This blog has covered many different topics over the years. We have talked about everything from managing hospital emergency departments to supply chain risk to baseball. But we have so far ignored hard liquor. That ends today. We are going to talk about bourbon. Corn whiskey has been an industry in the US for a long, long time (remember the Whiskey Rebellion?) but, as Fortune tells it, the industry is incredibly hot right now (The billion-dollar bourbon boom, Feb 6).
In absolute numbers, the bourbon industry’s $8 billion in global sales is relatively modest. (The Coca-Cola company alone has 16 drink brands with annual sales above $1 billion.) What’s extraordinary is the growth—and the fact that bourbon’s popularity appears to have come out of nowhere. According to Euromonitor, domestic whiskey sales have soared by 40% in the past five years—NASCAR-fast numbers in a sector where good growth often means 2% or 3% a year, and a revolution for a spirit whose sales declined almost without a break for 30 years. Things are even better abroad. In 2002, American distillers exported just $376 million in whiskey; by 2013 that number had almost tripled, to $1 billion, according to numbers released this month by the Distilled Spirits Council of the United States.
Growth is particularly strong in the so-called super-premium category—that is, the brands that cost about $30 or more, like Maker’s Mark—where sales were up 14.4% in 2012 alone, according to the Distilled Spirits Council. “We have trouble keeping bourbon in stock that’s over $50,” says David Othenin-Girard, a spirits buyer for California’s K&L Wines. “It’s just flying off the shelves.”
Just what is behind the growth is open to speculation. Don Draper knocking back Manhattans on Mad Men helps as does marketing that emphasizes an “authentic” American product. However, there is a problem. Producers cannot simply flip a switch and produce more.
Whiskey is unlike most spirits—or most any consumer good, for that matter—in that production cycles are measured in years, not days or weeks. No matter how efficiently a distillery mills its grain or ferments its mash, a four-year-old bourbon has to sit in a barrel for at least four years. That means production levels are based on projections far into the future. …
“We only have as much [10-year-old bourbon] available as we made 10 years ago,” says Comstock. “We’ll continue to make more, but it won’t help today.”
All of this creates an interesting operating challenge. Investments are required down but no one can be sure how much will be needed in the future — and make no mistake, different distilleries are making some significant investments.
In response, distillers have gone on a building spree. Brown-Forman, which owns Jack Daniel’s, is spending $100 million to expand its distillery in Lynchburg, Tenn., $30 million to expand its Woodford Reserve distillery in Kentucky, and another $60 million on a new cooperage, or barrel factory, in Alabama. Maker’s Mark, which is owned by Beam, recently committed $8.2 million to expanding its supply. And Heaven Hill has increased the capacity at its main distillery by 50% and added four new warehouses.
As the article notes, most of the bigger brands are part of firms with a broad portfolio of liquors so they are not totally living and dying with bourbon. Still it is not clear that all of these assets have much use outside of producing bourbon. A cooperage can sell to a variety of distilleries but a warehouse in Kentucky isn’t necessarily conveniently located if one is making, say, Puerto Rican rum.
Another interesting aspect of the bourbon business is that for all their years of making booze, distillers don’t know completely which production variables impact which drinking characteristics. As the Atlantic reports, that has led to explicit experimentation (The New Science of Old Whiskey, Nov 2013).
Rather, Buffalo Trace clearly revels in tweaking its ancient technology. The company’s most intriguing foray into barrel science has been the Single Oak Project. It was conceived, according to Brown, when a pair of curmudgeonly warehouse managers, Leonard Riddle and Ronnie Eddins, started needling each other during a meeting, with taunts of “my whiskey’s better than your whiskey.” Brown told them, essentially, to put up or shut up by aging a barrel of the same spirit and then comparing the resulting whiskeys.
But as they discussed the rules of engagement, Riddle and Eddins realized that they faced a more vexing problem: finding two identical barrels. The three dozen or so staves in any given barrel likely come from different trees (possibly even from different states), and by dumb luck one of the men might end up with a honey barrel. So Riddle and Eddins started compiling all the variables that might affect a barrel, and soon had listed dozens, ranging from the age and size of the oak used, to the latitude and elevation where it grew.
To test all their variables, they calculated, they would need to make about 3,000 barrels. So they narrowed down the list to what they believed was a more manageable number of salient qualities, including growth rings per inch, soil quality, and whether the oak grew on a north- or south-facing hillside. Then they set off into the Ozarks to select trees. They returned with 96 white-oak logs, which were then cut in half to test another persistent myth: that a barrel produced from the upper half of an oak tree makes better bourbon than one produced from the bottom half. The logs were cut and dried and assembled as 192 barrels, each representing a different set of variables. The barrels were filled with freshly distilled whiskey, and left to age for about eight years.
Buffalo Trace has been releasing these single-oak bourbons and soliciting drinker feedback as well as analyzing them in-house to determine what kind of wood makes the best bourbon. It is an interesting design problem but clearly one that requires a longer time line than most quality improvement programs.