Why bourbon is getting more expensive

[Postal Grunt]

Lew Bryson expounds upon the reasons our favorite adult beverage continues to increase in price.

 

https://www.thedailybeast.com/why-is-bourbon-so-damn-expensive?via=newsletter&source=AMDigestOrig_ABTest

[Whiskey Lullaby]

Very interesting, thanks for sharing. 

[Surtur]

Sounds about right. My local Bevmo's prices also change +/- a good $10 on top of it. Sometimes Buffalo Trace is $25 and sometimes it's $35

[gurgalunas]

Good read, PG.  Every time I roll my eyes at the prices of bourbon, I just wander into the scotch section...  And remind myself that it could be worse.

[cdcdguy]

Great read. How are they selling JTS Brown, HH6, Mellow corn for 10 to 13.00 ?

From what the article said there would be no profit and likely a loss? There must be something else we don't know.

Edited March 2, 2018 by cdcdguy

[musekatcher]

37 minutes ago, cdcdguy said:

Great read. How are they selling JTS Brown, HH6, Mellow corn for 10 to 13.00 ?

From what the article said there would be no profit and likely a loss? There must be something else we don't know.

I've tried to point several times that Bourbon is not getting more expensive.  Folks are just paying more.  Visualize a price increase for Old Forester.  One day, 30 bottles are 22.99.  Two days later, they are 24.99.  Bottles didn't move, contents didn't change, no labor or materials were expended - the cost didn't go anywhere. 

 

The article may have some false data.  I'm pretty sure there's a lot less than 750 lb of corn used per barrel.  Also, even if that is correct, 750 lb of corn runs about $45, or $3.50 a bushel.  The article claims the corn costs $375 ?!? That's a huge error that has me questioning the entire article, as maybe a lampoon or farce.

 

I think its more likely there's less than $100 of corn, rye, water and yeast in a barrel, plus the barrel cost - which also sounds fakely high at $250?  Maybe if it were furniture, lol.    After aging and losses, you get what, 175 bottles of whiskey?  At Mellow Corn prices, thats $1750 a barrel.  At Old Forester prices, thats $4200 a barrel.  How much profit is that?  And its still not enough....

Edited March 2, 2018 by musekatcher

[FasterHorses]

23 minutes ago, musekatcher said:

I've tried to point several times that Bourbon is not getting more expensive.  Folks are just paying more.  Visualize a price increase for Old Forester.  One day, 30 bottles are 22.99.  Two days later, they are 24.99.  Bottles didn't move, contents didn't change, no labor or materials were expended - the cost didn't go anywhere. 

 

The article may have some false data.  I'm pretty sure there's a lot less than 750 lb of corn used per barrel.  Also, even if that is correct, 750 lb of corn runs about $45, or $3.50 a bushel.  The article claims the corn costs $375 ?!? That's a huge error that has me questioning the entire article, as maybe a lampoon or farce.

 

I think its more likely there's less than $100 of corn, rye, water and yeast in a barrel, plus the barrel cost - which also sounds fakely high at $250?  Maybe if it were furniture, lol.    After aging and losses, you get what, 175 bottles of whiskey?  At Mellow Corn prices, thats $1750 a barrel.  At Old Forester prices, thats $4200 a barrel.  How much profit is that?  And its still not enough....

This is how I feel. I don't trust those numbers.

[JoeTerp]

I enjoyed the read, but I think bourbon is getting more expensive because people keep buying it at increased prices.  If it wasn't selling the price wouldn't keep on going up.

[Postal Grunt]

We may get to see the effects of politicians on the market place should there actually be a trade war over product tariffs. Some of the first US exports that are expected to be hit are bourbon, other whiskeys, and cheeses. The increased production levels that the distilleries have boasted about will eventually have to go somewhere and the older stocks will have to be released before the angels take an even larger share.

[flahute]

3 hours ago, musekatcher said:

I've tried to point several times that Bourbon is not getting more expensive.  Folks are just paying more.  Visualize a price increase for Old Forester.  One day, 30 bottles are 22.99.  Two days later, they are 24.99.  Bottles didn't move, contents didn't change, no labor or materials were expended - the cost didn't go anywhere. 

