Supply shortages demand structural change

whisky barleyTurning to the spirits category, Rabobank suggested that rising grain and grape spirit costs are proving a source of “ongoing innovation” within the sector as it seeks to preserve profit margins.

To illustrate the potential impact of these hikes, the bank cited recent estimates from Brown-Forman that rising corn prices could result in “roughly USD 6.5 million in lost profits.”

Showing the broad impact of this issue across the spirit sector, the report noted a price rise of over 20% last year in the malt barley used in Scottish whisky production. Meanwhile brandy and Cognac producers – not to mention the Port trade – have seen the cost of grape alcohol soar by 370% since EU distilling subsidies ended in 2008.

In some cases, spirit producers have already started to pursue what the bank described as “creative” alternatives, especially at the value end of the spectrum. Beam’s Wolfschmidt and Kamchatka vodka brands are now technically classed as liqueurs following a shift towards using wine and sugar in the products.grape spirit prices

Likewise, some European brandy producers have switched to cheaper ethanol derived from molasses for their lower priced brands. Although these must now be labeled “spirituous liquors” rather than brandy, their lower alcohol content has the added benefit of a decrease in excise duty and, the report indicated, “only a minimal adverse response from consumers.”

Against this backdrop, the report concluded: “Those beverage companies that have a vision and commitment to engage in strategic sourcing will have a competitive advantage in 2013 and beyond.”

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