Saturday, December 29, 2007

Bourbon History, Republished.

The University of Kentucky Press is republishing Henry Crowgey's 1971 Kentucky Bourbon: The Early Years of Whiskeymaking.

Crowgey's Kentucky Bourbon is one of the few serious, scholarly works ever done on the subject, and is a very thorough and credible account of the industry's development in the late 18th and early 19th centuries. The release is scheduled for February 1, 2008. Amazon is accepting pre-release orders now. (That's the link.)

I won't lie. If you buy it here, you will put a few pennies in my pocket, but the cost to you is the same.

Especially at the price Amazon is offering, you can't afford not to buy this if you have any interest in bourbon history. I'll be buying, since I have been working for 15 years from a Xerox I made of a library copy.

Friday, December 21, 2007

What Is Really Going On With George Dickel No. 8?

Whiskey is weird.

How many other products can you name that take four or more years to manufacture? We always talk about this, how the whiskey aging cycle challenges distillery production planners. The story of George Dickel No. 8 Brand Tennessee Whisky demonstrates what can go wrong.

In the early 1990s, United Distillers was a company with big plans. The spirits division of Guinness & Co., it had been built by acquisitions over the previous decade. It was an international company with major brands in the scotch whiskey and American whiskey categories, as well as gin, rum, and others.

Among its assets was George Dickel Tennessee Whiskey.

One of the company’s big plans was to take selected American whiskey brands and give them a big marketing push in Europe and Asia, where American whiskey was starting to grow as a category, unlike the U.S. market, where it was doing nothing. One of the brands selected was George Dickel.

As a Tennessee whiskey, Dickel is a unique product. Unlike United’s many bourbons (at the time), the George Dickel recipe is shared by no other brands. Because of the whiskey aging cycle, any long-term sales growth strategy has to be accompanied by steady production growth, so that when the marketing plan succeeds, you have enough product to sell. United started to make more Dickel, a lot more.

The effort to sell more Dickel overseas wasn’t a failure exactly, but it didn’t meet expectations either. Part of the problem was that the newly huge company was unwieldy and often lacked focus. Dickel was too far back in the portfolio to get the attention it needed. Because the whiskey made at Dickel could only really be used for the Dickel brand, the stocks built up, and because nobody was paying close enough attention, they just kept producing.

In 1997, Guinness merged with Grand Metropolitan to form Diageo. To accomplish the combination, the company assumed a lot of debt. It soon had to start selling assets to generate cash and also cut costs wherever it could. It decided what its core business would be and, by 1999, it had decided that American whiskey was not part of that picture. Early that year, it sold off all of its American whiskey assets except two brands, I. W. Harper and George Dickel. It also stopped production at the Dickel distillery.

In addition to the excess whiskey inventory, Dickel had some environmental issues in Tennessee, having to do with wastewater disposal. They weren’t a huge deal but would require a significant investment to fix. Because of that, the company couldn’t casually crank up the distillery for a few weeks each season, just to keep some current production in the pipeline. They had to stay completely dark and take their chances.

When they stopped Dickel production, they pretty much stopped marketing it too. That will tell you what the underlying strength of a brand is. Maybe that was their plan, maybe there was no plan beyond stopping the bleeding and making the brand profitable again. With the distillery closed and the marketing budget at zero, it wasn’t too hard to make the brand profitable in the short term.

At that time, now almost nine years ago, product availability seemed like the least of their problems.

In 2002, Diageo began to pay some attention to Dickel again. The brand got a marketing budget and started to make some noise. Either the marketing worked, or it was just time, you never know exactly, but Dickel sales suddenly picked up here, there, and everywhere. They got their environmental problems fixed and resumed production in fall of 2003.

