INVESTING IN WHISKY A PATHWAY TO PROFIT? PART II

 ALL THAT GLITTERS MAY NOT BE GOLD: STAY AWARE

In continuation of my previous post on the same subject, imagine your very own cask of whisky….it’s the ultimate indulgence, isn’t it? When you love whisky this much, owning your cask – or investing in one – is the icing on the cake, yes?  But icing can go off if you’re not careful….

There’s no denying that there’s a degree of romance involved.  It’s like owning your own little piece of Scotland, not to mention that it affords great bragging rights with your mates on WhatsApp and Signal. And, if you buy a cask when it first gets filled, you also get the enjoyment of watching it mature and tasting it at various intervals along its maturation journey – almost like watching your kids grow up!

It all sounds great on the surface, and plenty of people pay for and acquire a cask with the expectation that nothing could possibly go wrong.  After all, what’s the worst that could happen?  In ten years’ time, you’ve got 200-350 bottles of your own whisky to drink, sell, or give away!  But, for many people, it seems this end outcome causes more problems than joys. “How?  Why?”

Diehards in the Scotch Malt Whisky Society regularly get emails from people who are trying to sell and off-load their cask.  The circumstances are invariably the same each time:  They purchased a cask 8 to 12 years ago, but found that the additional costs and expenses involved to bring their bounty home were prohibitive, and they can no longer afford (or risk) to complete the deal.

In the period from 2008 to 2014 or so, such experts were getting at least two to three emails each month from people around the world who were trying to offload their cask.  Several distilleries – Springbank and Bruichladdich being two good examples – had cask purchase schemes in place for the general public in the late 1990’s and early 2000’s, and when these casks reached maturity at around 10 years of age, the purchasers discovered all the additional costs that weren’t instantly evident at the start of the process 10 years earlier. We’ll see what these costs and risks are in just a moment….

There’s a difference between owning or buying a cask of whisky and investing in one.  The former implies that you’re doing it for a bit of fun, and you plan on drinking, enjoying, and sharing your spoils when you eventually decide to bottle it.  Investing in a cask, on the other hand, suggests that the exercise is purely a financial affair, and you’re hoping to make a few bucks out of the deal.  Both alternatives are very different prospects, so let’s look at them separately:

BUYING A CASK

As explained in Part I, if you were tempted to buy your own cask of whisky as a means to “cut out the middle man” and to obtain some bottles of whisky cheaply, stop reading here and head down to your local liquor outlet instead.   Commercially available whiskies that you find in these outlets or in the online stores enjoy economies of scale that are beyond the humble cask-buyer, and the journey of buying, maturing, and bottling your own cask is not a path to cheap whisky.  Get back to mother earth now.

Several Scottish distilleries offer cask purchase schemes and, in fact, with the huge number of new distilleries establishing and opening in the last few years, the opportunities to buy your own cask are better than they’ve been for a long time.  Ardnamurchan, Glasgow, Ballindalloch, Lagg, Annandale, Lindores Abbey, Kingsbarns, and Ardnahoe are all just some examples of Scottish distilleries that have (or had) private cask purchase offerings in place for individuals. 

The schemes vary from distillery to distillery but, in most cases, your original buy-in purchase price will afford you somewhere between five and ten years of warehousing and a sample sent out to you once a year.  Additional fees and costs apply if you want to mature the cask and keep it warehoused beyond the initial allowance, or to obtain extra samples.

HIDDEN COSTS

The “hidden” or extra costs – and what catch so many people out – are the costs involved once the whisky is matured and deemed ready for bottling.  Nine times out of ten, the purchase price you pay at the start covers only the cask and spirit up until it’s deemed ready to bottle.   For whatever happens after that, the ball is in your court, as are the expenses. This aspect has been dealt with at length in the earlier article.

But if you’re flying this exercise solo, there are also some practical issues to deal with.  It all sounds fun at the start, but it’s a very different prospect when 250 bottles suddenly lob up on your doorstep.  How much of this do you really expect you’ll be able to consume yourself?  How much can you afford to give away to family and friends?  If you want to sell a few bottles (or a few hundred bottles) to re-coup some of your costs, how can you realistically and legally move that stock?  Your close friends or the colleagues you know through your whisky circles might drop around to your house and exchange cash for a bottle, but that might account for just 30 or 40 bottles if you’re lucky.  If you want (or need) to move 100, or even 200 or more bottles, then the complications and costs of acquiring a liquor licence come into the mix, and you’ve STILL got to find your market and buyers…and all at a price where you at least break even on your costs.