 

The article may have some false data.  I'm pretty sure there's a lot less than 750 lb of corn used per barrel.  Also, even if that is correct, 750 lb of corn runs about $45, or $3.50 a bushel.  The article claims the corn costs $375 ?!? That's a huge error that has me questioning the entire article, as maybe a lampoon or farce.

 

I think its more likely there's less than $100 of corn, rye, water and yeast in a barrel, plus the barrel cost - which also sounds fakely high at $250?  Maybe if it were furniture, lol.    After aging and losses, you get what, 175 bottles of whiskey?  At Mellow Corn prices, thats $1750 a barrel.  At Old Forester prices, thats $4200 a barrel.  How much profit is that?  And its still not enough....

I agree that the cost of corn number is off, but the weight seems right. Granted my calcs were of the back of the napkin variety and done quickly, but I approached it from two different directions and got close to 750.

The writer of the article is well know and respected in the industry so I really don't think the article is a lampoon or farce.

[Surtur]

If I had to guess he probably went high on most of the numbers to help reinforce the point. I can still buy WT101 for $15/750ml and that wouldn’t keep thenin good business with those numbers 

[GaryT]

7 hours ago, JoeTerp said:

I enjoyed the read, but I think bourbon is getting more expensive because people keep buying it at increased prices.  If it wasn't selling the price wouldn't keep on going up.

I thought it was a good read and accurate, but also agree that the demand is a factor.  That increased demand has led to increased marketing spend, but I think there is a big piece Lew did leave out - and I understand why.

 

Expansion.

 

Them distilleries are bought/paid for (from the big players), but they are all expanding production, which has a huge cost.  They're making that investment assuming it will make them money in the long run (and I hope they're right!) but in the short term that likely creates some cash flow challenges.  Coupled with the demand, to fund that expansion I think they need to raise the price.  If they opted to not expand, they'd wind up raising the prices more to avoid stock-outs.  But - how much does that expansion factor into each bottle?  That would be a shit-ton of speculation, and trying to include any math to that would have hurt the article (as Steve pointed out - Lew knows his stuff and knows people who know their stuff; I have no better source to challenge his numbers).  

[musekatcher]

1 hour ago, GaryT said:

 

Them distilleries are bought/paid for (from the big players), but they are all expanding production, which has a huge cost. 

Expansion increases production which reduces costs.  Otherwise, no one would expand.  It only increases cost if you miscalculate, and overproduce.  Which isn't happening right now.  But it may in the future, as the fad wears off Bourbon, and moves on to [insert new trendy liquor here]. 

 

 

[BigRich]

Expansion increases production which reduces costs.  Otherwise, no one would expand.  It only increases cost if you miscalculate, and overproduce.  Which isn't happening right now.  But it may in the future, as the fad wears off Bourbon, and moves on to [insert new trendy liquor here]. 
 
 

Yes on a marginal basis but you have to upfront the cost to build and recoup it, which I think was Gary’s point.


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[Jav]

5 hours ago, musekatcher said:

Expansion increases production which reduces costs.  Otherwise, no one would expand.  It only increases cost if you miscalculate, and overproduce.  Which isn't happening right now.  But it may in the future, as the fad wears off Bourbon, and moves on to [insert new trendy liquor here]. 

 

 

 

4 hours ago, BigRich said:

Yes on a marginal basis but you have to upfront the cost to build and recoup it, which I think was Gary’s point.


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Exactly.  Most distillers aren't going to just eat the sunk costs until they start profiting from the expansion.  If they decide to expand that means their current products are selling and can likely survive a price hike.  Increasing prices now helps pay for the expansion.  And even when there is more available the only thing that will bring prices down is people not buying the product at the current price...

[Charlutz]

Equity and debt pay for expansion. Sure, the demand and sale drive the decision that they can sell more bourbon 6+ years from now but we’re overstating the correlation. 

