Whiskey galore: Ireland’s gold rush loses some of its shine
While many whiskey firms continue to grow at pace, some on the fringes are feeling the pinch as Covid-19 presents new issues,
IT looks like James Doherty, a co-founder and managing director of Sliabh Liag Distillers, may have his hands full over the next few months. Last week, the whiskey entrepreneur shipped his fourth container of spirits across the North Atlantic Ocean, only a short distance away from his Co Donegal distillery, to the high-value US market. Doherty didn’t expect the order to come so soon, having budgeted for it to come in June. The order was welcome, but it’s going to bring about a small, though welcome, challenge.
“It’s come really early,” he said. “They’ve actually already ordered another for mid-April.
“For us, it creates a bit of a problem. We are completely hand-bottled, so it puts a lot of pressure on the guys to get everything done.
“It’s a great problem to have,” he adds. “Especially at this time of year, and the times we are living in.”
Doherty is feeling happy with the start to the year, particularly after the trouble that 2020 and the Covid-19 pandemic caused the whole sector. He admits there were challenges last year, though he feels satisfied Sliabh Liag Distillers and his staff navigated their way through the period well.
“With the pandemic and the conventional model of ‘you go to the on-trade first, and that’s where the influencers influence’, you’ve got the opportunity [there] to tell a story in the on-trade that allows you to compete with the big guys,” he said. “With that taken away, it has forced us all to look at this in a different way and has put a bit of pressure on people.”
Sliabh Liag Distillers, which has brands including An Dúlamán Maritime Gin and Silkie blended Irish whiskey, is one of a flurry of distilleries to have entered the market in recent years. From just four distilleries in 2013, there are now 38 dotted all around Ireland.
The sector has also grown substantially in terms of value and volume. According to a recent report by the Irish Whiskey Association (IWA), it is the world’s fastest-growing spirits category of the past decade, growing volumes by 140pc. This equates to an average compound annual growth rate (CAGR) of 9.1pc.
Global sales of Irish whiskey grew from 60 million bottles in 2010 to 144 million bottles in the 12 months to January 2020, said the report. The value of Irish whiskey exports from Ireland also reached €890m in 2019, led comfortably by the US, which accounted for 42pc of those sales.
Despite the growth, 2020 was a year of pain for many in the Irish whiskey sector — particularly the newcomers. Some worry that this year could be another.
Covid-19 has meant the closure of the on-trade sector, which is valuable for those newer brands. It has also seen the international travel retail sector decimated, another important market.
Exports, the lifeblood for the Irish industry, appear to have taken a hit, bringing concerns that the Irish whiskey sector’s decade of growth had crashed to a halt. Figures from Bord Bia suggested exports of whiskey were down by more than €200m last year. However, Drinks Ireland has claimed this fall doesn’t account for the large volumes of whiskey already in place in the US, the sector’s largest market, ahead of potential tensions over tariffs.
Other issues have come to the fore. Last year, Stock Spirits incurred a €14.2m impairment loss after writing down the value of its Irish whiskey joint venture with Quintessential Brands, which owns the Dublin Liberties whiskey.
The year also brought some concerning news. A boardroom battle emerged at Co Mayo’s Nephin Whiskey. According to a warning letter from one of its principal financial backers, the company is reportedly facing a nearly €1.8m funding shortfall that could threaten the future of the business.
Despite some positives with e-commerce, William Lavelle, who heads up the IWA, admitted 2020 had been a tough one for many in the sector — particularly the newcomers.
“We’ve come off an amazing decade, and we are pretty certain there is going to be a lot more growth over the next decade, but not every business will survive, even in a booming industry,” he said. “Like any industry, if one company fails, it is not symptomatic of the broader industry.”
According to the IWA, the Irish whiskey industry has invested €1.55bn in total over the past 10 years, led by capital investment in distillery developments. Is that money performing as expected, and is there enough patience among investors to reap the long-term rewards?
“Anyone who built a distillery came into it with their eyes wide-open,” said Lavelle. “You come in with a business model and a business plan that was pretty resilient and robust.
“The resilience and robustness of those business models have been tested to the absolute max as a result of Covid. So far, in terms of distilleries that were open, we haven’t seen any failures. But we are now looking at a situation where we are a year into it. People who can survive a year may not survive 18 months.”
The challenges facing industry newcomers has been recognised by those who have been in their shoes and built successful distilleries and brands of their own.
Jack Teeling, co-founder and managing director of Teeling Whiskey Company, started his whiskey brand in 2012 following the €71m sale of his father John Teeling’s distillery, Cooley.
The sale of Cooley is described by many as a seminal moment in Irish whiskey. Some believe it spurred the wave of distilleries that subsequently entered the market over the past decade.
For Jack Teeling, who has grown his Dublin-based distillery and whiskey brand into a business that reported pre-tax profits of €1.6m in 2019, there are challenges ahead for some of the more recent entrants to the market.
“There has been a lot of buoyancy, energy, enthusiasm and a lot of new entrants into the category,” he said. “There has been money floating around… but the reality of it is that a lot of the newer projects that have been bandied around over the last three or four years, most of them probably don’t have the financing behind them.
“They have an idea, a brand, location and want to get things moving. They see it as a staged process to be able to raise funds once they hit certain milestones to push it out there. But there is only so much risk capital and only so many projects that can get funded. I think some of the projects take what money they can get, but it’s not enough.
“You can see that now,” he added. “I’m not sure if they will be able to get enough money to get them through ‘the valley of death’, or the amount of money they need to get to a stage where they are up and selling at a scale that allows them to get a return on that investment.”
Jack Teeling has long held his view that some of the newer entrants might not hit the heights they had perhaps hoped. He believes there is space for new entrants, but they must add something new to the category.