Some readers will be familiar with Facebook whisky groups like Dram Full ex-Australia, and plenty of other similar country-centric groups on Facebook and other Social Media forums.  With Social Media forums having a combined Facebook group membership of over 100,000 people, did you think a simple ad or announcement on Facebook would easily find your market and help you shift your bottles?  But joining a Facebook group and being willing to spend $200 or more on a bottle of whisky are two very different things and it seems a large proportion of those group’s members baulk at paying more than $100 for a bottle of malt when it’s sight unseen.  Experience has shown that social media groups will only help one move 30-50% of your cask, if one is lucky.  And they’ll want or expect discounts or other incentives, too, so the revenue you get might not be what you banked on.  Moreover, if you’re inviting people from other cities and states to buy your bottles, you’ll also need to organise and handle all the packaging and posting – no small or convenient task.

So, after all that, is it really worth it?  Is the work, cost, effort and expense rewarded?  I guess that depends on whether you find your cask tasty and how much you’re prepared to drink or give away.  But it certainly is nice to see your name on your own label.

INVESTING IN A CASK

Most of the pitfalls and additional expenses associated with investing in a cask are the same as what we’ve already outlined above. The key difference here is that the ultimate objective is to make money. That means divorcing yourself from the romance and fun of the affair, and focussing purely on ensuring every last drop of spirit is sold.

In such an instance, the easiest – and recommended – path is to simply sell the cask off once it’s reached maturity, i.e. let someone else take on the risk and hassle of bottling the spirit and selling it as a labelled product.  A cask of 10 years old matured whisky is worth more than a cask of freshly-filled newmake spirit, and so the exercise simply becomes an 8 to 12 year long-term investment that relies on the capital growth of your asset.  Of course, like every long-term investment, there are risks involved, and you need to consider these:

Will the whisky industry still be buoyant in 10 years’ time and will there be demand for your cask? If a bust follows the current boom, your cask might not attract the same interest or price-tag you anticipated when you first invested.

You may be obliged to pay UK duties and taxes, depending on how the transfer of ownership takes place and how the deal is negotiated. Bear in mind that excise, duty, and VAT generally increase over time, and so the taxes due in 10 years’ time will undoubtedly be more than what you can currently calculate.

Casks can get damaged. Leaks are not uncommon, and whilst it’s been a long time since a fire ripped through a Scottish warehouse, fire and loss of your cask is also an ever-present risk.  Or, as many distilleries found out in 2010, so is collapse and damage of a warehouse under extreme snow!  Most cask investment schemes offer insurance against such losses, up to an extent, but you’d want to check the fine print for yourself.

This is only applicable in the case of a sherried cask, but what if your cask is tainted with sulphur? If the sale of your cask at the end of its maturation relies on sending samples out to prospective buyers, you might be in trouble if those doing the sampling hold an anti-sulphur sentiment.

How reliable is the investment scheme and the distillery? Some distilleries offer schemes whereby the distillery buys the cask back from you once it’s matured, and the terms and prices of that buy-back are written into the initial contract.  Beware of any investment scheme that sounds too good to be true.  Remember that the end buyer of your cask – whether it’s the distillery, or a cask broker, or a whisky club such as the SMWS – has to meet all the costs associated with bottling, labelling, transporting, and selling the whisky, and it’s they that capitalise on the real or retail price of the whisky.  You are effectively just a wholesaler and must accept the smaller margins.   As investors in the infamous Nant Distillery found in Australia, not every investment scheme returns the dollars it originally promised. Matthew Hayden was among the losers.

Like any investment, consider what the return is and whether your money would be better placed somewhere else? You’re looking at least an 8 to 10 year wait for your return, and it’s not unreasonable to ask if your money would perform better if invested in some other fund or scheme for that same period.

Regardless of which of the above two routes you go down, remember that 10 years is a relatively long time into the future, and our crystal balls can get a bit cloudy when looking that far down the track.  Your health may be a different prospect in 10 years’ time, as might your circumstances and address.  If all the distillery knows about you is an email address, it’s easy for either party to lose track of one another if you re-locate or change your internet service provider.  And, whilst it’s a morbid thought, if you were to accidentally die at some point, make sure someone in your family knows that a cask in a foreign land forms part of your estate!

