This Doesn't Taste As Good As I Remember It

Pretend you own your own whisky company. Business is booming. Your product is flying out the door.  In fact, your product is so popular that you can't make enough of it - literally. You're looking at the numbers from last year: one million bottles sold for thirty dollars a piece = $30 million. It's been a pretty successful operation, but now there's a problem. You're running out of whisky to sell. Looking at the projections for the coming year, you notice that you've only got about 500,000 bottles of whisky to offer.  That means you're only going to make $15 million this year.

"Hold on there!" says one of your investors. "We're one of the most popular whisky companies in the world! How is it that we're going to only make half of what we did last year? We should be making more, capitalizing on a successful year!"

From a marketing perspective, he's completely right. You've spent the past few years promoting your brand, traveling all over the world, busting your behind to put these bottles into the hands of whisky drinkers everywhere. It would be a shame to lose all the momentum you've built up. However, the whisky industry is a tricky business. You needed to prepare for this new-found success a decade ago when you were actually making the whisky, laying down the barrels to mature the product you're currently selling. Unfortunately, no one at your company thought 2012 was going to be such a successful year.

You're now in a pickle. You own the hottest product on the market, but you don't have enough of it.

"Sir? Did you hear what I said? We should be capitalizing on our success!"

You clear your throat and address the board room.

"We've got a problem, gentlemen. We only have half as much inventory as we did last year. We're going to have to make some tough decisions."

What are your options? As far as I can tell, you've got three choices:

1) Take the hit, try and prepare for the following year. Your investors aren't going to like this option, however. You also risk losing your place in the market. If your product isn't visible, people might forget about it and move on to a different brand.  That would be terrible!

2) Raise your prices. Simple supply and demand. There's less product, it should cost more. Your customers aren't going to like this, however. Consumers flocked to your whisky because it offered quality at an affordable price. Forcing them to cover the holes in your budget might upset what has been, up to this point, an incredibly loyal following.

3) Bottle a younger product. You've got whisky, it's just not nearly as mature as what you've been selling. Would it be better to sell an inferior product than nothing at all?  Maybe no one will notice the difference. However, if people do notice the difference then your product's reputation is in the toilet.

What do you do? Your investors are waiting to hear from you. 

-David Driscoll


The Market Reacts

Lots of feedback via email after yesterday's post! Thanks to all of you who offered up support and varying points of view.  I really enjoyed reading through them and I learned a great deal about what's on the mind of customers all over the country.  I'd like to take a few minutes to address some of the concerns reflected in these emails:

You can't fight the rising cost of things.

This is entirely true. Gas is more expensive than it was last year. Concert tickets for the Rolling Stones cost me $60 in 1994 (and that was for the 3rd row center at the Oakland Coliseum), but now they sell for thousands.  A bottle of Chateau Latour was $25 in the early 80's, yet the 2009 sold for $1500 on pre-arrival. Believe me, I'm not some curmudgeon who is trying to fight inflation. I'm also well schooled on supply and demand.

That being said, no whiskey has had more demand and less supply than Pappy Van Winkle Bourbon. Yet, the last time I looked, the price for each expression has been roughly the same each year (maybe a few dollars more here and there). The Buffalo Trace Antique Collection bottles are all the same price as last year.  The new Flaming Heart is the same price it was two years ago. Ardbeg continues to sell like crazy, yet I haven't changed the prices in years.  In fact, the last time I changed the price on Ardbeg was to lower it. I'm totally fine with a whisky adjusting its price tag to fit in with the market, hence why the recent increase on Laphroaig 10 isn't that big of a deal. 

That being said, small market adjustments are not what we're seeing in all cases. Some whiskies are looking to exploit the market.  They're looking to cash in while the market is hot.  Remember when a house in Modesto was selling for $600,000 a few years ago?  That house was never worth $600,000 but realtors had some people believing it was.  With so many brands keeping their prices consistent, why do some companies believe their whisky is worth more now?  Is it actually worth more, or are they just trying to convince us that it is?  I knew people who sold their houses in Modesto for ridiculous prices just to see if they could.  Are some whisky companies doing the same?

As someone who works with whisky, am I not cashing in on this as well?

