Handling Increased Demand

[HighInTheMtns]

As much as I'd love to see it, increasing production just isn't that likely. Figuring 6 months for approvals, 18 months for construction, 3 for testing/hiring, and then 6-10 years for aging, We'd be looking at the 2020's before we saw a real increase on the shelf. Also, I don't think we're looking at the micros through the correct lens. While most of then aren't making premium products right now, in aggregate, they still represent a lot of idle still capacity that could be turned on instantly. I don't know which brands they will be, but a handful probably will take off. A big producer could buy that brand, purchase some idle capacity to increase distirubtion of their new brand (after aging), and improve their sales much faster than through factory expansion.

Someone who knows more than me could confirm or refute this, but I think in general, still capacity is not the issue in Kentucky. Warehouse space is.

[Bourbon Boiler]

I'd be interested in knowing that. Warehouse space would seem to be a little easier to deal with. I know there are fire concerns behind the spacing, and the bourbon fungus is making too many headlines these days, but I'd think another couple of rickhouses for the big boys would be simple.

[p_elliott]

A lot of the distilleries are building about one new rickhouse a year. But it takes years to see the benefits from a new rick house.

[squire]

Beam could fill a warehouse in short order with same recipe wheat whisky.

[ILLfarmboy]

I'd rather have distilleries raise prices and perhaps use cyclical shortages to take some of the pressure off than reduce proof ore age.

I understand with Maker's they can't really have cyclical shortages of their flagship bottling without hurting themselves. But I shop for whiskey the way I shop for any other grocery item; I don't shop every day or even every week, I keep lots of supplies on hand and rotate the most recently purchased stock to the back of the cupboards/the freezer, I shop the sales and though I have my favorite brands/bottlings I'm not 100% loyal to any of them. I rarely run out of anything/ or any of my favorite bottlings I just drink something else when supplies get low and re-up on those bottlings when I catch a good deal or when they are released (for those things like ORVW 10 107)

I'd venture to guess most of us are like that, at least when it comes to bourbon. I'd also venture to guess the average consumer is not that way. We are not only different in what bottlings we buy the most of, but I think we're also different in our whole approach.

[cowdery]

The posts in this thread have identified most of the relevant factors. Here's another: stability. You don't want to be constantly raising and lowering prices, like a commodity, or making lots of changes to the product itself, because the consumer wants stability. They want a consistent product at a stable price. You need to respond to market forces, of course, but as much as possible without sacrificing consistency of product, message, and price.

[MauiSon]

I think I won with regard to identifying the problem with MM - distribution logistics. Didn't they say as much?

[Gillman]

What about simple allocation? I.e. you honor all existing contracts and for uncontracted sales, you allocate amongst the customers as fairly as possible, e.g. regionally in proportion to the full market, and perhaps (although I'm not sure here) favoring the domestic market since it is the oldest and least likely to change with the trends.

This way, while not maximizing profits short-term that commercial logic would normally justify by raising price, people will feel fairly treated and retain brand loyalty when the supply can be increased. Whereas if you raise prices, that will put some people off and they may not return later. Or even if they would return, higher prices may leave some product on the shelves for too long, i.e., couldn't price increasing backfire? I'm no economist but this seems logical to me, given too we are dealing with products in which there is a certain emotional investment i.e. relatively high brand loyalty, but also a point at which people will switch, elasticity I think they call it.

Gary

Edited February 19, 2013 by Gillman

[squire]

Elasticity in pricing, aye, there's the rub, whisky may be the water of life but high tone whiskys command a premium and brand loyalty stretches thin if a customer starts to believe they're no longer getting their money's worth.

[CoMobourbon]

I feel like this question depends on the million dollar whiskey industry question: are we in a price bubble of some kind, or are increased demand and correspondingly increased prices here to stay?

If the latter, then definitely increased production would benefit customer and distiller alike - especially for the low and mid shelf brands. If the former, then I can hardly blame all of these big distilleries for getting it while the getting is good (raising prices, degrading quality via lowered age or proof, etc.).

Overall, if I could pick my poison, I too would come down on the side of cyclic shortages. But really, anything other than increasing production (except for a bubble pop) is not a solution.