This is what WhiskyInvestDirect posted about their Investment Scheme:

Good returns from whisky maturation have been achieved over many years, but historically only distillers and blenders could benefit. Until now, that is.

                  

Launched in 2015, WhiskyInvestDirect changed that, by allowing private investors to buy quality whiskies at wholesale prices. Already some 3,500 users own enough to fill over 70,000 casks, that's the equivalent of 29 million bottles of maturing Scotch. Accounts range in size from £700 to £750,000. 

Economies of scale mean your whisky will be stored — still in the barrel — at exceptionally low cost, in the original distiller's bonded warehouse. Its safe storage there is evidenced every month by our published audit.

You will own the whisky as it matures, and when you decide to sell, via our trading exchange, you'll receive a transparently competitive price from other users and industry bidders. To date, mature whisky bought back by the trade has realised an average annualised return of over 10% for private investors — after all costs.

Together we profit through tackling this industry's greatest problem — the large working capital requirement of financing maturing stock.

On the other hand, investment specialists at Rare Whisky 101 (RW101) have expressed “worry” over the increased number of inexperienced investors buying new make spirit.

RW101, a rare whisky indexing, valuation and brokerage firm, recently released its review, outlining performance of rare whisky on the secondary market last year.

RW101 said it has brokered a number of sales of “exceptional” casks containing old liquid, including Ardbeg, Laphroaig, The Macallan, Highland Park and Springbank. However, the company said these sales were made by “sophisticated buyers with a wealth of experience in maturing stocks”, adding that it would not advise inexperienced investors or buyers to purchase “even the most sought after of casks” due knowledge about the loss of liquid in the maturation process.

In addition, the increased incidence of inexperienced investors looking at buying into new make spirit, that is, whisky that has not aged in the barrel, is “worrying” to RW101. “Malt and grain production is at an all-time high with distilleries being worked 24/7 to get more out of every last cell of years,” the group said. “Should the current negative trend for global sales of big brand blends continue, it would not be beyond the realms of possibility that there could be a whisky loch in a few years’ time.”

In order to generate funding to increase capacity, a number of whisky distilleries offer cask investment schemes to consumers, who can purchase either entire casks or shares in casks at a time before the liquid has aged.

While RW101 concedes that buying new make spirit from distilleries where it’s not usually obtainable “may not be disastrous”, the firm said such investments “might not yield the expected results”.

“The market for older casks of quality liquid from renowned top-tier distilleries, in our opinion, will continue to go from strength to strength,” RW101 said. “However, we’re strongly advising our customers against buying new make from less desirable single malt distilleries or new make single grain. Rarity, singularity and quality, again in our opinion, are crucial factors when looking at casks.”

HIGHER GLOBAL PROFILE FOR SCOTCH

The profile of this market, in recent years, has only been raised. And for investment, the opportunities have only grown with prices collectors are willing to pay exponentially increasing. Andy Simpson of RW101 (rare whisky 101) says:”One person’s investment or collection today can be another’s drink tomorrow. Stick to limited editions, single casks, discontinued bottles and older rarities from the iconic collector’s distilleries.”

TIPS THAT WILL STAND THE TEST OF TIME

TASTE TEST

In order to understand an investment, it’s imperative that investors get to experience it for themselves. Due to the pure nature of the commodity, this is possible by conducting educational virtual tastings. Not only does this give investors the chance to understand their investment from a different perspective, it also allows them to feel part of the investment they are making – something very unique in the general investment markets, as well as in the whisky sector.

KNOW WHAT TO LOOK FOR

It is important to look for a high alcohol by volume, which means you will get longevity in the spirit so that if you do intend on ageing it, whether it be anywhere from five to 50 years, a high ABV at any stage of investment will give you the maximum opportunity for growth in the investment.

UNDERSTAND THE BRANDS

It is essential to invest in a recognised brand name that you would see in the supermarket, on a recognised website like The Whisky Exchange or Master of Malt, or that you would see in duty-free. If you are buying or investing in a recognised name, you will be able to track the growth across the years by observing the year-on-year price and inflation increases.

If you are able to get hold of a name-brand whisky from 2020 or 2021, it will probably grow quicker than other whiskies distilled the previous year due to the lack of ability and increased demand, making it highly investable whisky.”