I'm not looking to work at K&L for a few years, make a ton of money by jacking up the price of whisky, and then cash out before the market crashes.  Even if that were a realistic option (which it isn't), David and I have worked too hard over the past three years to build this department into what it is now.  If companies continue to drive prices higher and customers eventually decide to get out of the single malt game, that affects me. If we are indeed inflating a bubble and that bubble pops, then we here at K&L pop with it.  I don't want that to happen! I'm passionate about keeping whisky affordable, not because of some idealistic socialist belief that everyone should be able to afford every whisky, but because my livelihood depends on it.  Plus, I love putting great bottles in our customers' hands and hearing about how much they enjoyed them. I'm definitely a big tent kind of guy.  I want everyone to come to the party.  When I hear customers say "I feel like I'm being priced out by my favorite whisky company," that's disconcerting.  It should be disconcerting to whisky companies as well.

Don't worry about the big brands, keep up your single barrel program!

I wish it were that easy!  Do you know how many barrels we had to pass on this year?  Many, and it was because of their price tags.  The independent, single cask market is completely connected to the brand market and an overall increase in price will inevitably affect our ability to go to Scotland and find great whisky.  If the retail price of Macallan 18 hits $200 a bottle (which it most definitely will within the next few months), then why shouldn't a 21 year old, single barrel, cask strength Linkwood cost $200?  Obviously, we're selling our 21 year old Linkwood for $125 right now, but I have a terrible feeling that next year's trip to Scotland is going to yield this kind of response.  Two years ago we sold a 1974 Ladyburn from Signatory for $300 a bottle.  They wanted $900 per bottle wholesale for the same whisky this time around.  That's a 300% increase in less than a year. 

Whaa! Whaa! Cry, Cry, Cry!  That's the market, so live with it.

Hey man!  I'm just looking out for you.  If you want to pay $600 for the new Lagavulin 21, that's your choice.  $1000 for the Jefferson's Ocean?  Yes, you heard me, $1000.  We made $900 of extra profit on that bottle (which we then donated to charity).  If the prices keep going up, I'm certain that some people will keep paying them.  However, I don't love my job because of the salary.  I think about my job in the morning, while I'm here at K&L, while I'm driving home, while I'm eating dinner, while I'm sleeping (I dreamt last night that I had to deliver a booze order and I couldn't find it!), and again when I wake up. I love my job because I like helping people.  That's the same reason I loved being a teacher in Chinatown.  I loved helping little kids learn how to read, spell, and add.  Once all of the everyday people get priced out, I'm really just a stock broker at that point. I'm not as interested in doing that. 

-David Driscoll


More Dialogue

Since we're talking about rising whisky prices, I've written a new, three-part dialogue for your perusal.  The last piece I wrote that included typed conversation seems to have gone over well, so I'm adding a follow-up here to help illustrate more important issues facing the whisky industry right now.

The first part is titled: In the spirits section at K&L

David is seen stocking the shelves, a customer enters from stage left

David: Hello sir.  Welcome to K&L. Let me know if I can help you find anything.

Customer: Actually, I'm looking for a bottle of ______.  Can you tell me where it is?

David: Certainly, it's right over there on the left, second from the end, on the bottom shelf.

Customer: Wow. $52.99?  I can get this at MevBo for $42. 

David: Unfortunately the price has gone up recently, so we had to raise our price as a result.

Customer: So you can't match MevBo's?

David: Normally, if it's just a matter of different pricing, I'd be happy to.  In this case, however, $42 is less than my wholesale cost.  MevBo is offering that price because they haven't bought in since the increase in cost.  It's not only that their price is lower than ours, it's that their current wholesale cost reflects a purchase from many months ago when they bought volume at the old price. While I can't match their price, I'd be happy to call the MevBo down the street, however, and have them hold you a bottle.

Customer: I'd rather buy it from you.  Can't you just match the price?

David: Well, if I do that I'm actually losing money.  It's one thing to make less profit, which I am happy to do in the name of customer service, but I can't actually lose money on each sale.  I can offer you a discount, but I can't match that price. You see, when liquor companies raise their prices there are some stores that still have inventory with a retail tag that reflects the old wholesale price.  We move through our inventory faster, so we have to change our prices first.  Unfortunately, in times of transition like this, that means we have to be the store with the higher sticker.

Customer: So MevBo has better deals than you, huh?

David: In this case, yes.  It just so happens that they haven't had to repurchase the item at the new wholesale cost.  Eventually, they'll have to raise their price as well.  All of these whisky companies are raising their prices right now and it's really a pain.  My margins keep getting thinner because I want to keep my prices consistent and avoid situations like this.

