brings a

guarantee of quality, with an image to boot.

The consumer framework for choosing a drink fo r a particular occasion

usually starts with the category of choice, and then narrows down to a

brand. In terms of category choice, the decision will be partly related to the

setting and type of occasion. On the other hand, for some consumers category

choice may be of secondary importance – particularly where there is a social

drinking occasion, wh en choosing the right ‘badge’ or brand may be more

important. When it comes to brand selection there is no end of choice available

to consumers today. Indeed the choice is bewilderingly large, and consumers

can select from scores of different products. A visit to any bar, restaurant or

retail outlet will confirm the plethora of brands available. Probably the mo st

promiscuous**55 of the three categories of alcoholic beverage is wine. Here the

choice is highly fragmented, with wineries remaining generally small in size,

notwithstanding some recent moves by major multinational drinks corpora-

tions to consolidate the industry and build a portfolio of wine brands.

Compared to many other fast-moving consumer good categories, the drinks

industry arguably offers more consumer choice than most – as can be seen

from a visit to any major supermarket, whose shelves are abundant with

alcoholic drinks of all tastes and variety.

A framework for consumer choice when selecting drinks is set out in Figure

10.3.**56 The three driving factors are need, occasion and personal state.

‘Need’ relates to the person’s mood, and ‘occasion’ to when, where and

with whom the consu mer is going to enjoy a drink. ‘Personal state’, on the

other hand , answers the question: ‘Who am I at that moment?’. The way in

which these three factors intercept help determine what choi ce of product and

brand the consumer makes.

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The consumer selecting a brand of spirits and inclined to make a popular

choice will naturally often chose one of the most popular brands. At present

the five most demanded international brands are Bacardi, Smirnoff, Johnnie

Walker, J&B and Absolut. These five names cover three distinct categories:

vodka, rum and whisky. When confronted with such an array of products, the

existence of well-known brands acts as a powerful means of assisting consu-

mers in making choices. The brand is a point of reference for consumers,

allowing them easily to identify their brand of choice by its values in terms

of taste, image and other attributes. Of course choices can be made without

reference to a particular brand – for example by choosing simply a vodka or a

whisky. However, today the vast majority of consumers rely on brands when

making choices, as this gives them reassurance as to the provenance and

quality, and ultimately a guarantee of satisfaction.

With the vast array of spirits that are on offer to consumers around the

world, Scotch whisky has to co mpete with some other very popular alterna-

tives. The choices have tended to grow over the years as consumers have

developed a taste for many alternative spirits, ranging in the past from gin

to more contemporary drinks such as vodka and tequila. However, this is a

dynamic process, and new categories emerge as others lose appeal. For exam-

ple, few people today know that the bitters that are popular in some European

markets used to be a desired tipple in Great Britain. Whisky has developed

almost universal appeal, and holds a strong position as the catego ry of choice

of many of the world’s drinkers. The whisky category also includes some

brands that are of international repute and have the strength to compete

effectively with strong competitors from ot her categories.

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Figure 10.3

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In terms of category share, Scotch wh isky at present enjoys approximately 9

per cent of the global spirits market. The total share of whiskies goes up a fair

amount when all other types of whisky from around the world are added,

including bourbon, Canadian, Japanese and other locally produced forms of

whisky. Indeed, contrary to common perception, ‘brown spirits’ are today

overall a very large and vibrant part of the total world spirits market. In

addition to whisky, this category includes such drinks as cognac, other bran-

dies, and dark rums. To put matters in context, the leading category continues

to be vodka, with a commanding position of approximately one bottle out of

every four bottles of spirit consumed globally, confirming the huge popularity

of white spirits with consumers.

Economics of the whisky industry – the value chain

Cost of goods and the impact of maturing spirit charges

A detailed understanding of the industry and its operations is helped by a full

understanding of the way in which costs are built up in the supply chain,

starting from production and continuing all the way through to marketing.

The most important element that differentiates Scotch whisky in terms of cost

from other beverages is the consideration of time as a factor. Whereas a normal

industrial product will be ready for sale the day it leaves the factory door, in

the case of whisky, law stipulates that the product must be matured for no less

than three years. There is a delay between the moment of production and the

time of sale, and during this period the funds that have been set aside for the

production process are effectively dormant, waiting for the product to become

ready for market. This in itself is not a problem in theory, providing that there

are sufficient funds availa ble to finance the business pending sale of the stock

that has been produced. In practice most players in the industry have a strong

and steady cash flow from their activities, and therefore the financial strength

and stability to afford the burden of holding some of their products for very

long periods of maturation before bottling and shipping to market.

This position can only be reached once a company is producing healthy

profits. Profit margins simply have to be calculate d to take the time/cost factor

into consideration. However, achieving profitability is much more complex,

and results from the marketing action that producers take. How they manage

to achieve this is discussed later in this chapter.

Looking at the cost of goods in more detail, the following aspects need to be

considered:

. Spirit: the cost of cereals, fuel and energy, direct labour and production over-

heads

. Financing: the cost of funds required to finance the inventory from the time of

production until a sale takes place

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. Wood: the depreciation of the cask (over its useful life) and the cost of repairs

to the stock of wood

. Warehousing: the cost of storing casks during the maturation period

. Transport: the cost of moving whisky from the point of distillation to the point

of bottling

. Bottling: the cost of packaging a case of whisky, including labour, bottling

overheads and depreciation

. Packaging materials: the variable cost of materials, including an allowance for

wastage.

Bringing all these costs together gives a total product cost, and provides a key

input variable in the value-chain equation. The gross margin on the product

can be calculated by deducting the net revenue derived from the product cost.

As in all consumer produc t industries, emphasis must be placed on minimiz-

ing the cost of goods in order to help maximize gross margin. The co st of

goods is generally being reduced through production efficiencies while mai n-

taining quality standards, and this process helps allow room for an adequate

marketing effort to take place and for a profit to be earned in the final count.

The nature of competitive markets is such that marketing costs have if any-

thing grown over the years, as producers compete harder for the consumer’s

loyalty. Therefore, driving gross margin generation helps to free-up cash for

marketing exp enditures that will have to be committed in order for the brands

to flourish.

Marketing costs

The main areas to be considered under the broad heading of marketing costs

can be broken down into two key components. First there are the brand devel-

opment costs, which include product marketing (advertising, promotion, pub-

lic relations and any other paid-for activities designed to influence demand in

whatever form). Secondly, there are costs related to channel management, or

selling and distribution. This catego ry refers to the entire infrastructure that is

required to drive product through the distribution chain to reach consumers.

Another way to view cost is that there are the costs of getting the product to

market (channel costs) and, once it is there, of pulling it through to the con-

sumer (advertising and promotion; A&P). The sum of these two major cate-

gories of cost is often the largest single cost line on the P&L.**57 The careful

management of these resources is arguably the most difficult area of the man-

agement decision-making process in a consumer brand ed goods company.

The direct output can be measured as profit after marketing (PAM), repre-

senting the net revenues minus the cost of goods and the selling/A&P

expenses. PAM measures the economic contribution of the product to the

company’s finances after allowing for all costs related to its production and

marketing. Adding value at this level is a key variable in terms of ultimately

driving corporate profitability. Success in building long-term value, measured

Chapter 10 Marketing Scotch whisky 319