The new marketing program featured the premium Dickel expression, known as No. 12, but the less expensive No. 8 continued to be the main seller. In about the middle of 2007, Dickel No. 8 drinkers began to notice bare shelves. In some cases there was a note on the shelf explaining that No. 8 was in short supply because of the 1999-2003 distillery shutdown. Ads in a few markets explained that the shortage was being caused by the shutdown, combined with “an incredible surge in demand for George Dickel No. 8."

No company gets itself into a situation like that on purpose, but when you find yourself with that kind of problem you try to make the best of it. One tactic has been to generate publicity about the shortage itself. Nothing makes people want something like telling them they can’t have it. Another has been to release a temporary stop-gap, a new product called Cascade Hollow Recipe, aged three years. The strange thing is, the Cascade Hollow label looks almost exactly like the No. 8 label and it is being sold for the same price. It’s obvious that many shoppers, grabbing for the familiar black label, will never notice it’s a different product, a fact no doubt anticipated by the brand’s management.

Since the company could easily have made the Cascade Hollow packaging look completely different, why make it virtually indistinguishable from the No. 8? The strategy, it appears, is to have it both ways. They’re being upfront with the people who are paying attention while hoping to slip one past the people who aren’t.

Here are some simple facts the people at Diageo aren’t talking about.

No Dickel product except the new Cascade Hollow carries an age statement. It has one because it is required to, by law, because it is less than four years old. Unofficial statements by distillery personnel have pegged the top-of-the-line Dickel Barrel Select product as containing whiskey 8 to 12 years old, the No. 12 as 8 to 10 years old, and the No. 8 as 4 to 6, but those ages are all unofficial. They are trying to match a taste profile, of course, and if the whiskey starts to taste a little younger they hope no one will notice. Having no age statement gives them a lot of flexibility. With no age statement, all you know for sure is that the whiskey is at least four years old.

Regardless of what age it actually is, the oldest and most mature whiskey they have is going into the more profitable No. 12 and Barrel Select expressions. Those are reporting no shortages.

On Monday, the Associated Press (AP) ran a story in which a Diageo vice-president acknowledged the “temporary” shortage and promised that No. 8 will return early in 2008.

What seems underway, then, is an effort to turn a problem into an opportunity, always a good idea. By next year, Dickel hopes to be in greater demand than ever thanks to publicity generated by the shortage. The AP story alone was picked up by thousands of print and electronic outlets. When No. 8 returns, the company will have a new entry-level product on the shelves and its best-seller, the No. 8 Brand, will reappear, maybe at a higher and more profitable price. Then maybe they will start to change the two labels to give the two products more separation. They’ll transition price-sensitive shoppers to the Cascade Hollow product and get a little more scratch from No. 8 loyalists.

Let’s hope for their sake that all this works out better than their last master plan.

Monday, December 17, 2007

Delete the "& Wine" Part

In 2005, when Jim Beam Brands Company partnered with Pernod Ricard to acquire and divide between them the assets of Allied Domecq, Beam became a major international player in spirits, but also in wine. A new corporate name followed in 2006 that reflected the change: Beam Global Spirits & Wine, Inc. Now, new facts have made the new name obsolete, as Beam has divested itself of its wine portfolio.

I blogged about this in November, when an $885 million sale of wine business to Constellation Brands was announced. I just received a press release announcing that sale closed today, but it noted an earlier sale I had missed, to E. & J. Gallo Winery. At any event, Beam is now out of the wine business and has close to a billion dollars to spend on other things.

Constellation got Clos du Bois, Geyser Peak, Wild Horse, Buena Vista Carneros and Gary Farrell. Gallo got William Hill and Canyon Road. Constellation is the parent company of Barton, a full-line spirits company with a whiskey distillery in Bardstown, Kentucky.

This exit from the wine business is a little surprising, mainly because such a big deal was made of the new corporate name barely a year ago. If at the time they had intended to get out of the wine business, they could have come up with a less specific name. This suggests that the decision was opportunistic rather than part of a long-term plan. Press releases from Beam parent company Fortune Brands invariably point out how profitable the premium spirits business is, without saying what everybody knows, which is that the wine business isn't.

