Saturation – Part II
I had an inspiring phone conversation with the head of a major distillery yesterday afternoon. He called me and said, "David, we have a problem. Sales are down and—tell me if you agree with this—we think it's because the market is too saturated and no one is buying the same bottle twice."
Then I started jumping up and down while I talked to him. Then he started laughing. Then we discussed.
Let me take you back to something I wrote in 2011 called "The Death of Brand Loyalty." What was true five years ago is now starting to have a serious effect on some of the more established names in the spirits industry. While I saw the phenomenon coming early I'm definitely not the only person who knows what's happening. Why do you think almost every major single malt distillery does an annual limited edition at this point? Why do you think duty free has now become "travel retail," with 27 different Johnnie Walkers, 19 different Macallans, and 154 different Glenlivets? Because boutique, high-end spirits are like fashion at this point and just like few consumers buy the same watch, bracelet, dress, or pair of shoes more than once, fewer and fewer folks are making repeat spirit purchases. Whisky is not wine. It can last months or even years in the bottle once it's opened. Once it's finally gone most drinkers are ready for something new. There's a whole new world of booze out there and most people (myself included) want to experience as much of it as possible while they're able.
Don't think this adventurous mindset is limited to spirits though. If you look closely at various markets you'll see a small crack that's starting to form in the façade of pop culture capitalism. Just like once-prominent booze brands and beer giants are now getting creamed by the multi-headed hydra that is the guerilla craft movement, you're starting to see fragmentation and fracturing in retail as a whole. Nordstrom? Huge losses so far this year. Macy's? Oh man..... Even a few major wine and spirits retailers around the Bay Area have recently departed. What are these stalwarts of retail being replaced by? Pop-up shops. Online retail. Anything that doesn't have to dump a lot of cash into real inventory and infrastructure. If you can either create something or gather products with minimal investment, you can come to market and disrupt major commerce in a major way. Well, maybe not you specifically, but definitely you and thousands of other people just like you. Harness that market like iTunes and you can make billions. Continue down the now-prehistoric path of standard brick and mortar retail and risk total annihilation.
Speaking of iTunes let's talk about music. Let's talk about what happens when an industry that was once controlled by record labels and major media outlets like MTV, Rolling Stone, and commercial radio becomes split into millions and millions of easily-downloaded pieces. Who are the rock stars today? Who are the biggest bands, the biggest stars, and the most famous players in the current rock and roll era? I know how to find out! I'll see who's been headlining Coachella lately, the biggest music festival in the world right now. Let's see....this year it was Guns N Roses. They're a hot new band. Last year it was AC/DC and Jack White, two up and coming acts. Before that it was Outkast and the Arcade Fire. Before that Blur, the Stone Roses, and the Red Hot Chili Peppers. Why do you think the biggest names in rock music are all from a time before music became digital, downloadable, and utterly-congested? I'll give you my opinion: it's because unless you're a teen idol like Justin Bieber or Taylor Swift, the music scene has become so splintered and saturated that it's almost impossible to gain a foothold. If you weren't established before the record industry fell into complete disarray, then you're fighting an extremely steep uphill battle.
Nostalgia is a powerful motivator when it comes to ticket sales and it's hard to be nostalgic about a band you're only going to listen to for a week before downloading something new. But what if you're the next new craft distillery looking to ultimately become the next big brand? Like I said to a friend of mine recently who works for a major company, "If you're not already established as a major global player, you're pretty much fucked." There are so many new spirits on the market that customers are already feeling overwhelmed. Getting just a small piece of their collective attention is almost impossible at this point. You'd have to spend millions just on advertising and have something pretty special to sell, but of course that's if you want to become the next big thing. Many new microdistilleries are happy to simply supply a local demand. They create a buzz in the community and then rely on local tourism and relationships to help them sell small quantities to nearby bars, restaurants, and retailers. The problem now is that even the local playing field is getting quite crowded. But that's not even the biggest problem. The real issue is this: NO ONE IS GOING TO BUY A BOTTLE OF YOUR BOOZE MORE THAN ONCE. Starting a distillery is a risky venture. Starting a brand, however, is almost foolish at this point.
Let me tell you a funny story now. A friend of mine was visiting a incredibly crowded night club in LA recently. Being a businessman himself, he began chatting up one of the bartenders about the apparent success of the place. "You guys are killing it!" he said to the man. "There's a line wrapping around the corner at this point." The bartender smiled and nodded. "How long have you guys been open?" my friend asked.
"Two weeks. But this is our last night. After this we're closing," the bartender answered.
My friend was puzzled. The place was absolutely packed, people were having a great time, and the demand seemed to be off the charts. "Why are you closing?" my friend asked in complete shock.
"Because we can only keep this up for about three weeks," the bartender responded. "After that people find the next hot spot and move there. This is just a pop-up."
You've most likely heard of pop-up capitalism. Pop-up shops. Pop-up taco trucks. Pop-up anything. It's a form of business that allows one to take advantage of a quick and likely waning interest without any of the risks of long term investment. In a sense, that's where everything is heading because right now consumers are looking for as many new experiences as possible. What do you think single barrel whiskies are? Pop-up Bourbon. What do you think batch numbers on Laphroaig cask strength bottles or Aberlour A'Bunadh labels represent? Pop-up Scotch. To be successful, you have to turn your inventory quickly, then create a new experience as quickly as possible in order to recapture the same audience once again. It's crazy! It's also extremely difficult, hence my summation from the last post: WORK. You have to take a whiskey that would normally be made in 100,000 case quantities and instead make ten different 10,000 case whiskies, or 100 different 1,000 case whiskies and differentiate them somehow in order to make the same amount of profit you made doing one simple batch.
But while pop-up capitalism might simply be a reaction to the limited attention and interest of the modern consumer (as well as a smart use of e-commerce) what are the long term consequences? Maybe I should put it this way: what happens when modern business philosophy revolves around capturing your money as quickly as possible with a product that's specifically-designed to be limited? As long as the quality is there and the intentions are pure, I think it can be rather exciting in limited doses. But I'm worried about what happens when people are no longer able to invest in quality and pop-up capitalism becomes the norm. Would you rather date a different person every two weeks for the rest of your life, or invest your time into building a special and lasting relationship? Would you rather discover a new band every two weeks, or would you rather watch a few great bands develop and improve year after year? Would you like twenty new restaurants in your downtown area each month, or five really good places that you can depend on when you need them? More importantly, would you rather do business with someone who has invested their heart and soul into building something great? Or would you rather buy your booze from someone who says, "Hey man, I'm just trying to build this thing up quickly so I can dump it off to a major brand for twenty million?"
I have to think microdistillation to many is the new start-up and that's part of the reason we're currently saturated in mediocre new spirits. The cost of starting a distillery is lower than it's ever been and getting to market has never been easier. The result? There's more good booze available now than there's ever been, but there are fewer great products. Transcendent spirits are even rarer. But if a quick-to-market, knee-jerk, exploitative, repackaged whisky costs fifty dollars, where does that leave long-standing brands who have invested in quality and can show a rich history of tradition? There's a reason why Yamazaki 18 costs what it does now, just like there's a reason it now costs $500 to go see the Rolling Stones. People are still willing to pay for quality. But is there anyone out there willing to invest in it?