[cowdery]

I think we're going to see, over the long haul, continuous pressure on supply resulting in steadily rising prices. However, so much of the growth is export-dependent, which can be unpredictible, that we also will see periodic blips of excess supply, which result in short-term bargains. This is a pattern we're already seeing and I believe it will continue. Also possible is a bust in one of the major projected export markets, such as India or China, resulting in a price collapse, but the odds of this happening appear to be small.

[mark fleetwood]

I think we're going to see, over the long haul, continuous pressure on supply resulting in steadily rising prices. However, so much of the growth is export-dependent, which can be unpredictible, that we also will see periodic blips of excess supply, which result in short-term bargains. This is a pattern we're already seeing and I believe it will continue. Also possible is a bust in one of the major projected export markets, such as India or China, resulting in a price collapse, but the odds of this happening appear to be small.

Perhaps sequestration can start a worldwide recession. Prices drop and the juice tastes better since we're all depressed.

[Cjen]

Whereas if you raise prices, that will put some people off and they may not return later.

Problem is that distilleries can't (legally) ditate the end prices consumers pay. Even if they charge distributors the same price per case as before, those distributors have an incentive to raise the price they sell each case to liquor stores for.

For example, say a case costs distributors $100 and they typically sell a single case to each of their 10 customers for $150. If all of a sudden that distributor can only get 5 cases, even if still purchased at just $100, they have a big incentive to raise the price to determine which 5 of their 10 customers is the most "serious about" or "committed to" the product. Some of those customers will likely pay $200/case, others maybe even $300. But the mom and pop store who only carries a product because one or two customers asks for it would probably drop out pretty quick. So the distributor, seeing the potential profit opportunity, will raise prices on their customers, which trickles down to the end price we pay. A profit-maximizing distributor will try and figure out the what the maximum price the (soon to be) 5th highest paying customer will bear, then price each case at that price.

Price elasticity from a consumers perspective plays a part (as that informs the liquor store as to what the maximum price per case they can afford is), but the real price increase would come from the main distributor or first "middle man" to touch the product.

I believe in some states there is no extra layer between the liquor store and the producer, in which case the liquor store will raise prices, following a similar thought process.

By the way, products that can bear large price increases are said to have "inelastic" demand (think insulin, AIDS drugs, or other life saving medicines/necessities), where those that have lots of substitutes (and thus price increases really impact demand) have "elastic" demand.

The demand for certain brands may be inelastic to many on these boards but, as prices go up in the bourbon market, I would predict the general public will quickly find their demand to be relatively elastic. At least for those who buy bottles on a regular basis.

[Cjen]

Also, I did some posting/research here a while back on new distilleries in KY. While doing that, I also saw a (relatively) new distillery in SC that focused on using technology to "refine" spirits. One of the benefits was said to be rapid 'aging' of bourbon. I remember looking them up briefly and hearing good things, but you never know what to believe without sampling for yourself! Company was called Terrassentia.

[cowdery]

People pushing rapid aging schemes are either fools or crooks. Pay them no mind.

All 50 states have a 3-tier system, i.e., a layer between the producer and the retailer.

Your point, I think, though you never quite get there, is if the market will support a higher price on something and the producer doesn't take it, those further down the chain (distributor, retailer) surely will.

[ThirstyinOhio]

Also, I did some posting/research here a while back on new distilleries in KY. While doing that, I also saw a (relatively) new distillery in SC that focused on using technology to "refine" spirits. One of the benefits was said to be rapid 'aging' of bourbon. I remember looking them up briefly and hearing good things, but you never know what to believe without sampling for yourself! Company was called Terrassentia.

Cjen, I recommend reading the threads regarding Cleveland Whiskey who is also using a process to quickly "age" bourbon and have already released their first batch to the market.

[squire]

Methods to artificially age or speed aging of whisky have been published for over two centuries now and the only thing that has been proven is none of them work.

[Cjen]

All 50 states have a 3-tier system, i.e., a layer between the producer and the retailer.

Not necessarily. All states have tiers, but not necessarily 3. For example, control states could be said to really only have 2, as the producer sends product to the state liquor store, where people can buy it. And I think some states allow direct shipments now as well--but I'm not sure, as I have never lived in any state that (potentially) does. But you also have many states with "tasting room" laws, which allow a producer to sample and sell direct to the consumer at their facility. But I agree that these are exceptions, not the rule.

