Industry Updates (Thoughts)

I read this week that Heaven Hill will be launching a new 15 year Bourbon exclusively for their gift shop and that the asking price might be around $250 per bottle. This falls right in line with what I've been hearing around the industry at the moment; that we might be in for a huge sea change concerning one of Kentucky's unspoken whiskey rules: Bourbon is supposed to be cheap. Now there's no law written on paper that regulates what Kentucky whiskey should cost, but there has without a doubt been a collective attempt from the larger players in the industry to maintain Bourbon's blue-collar roots. It's a source of pride among many distillers we've met over the years, as fine Kentucky whiskey has always transcended social class. The result of this unspoken policy, however, has allowed for gigantic mark-ups on the secondary market, as scalpers continue to buy up the inexpensive stock of Kentucky's most affordable (and desirable) expressions, and more than quintuple the price for these now hard-to-find bottles.

When will we finally hit that watershed moment when a number of Kentucky producers say: enough's enough?

Soon, maybe. And you can't really blame them. If Pappy 15 sells for $500 on the secondary market, why should $400 of that profit go to a greasy scalper, instead of to the Van Winkles and Buffalo Trace who actually produced the product? That's what the Bordeaux producers said to each other in 1995 and things have never been the same for the wine industry since. If you're not a wine drinker, here's a bit of background for you:

1995 was a great vintage for Bordeaux. The wines were (and still are) amazing, the prices were reasonable for the level of quality, and the scores from critics were through the roof. At the same time, however, California had producers like Harlan, Dominus, and Opus One selling out their Cabernet-based wines (that were not nearly as revered as their Bordeaux counterparts) for double or even triple what most first-growths were going for. On top of that, there were loads of wine speculators getting rich, buying Bordeaux futures at first-tranche, pre-arrival pricing and tripling their money on the auction market when the wine actually showed up. There were some serious rumblings in the Medoc after that. In 1996, after another fantastic vintage with more outstanding press, the Bordalais started looking around to see what their wines were selling for at auction and on the grey market. They said to each other: "We're leaving millions of dollars on the table by not raising our prices." Latour was sellling its wine for $200 a bottle, only to see that same bottle sell for $800 at an auction later that year. By 2000, which was considered to be the "vintage of a lifetime" in Bordeaux (until 2005, and then followed by the "best vintage ever" in 2009), many Bordeaux producers had tripled their prices, and the wines still sold out quickly. That's when things started to explode.

In 1996, a bottle of Haut Brion would have cost you $189 on pre-arrival. In 2009, we sold them for $1100 (and they sold out in minutes). That's almost a 600% increase in a span of fourteen years without any increase in quality. 1996 and 2009 are both outstanding vintages. The only force that drove that price up was increased demand and the fact that Haut Brion was tired of missing out of profits it felt rightfully belonged to the Chateau (the exact same situation we're seeing in Kentucky). With Bordeaux as a historical example, my question now is: how much longer will Kentucky Bourbon producers hold true to their working-class morals before the urge to raise prices and reap those profits becomes irresistible? 

I've seen signs of weakness beginning to show themselves over the last few weeks. We've been working behind the scenes with a number of producers, and prices for whiskies we had agreed to purchase for one price are now suddenly double what we had originally agreed upon ("things have changed," they tell us). Then this story popped up in the headlines yesterday. Let me say this clearly: I have no clue what's happening at Balcones, but the way the story reads leads me to believe that there's a difference in philosophy between the guy making the whisky and the people looking to profit from it. There's a lot of money to be made in the American whiskey business right now, and with bottles of single malt selling (quickly and easily, mind you) for triple of what comparable bottles of Bourbon sell for (wholesale, that is), I have to imagine it's just a matter of time before that final straw breaks the camel's back.

Before you jump to any conclusions about this situation, ask yourself this: if you made your own whiskey that you sold to friends for $30 and discovered that your friends were secretly selling those bottles for $100 behind your back, how would you react? Let's say you didn't immediately disown all those friends, but instead entered into a business arrangement, selling those same bottles to them for $100 and making that profit for yourself. But then you found out they were now flipping those same $100 bottles for $200! That's what happened to the Bordalais in the 1990s and the prices just kept going up from there. 

I know for a fact that if we were to take our 2014 allocation of Pappy and sell those bottles for quadruple the regular asking price, we would sell it all out in seconds. Luckily, David and I are in control of that pricing and how we allocate those bottles. But what if a new ownership group came in and said, "Fuck that -- you make as much money for the company as possible. That's your new job. Nothing left off the table."

I'm wondering how much longer it's going to be before those types of investors start saying similar things in the Kentucky board rooms. My co-worker told me recently that the Yankees started using StubHub to accurately set the price for their season tickets, no longer allowing that extra profit to go to secondary scalpers. How much longer before Kentucky distillers start using WineSearcher and Ebay to accurately set the wholesale price for their whiskies? We'll have to wait and see! 

 -David Driscoll

David Driscoll