[BigRich]

Equity and debt pay for expansion. Sure, the demand and sale drive the decision that they can sell more bourbon 6+ years from now but we’re overstating the correlation. 

Equity rarely, debt mostly. Debt has to be paid. Price hikes have a way a being helpful in servicing debt.

 

 

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[flahute]

8 hours ago, musekatcher said:

Expansion increases production which reduces costs.  Otherwise, no one would expand.

 

I don't really follow. Does expansion reduce costs? Unless you're counting on bulk/quantity discounts, all the material costs that go into the product is the same. They expand so they can sell more and make more profit.

[Richnimrod]

In SOME cases "expansion" can be attended with modernization.   That will decrease per-bottle costs at least a bit. 

Just expanding production capability wouldn't improve per-bottle cost ratio in a meaningful way for most (any?) of the major distillers. 

It certainly could for a 'craft' distiller, who may be able to realize some economies of scale assuming the space for both production and aging is already embedded.

At least that's how it seems to me; admittedly, from the outside looking in.

[bayouredd]

Yes, but you still have to pay for that expansion & to pay for it, costs "will" increase. By the time the production increases for said expansion, inflation rears it's ugly head & companies aren't likely to drop prices after the fact...

[Richnimrod]

11 minutes ago, bayouredd said:

Yes, but you still have to pay for that expansion & to pay for it, costs "will" increase. By the time the production increases for said expansion, inflation rears it's ugly head & companies aren't likely to drop prices after the fact...

Oh, YES!   It goes without saying that increased costs will ALWAYS be passed on to the ultimate source of the Company's revenue: The Customer.  

And, your point about it being unlikely to see anybody lower prices due to a better cost ratio is well taken as well.     Not that it NEVER happens; but, it is exceedingly rare.

[Charlutz]

I understand we’re not in a finance classroom but we’re talking about many different things as if they are one. We’re mixing variable costs, per unit costs, with total costs, total revenues, as well as near term borrowing of long term debt v. long term revenue. It’s not an easy industry to finance because of the long horizon before you see returns on investment. We’re oversimplifying it. To me, the only simple truth I’m confident in is that the distilleries believe that the boom is likely enough to continue that they are confident enough to put in more equity and borrow more money to spend money on capital assets that won’t generate returns for 5 years or more. That confidence is a good sign but who knows if they are right. 

Edited March 2, 2018 by Charlutz

[Richnimrod]

2 hours ago, Charlutz said:

... That confidence is a good sign but who knows if they are right. 

I KNOW!!!!            Go ahead.    Ask me! 

[kaiserhog]

I generally buy old school bottled in bond, bottom of the shelf bourbon.  EWBIB and OGDBIB.  I bought a handle of WT101 for $28 the other day.  I occasionally splurge on WTRB.  I am looking for Col EH Taylor BIB and it is a little more expensive.

[flahute]

9 hours ago, Richnimrod said:

In SOME cases "expansion" can be attended with modernization.   That will decrease per-bottle costs at least a bit. 

Just expanding production capability wouldn't improve per-bottle cost ratio in a meaningful way for most (any?) of the major distillers. 

It certainly could for a 'craft' distiller, who may be able to realize some economies of scale assuming the space for both production and aging is already embedded.

At least that's how it seems to me; admittedly, from the outside looking in.

I'd say that modernization allows some of the steps to go faster, but only by a little bit, and results in savings in the form of reduced labor.

Fermentation takes as long as it takes. You can speed it up by fermenting at a warmer temperature, BUT, you effect the flavor so you aren't going to do that (unless you're Four Roses). But that's not expansion.

A still can only output according to it's size. Perhaps a new one can go faster.

Aging is aging and new rick houses don't speed that up.

A new bottling line can go faster and output more volume.

Either way, all the steps are interrelated. They need to be up to a certain volume level to support increased speed and/or capacity in another. All the material costs stay the same (according to day by day market forces of course).

A little less labor can reduce the per bottle cost by a small amount. At their level of output though it can add up.