“The fact you can create a PowerPoint presentation with an idea to create a whiskey brand doesn’t make you successful,” he said.
“The successful entrepreneurs will pull the resources together. If too many see it at the same time and all go running for the same limited pool of risk capital and given the challenges over the last year with Covid, it is probably just weeding out some of the projects that maybe haven’t been as well thought out as they need to be.
“I expect there will be more challenges over the next 24 to 36 months, to be honest,” he added. “It was bound to happen. It happened in craft beer and other sectors, so I’m sure it will happen in Irish whiskey.”
While entering the market at the right time played its role, Jack Teeling also believes his industry experience was crucial.
The route to market is widely recognised as the most crucial factor for any Irish whiskey business. Jack Teeling could count on around a decade’s worth of whiskey knowledge to help him get into the international markets where the company needed to succeed. Not all new entrants can say the same.
“There are unique challenges in Irish whiskey that are hard to learn on the job. You end up making lots of mistakes,” he said. “If you are a new entrant in this, you can only make so many mistakes before you end up in trouble.”
Securing reliable routes to market was crucial to Teeling’s success. As the sector gets more competitive and brimming with new entrants, the challenges over the route to market will only grow. “If there are more and more Irish whiskeys trying to find homes, well, there are only so many homes before you are at the bottom of the barrel trying to scrape distribution from whatever you can get. That makes it hard to be successful.”
Another important factor identified by Jack Teeling is finding patient shareholders.
“It is not an overnight success, it takes time, and it probably takes longer than a lot of people expect,” he said.
Jack’s father, John Teeling, agrees with this point on the need for patience in whiskey. He points out that many can be caught unaware about how long it can take before turning a profit.
“People don’t understand that this is a decade-long business. In fact, it’s longer,” he said. “…it can be anywhere from 10-15 years. Banks don’t like that. You are not making any money; you are losing money.
“We had the problem at Cooley – this was Cooley in a nutshell. We were several years with no profit.”
John Teeling knows a thing or two about whiskey. Over a nearly 34-year career in the sector, he founded the Cooley distillery in 1987, the first new distillery in Ireland for 100 years. Since he sold Cooley, he has set up the Great Northern Distillery, which sells whiskey on contract to brands across the country. It reported a pre-tax profit of €8.17m for the year to the end of April 2020. John Teeling thinks the sector may be set for a shakeout.
“The nature of industrial theory is that there will always be a shakeout as too many people go after the same thing, and they all aren’t properly financed,” he said. “I think it has been made worse by an awful lot of Irish companies have focussed on the US. And the US market took a fierce hammering in the on-trade.”
He is aware of some international drinks companies taking an interest in the sector. He said Polish, Romanian and Russian companies had cast their eye over the market.
“They are not here yet,” he said. “They will come here.”
West Cork Distillers co-founder John O’Connell also shares the view on industry consolidation. He believes there are up to four Irish whiskey distilleries that need cash, something he said would have been easier five or six years ago when Irish whiskey was growing at a higher rate.
He knows of up to five global spirits companies who may be looking to get into Irish whiskey.
“They are all established drinks companies,” he said of the international players looking at the Irish sector. “They want value for money. They don’t see a sparkling copper distillery being worth €20m, €30m or €40m. They could probably build that themselves — they’d be more frugal on the valuations.”
“There is a bit of dichotomy there at the moment. A lot of people thought they could build a distillery with all the bells whistling, and people would come valuing that at a much higher price. To be honest, I’ve spoken with a few of them, and they don’t see the value in it.”
He added: “The real value is in route to market and volume. Unfortunately, that is not there with a lot of companies.”
O’Connell has long held the view that consolidation is coming for the industry. He believes some companies will go for funding, attract interest from the big players but not quite get the valuation they want.
“They may run out of cash and will have to sell up for lower quantities than they wanted or bring in a partner, but on the partner’s terms and not their [own].”
O’Connell is critical of some of the business models utilised by the newcomers, which has led to too many brands and distilleries chasing too small a segment of the market.
“Covid has precipitated an issue that was going to come up all along, I think,” he said. “As I’ve said before, most of the new companies are going for the super-premium or premium business which only accounts for 10pc of total Irish whiskey sales. I believe whiskey consumers are very critical in a lot of ways; they want to know about provenance. The cloak and mirrors of marketing I don’t think carry much trust with them.
“I do think [the sector] is facing challenging times for the newer ones and all the brands that are trying to get out there,” he added.
Despite the concerns of O’Connell, and both of the Teelings, the trio share a great optimism for the Irish whiskey industry and believe significant opportunities exist. They agree the sector can thrive particularly as demand for whiskey grows.
According to John Teeling, Irish whiskey is finding new markets all the time. He said Russia had recently become a key market, while Nigeria was also growing faster than expected.
Money also continues to pour into the sector, with some investors buying significant quantities of whiskey and leaving it to mature.
“There is no yield anywhere else,” he said. “The logic is impeccable. You buy a litre of malt now, and probably the worst-case scenario is that it would be worth what you paid for it in five years time.”
Sliabh Liag Distillers’ Doherty shares the optimism of O’Connell and the Teelings and was also aware of challenges new players can face. He said route to market is “absolutely everything”, while he is also conscious of the importance of adding something new to the category.
Having raised €7.7m since starting the distillery, Doherty has high hopes for Sliabh Liag. The man who brought distilling back to Donegal feels now is the time for his business to thrive.
“It’s a great industry and a great category,” he said. “The reality is we are only now getting into that. There’s almost been a faux renaissance, where you only had a couple of guys who had whiskey of their own to sell,” he added. “I think you are going to see now the genuine renaissance of Irish whiskey.”
Figures from Bord Bia suggest that exports of whiskey were down by more than €200m last year