As a rule, investors hate surprises, so publicly-traded companies usually try to avoid them, but investors like profits even more than they hate surprises, so this surprise sale doesn't seem to be a problem for Fortune. It does, however, suggest that if Beam is thinking about using the proceeds of these sales to make a major acquisition in the spirits business, such as Absolut Vodka, it may not publicize its intentions in advance.

Still, what are they going to do about that name and their new web site?

On a slightly different subject, corporate press releases like the one I got today from Fortune invariably end with a paragraph that describes the corporation's business. It was a big deal a few years ago when the phrase, "Major spirits brands include Jim Beam bourbon.." was changed to read, "Major spirits brands include Jim Beam and Knob Creek bourbons..." It was a way of saying that Knob Creek had arrived as a successful brand. Sadly, Knob Creek has been bumped and replaced by Maker's Mark, one of the key brands in the Allied deal.

Friday, December 14, 2007

More Knob

My post Tuesday attracted some attention at Beam Global. They wanted me, and you, to know that, "Knob Creek is a product of such quality and aged a full 9 years that demand has exceeded any imaginable supply forecast. We are now managing allocations very closely as we are product constrained and will certainly not be lowering price. We are doing everything possible not to gouge our loyal consumers, but in some key markets we have raised price and will continue to do so to control overall demand."

I specifically mentioned Knob Creek in Tuesday's post because sightings of higher prices on Knob were reported to me by several consumers in different markets around the country. My point then was that, historically, Beam has been one of the more aggressive companies at using short term promotional deals to gain floor stackings and drive volume. A few years ago, a brand like Knob didn’t have enough volume to make that worthwhile. Now it does.

Most companies will run promotional deals just after a price increase to take some of the sting out for regular customers. In saying that, I didn't intend a knock on Beam or Knob Creek. That's just good business, especially for building volume. Beam does that as well as any and better than most.

When the tight supply situation for well-aged bourbon was first developing, about two years ago, some industry leaders expressed concern to me that using price to control demand might be counter-productive, as it risked stifling the current boom. They suggested that allocation was a better solution. In fact, we're seeing a combination of allocation and price increases.

An argument can be made that American straight whiskey has long been underpriced. It certainly remains, at least for consumers within the USA, the best value in fine aged spirits.

Tuesday, December 11, 2007

Like Day Follows Night

...price increases follow supply shortages.

Because of the whiskey aging cycle, sales increases can't always be matched by supply increases. It is a nice problem to have and American whiskey producers haven't had it for a long time, but they do now. More and more brands are on allocation and we're starting to see higher prices at retail.

Two things we probably need to get used to are: less availability of long-aged whiskey at bargain prices, and higher prices for American whiskey across the board.

One bright spot is that we probably can expect to see more frequent deals on mainstream premium brands such as Knob Creek. With Knob Creek especially, since that is how Beam operates.

What we are seeing now is cyclical, though that may be small comfort since this expansion could be a long one. If China, India and some other markets develop as they are expected to, there could be supply pressure on whiskey for the next decade.

Producers are moving cautiously, in terms of both price and production increases, so a major backlash seems unlikely. At least here in the USA, American whiskey remains a bargain compared to other aged spirits. Higher prices will have an effect but it is hard to predict what that effect will be.

Wednesday, December 5, 2007

Check Out the Midwest Wine Connection.

I write a column about distilled spirits for the Midwest Wine Connection, a monthly publication out of Minneapolis. You can pick it up for free at most beverage retailers in the Twin Cities metropolitan area. The current issue is also always available, in PDF format, at the web site. A new issue comes out about the first of every month.

For the season, my column this month (December issue) is about punches, mostly about their history, but with some tips for making them too.

I've now been doing the column for almost two years. I like the publication and like being associated with it. It's mostly about wine but they also feature articles about food, the arts, and other subjects. You might want to check it out.