But you are correct cowdery: the point is that the market will figure itself out in terms of pricing. And since spirit producers can't add an "msrp" or print a price right on the bottle like other industries (think potato chips), we will see the highest price consumers will bear (for mass market brands).

Competition drives price down, but supply shortages force it up--hence my comment that, during this bourbon shortage, I bet many end consumers will explore alternative brands..

[callmeox]

Ohio is as controlled as it gets and there are 3 tiers here.

The producers may ship liquor to the state warehouse, but the transaction is brokered by a distributor.

[Cjen]

Methods to artificially age or speed aging of whisky have been published for over two centuries now and the only thing that has been proven is none of them work.

True. But distillation has been going on for millennia and hasn't really changed much. Yes, I realize that there are hundreds of significant variables involved and everything from still shape and size to vapor pressures and running length to mash bills and barrel char make a difference in the final product, but the core concept is the same now as it was back in the day. After 2,000+ years of distilling and aging, I'd say someone ought to figure out how to do it more efficiently. Not necessarily better, but more efficiently. That way the mass market brands can stabilize their supply and the micros can garner more interest and get more creative without having to worry about achieving a certain scale to survive.

I'd personally love to see more places like Corsair, where almost everything they make is "experimental." The downside to these types of micros is that they often can't afford to play around and have a great everyday bourbon (at least not in reasonable supply/circulation). But I know Corsair uses small barrels to "age" faster (which apparently works pretty well?), but "faster" still means a couple years. They can't keep up with demand as is, and I'd hate to see them slow their experimentation in favor of lots of traditional product because I think the industry needs more of the experimental stuff. So you have to take the lesser of two evils in cases like this, balancing innovation for extra supply of a more traditional product.

In any case, I'm open to new ideas in this industry and will try anything once. Be it now or a hundred years from now, someone will probably look back on some of the things we do with bourbon today and compare it to the clay pot "stills" used in the earliest years of distillation. Will they still be honoring traditional distillation methods and barrel aging as they look back and reminiscence? Absolutely. That will never drop away--we won't let it! But will the bourbon most people drink everyday be produced the same way as today? Probably not. No clue how it will be made, but you've got to believe that in today's world of "disruption" and bourbon both being trendy, something going to happen sooner or later.

[squire]

Actually, I don't "got to believe" anything.

[Cjen]

Actually, I don't "got to believe" anything.

Just a playful expression.

I'm not making a case or asking you to do anything. I'm just intrigued.

[cowdery]

Historically in Ohio, the state was both distributor and retailer, and actually performed both functions, though separately (so two, not one). Now the retailers are private owners who act as agents for the state; and even though the state is still technically the distributor, the actual work is done by a private, commercial distribution company. Since the state occupies two of the three tiers, you could argue that it's a two-tier system, but functionally it is a three-tier system, in that producers do not ship directly to retailers.

The producers wish they could sell direct to major chains, both on- and off-premise. They do in a way, in that they can do everything except actually write the order. The order must go through a distributor.

The system has broken down in the sense that prohibitions against the same person having ownership interest in more than one tier are easily gotten around, and the local companies distributors were supposed to be are now legal fictions, since most distribution is done by national or large regional companies. The idea was that a producer could be remote and hard to touch legally, but a distributor would be local and thus more readily brought before the law. It's still true in the sense that distributors are required to have in market assets. Therefore, a distributor who has business in both Ohio and Indiana can't supply Ohio entirely from its Indiana warehouse. At least, I don't think they've gotten around that one yet.

Like a lot of Prohibition vestiges, the problems these systems were meant to solve don't seem like problems anymore, but the system doesn't change because there are people who have a powerful financial interest in keeping things the same.

[callmeox]

If you consider the state to be a distributor due to the regional warehouses, then Ohio has a 4th tier as the state buys through traditional distributors like Glazers and Southern Wine and Spirits.

Also, Ohio DLC is the only liquor retailer as the local shop does not own the booze on their shelves. It belongs to the DLC until it is sold on a consignment basis by a retail permit holder. This is only true for liquor over 21% ABV and not other alcoholic beverages.

Regardless, there are quite a few profit minded folks who touch the liquor between the distillery and the consumer.