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Friday
Dec202013

Letters to the Editor

Here's a great letter from Spirits Blog reader David Knopfler (not of Dire Straits) out in North Carolina in response to yesterday's post about whisky profiteering:

David,

Thanks for the thought provoking blog post today.  I've seen any number of articles, blog posts, and comments on forums expressing rage at the rise in prices, accusations of gouging etc.  What I haven't seen is a clear eyed analysis of the whisky business balance sheet to determine what is in fact reasonable pricing to ensure a sustained profit, and the capital necessary to expand to meet the burgeoning global demand.  We are comparing the current rising prices with those that were set at a time the trade was attempting to purge a glut of product before it went over the hill.  A time when the industry still suffered a hangover from almost two decades of declining demand.  Certainly that is not a reasonable pricing baseline for a healthy business.  You've used your industry contacts to provide great insight into the nuance of the products you carry.  It would be interesting if your could do the same to illuminate the business side of things since that has become such a hot topic for everyone.

Thanks and best regards,

Dave Knopfler

David makes a great point that I'm not sure today's generation of drinkers really understands: the prices we were used to paying for whisky (pre-spirits boom) were based on low demand and high inventory. The industry was sitting on a large amount of mature casks (at one point the Laing brothers dumped a 30 year Brora cask into a cheap blend because they didn't know what else to do with it) and the prices reflected that. Many producers were happy just to break even after investing so much capital into supply. Now that their product is back in demand again, however, they can now start to profit from that extra inventory--if they still have any left. I think that's an important fact to keep in mind, especially when trying to find an answer for David's request: taking into account expenses and cost projections, what is actually a fair price for a bottle of whisky?

I'm not sure that many producers would be willing to open up their accounting books to someone like me, but there's something else you have to keep in mind when looking at today's newer distilleries: production overhead. Some distilleries are including loan payments and debt into their bottle price, while others have long paid off any outstanding investment fees. That's part of the reason why Armagnac is so reasonably priced for what you're getting: these guys are producing on farms handed down for generations, with backstock that was paid for decades ago. Any sale is pure profit at this point. Craft distilleries, on the otherhand, have to work quickly to pay off the loans, and if they've taken money from investors, to make sure those investors are getting a return on their money. These investment expenses are definitely factored into the price of each bottle sold, after taking into account supplies, labor, maturation, etc.

Nevertheless, you've got me thinking, David! Thanks for the letter. Hopefully I can get back to you about this subject with some sense of accuracy.

-David Driscoll