Customer: Wow, what a bummer.  I guess I'll have to go to MevBo. 

David: I'm sorry about that, really.  It's not us raising the price.  We're simply reacting to the increase ourselves.

Customer: I don't understand anything you just said.  All I know is that MevBo has better prices than you.  I'll just go there first next time.

End scene

Wow, that was intense!  I was wondering what was going to happen the entire time!  Was David going to lower his prices and take the hit?  Was the customer going to be sympathetic to the changes of the market?  Riveting stuff!

OK - now for the second part, titled: What the F?!

A retail store manager is seen sitting at his desk. He is talking on the phone to a brand manager, whose voice we can hear through a speaker.

Manager: Listen, all I know is that I've had customers calling all day, wondering if we'll price match the ______ whisky with K&L.  I can't match that price!  What the F is going on?  Did you guys cut them some kind of a deal?

Brand Manager: Not that I know of! They must be choosing to make less money per unit and move volume instead.

Manager: This is total bullshit.  There's no way that any retailer can sell the ________ for $77.99 and make any money.  That's practically what that whisky costs wholesale!  I can't even pay my electric bill with $1 per bottle profit margins! You must have cut them a backdoor deal and now you're just trying to cover your ass!

Brand Manager: I promise you, we didn't! They paid the exact same price as you did!

Manager: Well I'm not matching that price, but if K&L has it for $77.99, then just how the F am I supposed to sell it for $100!  Everyone will think that I'm overcharging them when in reality they're just offering ridiculous pricing.  I'm just going to close it out and get rid of it.  I can't compete on this anymore.

Brand Manager: Let me see what I can find out.  I really don't want you to have to stop carrying the product.  Just give me few days to see what's going on. 

End scene.

Jeez.  This is a really intense story so far.  I wonder what's going to happen next!  Let's find out in part three, called: Now You Know How I Feel

David is shown sitting at his desk, eating a sandwich when the phone rings. He picks up and we hear the brand manager greet him through the speaker.

David: Hi, this is David.

Brand Manager: David, it's Larry over at _________.  How's it goin'?

David: Hi Larry, it's going fine.  What's up?

Brand Manager: Well.....not so good.  We've got a problem and it pertains to your price for _______.  You're selling that for $77.99 and that's a little lower than we're comfortable with.  We've been getting complaints from other stores all day and they're threating to drop the product if you don't change your price.

David: Wow, that's a problem.  You know what else is a problem?  My price for _______.  I'm at $52.99 but other stores are still offering that product for $42.  People think I'm overcharging them for the bottle because there are still a bunch of stores nationwide with the old price.  I've been getting complaints all day as well.

Brand Manager: David, you know that we raised the price for everyone, not just you. 

David: That's true, Larry.  However, I'm still a smaller retailer who can't afford to buy in before the increase like other huge chains can do.  While they're still sitting on older inventory with hundreds of cases, I'm moving through my inventory faster and I'm forced to raise my prices first.  The problem is that customers don't understand this, so they think I'm just charging them more.

Brand Manager: But eventually, the other stores will sell through and raise their prices as well.

David: True, but with so many increases happening across the board, there are always going to be whiskies that I simply am not competitive with because someone, somewhere, will have a deeper inventory than me.  We're getting national attention now and I have to be able to compete with Chicago and New York, too.  But that's OK because I've figured out a way to balance that all out.

Brand Manager: What's that?

David: For every product that goes up in price, I'll pick a product from the same company and lower it.

Brand Manager: How is that going to even out your profits?

David: Oh, I didn't mean financially.  I meant it would even out the amount of complaints we would both have to hear.  You see, producers never take any flack from customers.  The retailers do. But now, for every complaint about price increases I hear from customers, you'll have to hear a complaint from another retailer.  So we'll be even!  What do ya say?

Brand Manager: I think you've lost your mind.  This is the craziest thing I've ever heard.

David: Maybe to you it is.  However, my customers are sick of the same whisky they bought last week costing ten dollars more this week.  It's frustrating, so I'm going to stick up for them and offer some relief. 

Brand Manager: I understand your frustration, but isn't there anything else we can work out?

David: Sure.  The next time you lower the price on a product, I'll respond by raising the price on one of mine.  Like the ______ whisky that's causing so much trouble right now.  Just lower the price on something and I'll bring it back up again.  That way we'll always have balance.  Balance is important.  So is regularity.  If you eat a balanced diet it helps to keep you regular.

Brand Manager: I think you need to take a break, David. You sound like you're losing it.

David: Nice talking to you, Larry!

End Scene.

Wow!  What's going to happen now?  Stay tuned for more exciting dialogues to find out!

-David Driscoll


I Will Single Handedly Fight This

I've been emailing with customers all day about the current state of the whisky market. I mentioned on this morning's email newsletter that the 1988 Glenrothes took a big price increase today, so I decided not to reorder it rather than raise my price by $20 per bottle.  Laphroaig 10 also took a hit, but I did adjust it because it was less drastic (now $42).  Because Laphroaig 10 is a whisky that we sell in high volume and that I really love personally, it's not something I'm going to quit on.  That whisky was probably priced below market value to begin with. The 1988 Glenrothes, however, won't really affect our sales whether we choose to carry it or not.  I can find plenty of other whiskies to take its place.

The perceived market value of a whisky is important to the equity of each particular brand.  When a brand wants to be seen as higher-end or more luxurious, they'll raise the price to reflect that desire. What would happen, however, if I started buying up all the big boy whisky in California and just lowering their prices?  Not on the bottles that pay my salary, like Lagavulin 16 or Ardbeg, but on the other whiskies that are not particularly key players at K&L.  What are the whiskies that people love, but are a bit too expensive to purchase on a whim?  Oban's a great example!  Everyone loves Oban 18, but it's usually about $100 or more at most places. $100 is a good price for that whisky because it is quite elegant. That being said, what if I called up the distributor for Diageo, bought up every last bottle of Oban 18, and then just sold it for less?  Would other stores follow suit?  Would that then pressure a large whisky company to lower its price?  What would happen? I don't really need to sell Oban 18, but it's nice to have.  Therefore, if I just blow it out on volume it should all even out for K&L.  Now I'm curious!

Let's just get on the phone here.......yes, this is David at K&L, how much Oban 18 is in stock?  36 cases?  OK, I'll take all of them.  Delivery tomorrow.  Redwood City please.  Thank you!  There.  It's done.  A huge truck of Oban 18 is coming to Redwood City tomorrow and I am just going to sell it for less. True, it's going to ruin the market price for Oban 18, which is usually a $100 bottle of whisky, but what else can we do? For every whisky company that raises its price, I will counter them by taking one of their whiskies and lowering its price.  Tit for tat.  Let's see how this works.  I refuse to let you all get priced out of drinking great whisky.

Oban 18 Year.  Was $100.  Now $77.99.  That makes for the lowest price I can find online. Who's next?

UPDATE:  I said "tit for tat," so let's add Glenrothes to this list.  Diageo raised the price of Ron Zacapa, so I've lowered the price of Oban 18.  Glenrothes raised the price of the 1988, so I'm now lowering the price of the 1995.  1995 Glenrothes: was $65.99. Now $51.99.  This is really fun!  I hope you're all enjoying it as much as I am!

-David Driscoll


New K&L Single Barrel Four Roses

Four Roses K&L Exclusive OBSO Single Barrel Cask Strength Bourbon $59.99 - Usually when we purchase a fantastic single barrel of Four Roses Bourbon, it comes in around ten and a half years of age or younger. When we tasted samples for this one, we noticed right away the darker complexion and the extra wooded flavor. Sure enough, this barrel was older - 11 years and 7 months to be exact. This being our second batch of OBSO (a 60% corn mashbill with a healthy dollup of rye and yeast strain "O"), we were hoping to recreate our previous whiskey, which we lovingly called "the iron fist in a velvet glove." What we got, however, was something far more powerful and out of control than we ever could have imagined.  I would refer to this whiskey as "the iron fist that just punched you in the mouth" because this Bourbon is a beast!  At 63.3%, our new barrel brings the heat, the spice, and the wood at an intensity most drinkers aren't ready to handle. With water, the fruit comes out, the wood briefly dials back, but each drop has the same futile effect as a bullet fired at the liquid metal Terminator in Part 2 - it punches a hole, but that hole just gets quickly filled with more unstoppable Bourbon flavor. This whiskey is perfect for rocks drinkers.  In fact, it will probably destroy most ice cubes in a matter of seconds. I'm a little afraid of it, to tell you the truth.  There were only 132 bottles available out of this cask because the whiskey just kept sucking up wood and evaporating like crazy.  It has only one goal - total Bourbon domination.

-David Driscoll