KNOWLEDGE IS THE KEY

When choosing your investment, make sure to investigate the distillery financial reports to see how well the company is performing, and look at future plans. Something small, such as a potential rebrand, could greatly increase the cask value.

KNOW WHERE TO FIND VALUE

With increased worldwide demand for whisky, including in America where tariffs have been reduced by President Joe Biden, the value of whisky in casks will only increase; in particular, more aged whisky, along with the value of that produced in 2020 and 2021 during the global pandemic due to the closures of distilleries, which meant that there was reduced supply.

LOOK FOR SPECIAL DROPS

The growth will definitely continue and cask values will keep on increasing, especially aged, rare and unique whisky, which will continue to outperform the standard single malts and keep meeting market expectations, with 2020 and 2021 casks likely to outperform them all.

 

A fair portion of the article quoted below has been used by me in my post. https://www.whiskyandwisdom.com/should-you-buy-or-invest-in-a-cask-of-whisky/

INVESTING IN WHISKY A PATHWAY TO PROFIT-PART I

Whisky: Investing in Liquid Gold

In a world fraught with economic uncertainty, investors are looking for ways to diversify their investments as a hedge against inflationary shifts. Bitcoin has skyrocketed, tech stocks have soared, housing prices are up and down depending on your location and now whisky is seeing a spike in investor interest.

Scotch whisky remains the global whisky superstar, putting all others in the shade. It is a drinks behemoth — the single most traded spirit on the planet and accounting for 75% of Scotland’s entire food and drink export revenue. The secret to Scotland’s success is its adaptability and today it is leading a move to premium whiskies. The global palate is becoming more refined and the value of the high quality Scotch single malt market is set to grow by over 11% a year to 2023.

Investing in Cask Whisky

When it comes to investing, time is your ally. This is as true of whisky as any quality stock. But when it comes to whisky investment, it may be the most important factor of all. In general, The longer you can leave it to mature, the richer you will be.

Producing whisky costs a lot, but one way distilleries capitalise on their efforts is to allow private investment. By investing in newly created whisky, the private investor can leave it to mature for as long as they like, making annual profits of 10% to 30% depending on how and where they market/sell it. Meanwhile, the distillery generates cash-flow to keep things ticking over.

Buying A Cask

If you were tempted to buy your own cask of whisky as a means to “cut out the middle man” and to obtain some bottles of whisky cheaply, stop reading here and head down to your local liquor outlet instead. Commercially available whiskies that you find in these outlets or in the online stores enjoy economies of scale that are beyond the humble cask-buyer, and the journey of buying, maturing, and bottling your own cask is not a path to cheap whisky. So now that you’re considering this for the right reasons…

Several Scottish distilleries offer cask purchase schemes and, in fact, with the huge number of new distilleries establishing and opening in the last few years, the opportunities to buy your own cask are better than they’ve been for a long time.  Ardnamurchan, Glasgow, Ballindalloch, Lagg, Annandale, Lindores Abbey, Kingsbarns, and Ardnahoe are all just some examples of Scottish distilleries that have (or had) private cask purchase offerings in place for individuals.  These smaller, privately owned distilleries need cash and investment up front, and so offering casks as fresh fillings to the public is a nice way for them to get the early injections of revenue they need.  However, the cost and value varies tremendously.  For example, both Ardnamurchan and Glasgow offered 200 litre ex-bourbon barrels for around £2,500, whereas Lagg and Ardnahoe are currently charging £6,000 for the same size barrel.

The schemes vary from distillery to distillery but, in most cases, your original buy-in purchase price will afford you somewhere between five and ten years of warehousing and a sample sent out to you once a year. Additional fees and costs apply if you want to mature the cask and keep it warehoused beyond the initial allowance, or to obtain extra samples.

According to The Whisky & Wealth Club, an organisation set up to connect investors with suitable whisky investments, investors purchased record palettes of the liquid gold in September. This boom at The Whisky & Wealth Club came as it sold 111.2 palettes of a new-make premium spirit for a total investment of over £1.8 million. This was nearly a 54% rise on its August sales.

Founded by Jay Bradley, owner of The Craft Irish Whiskey Co, The Whisky & Wealth Club is a specialised cask whisky wholesaler breaking down the barriers to entry in this ancient industry. Although it’s technically called a club, the private investors are not joining what has traditionally been an exclusive club for industry insiders. Instead, The Whisky & Wealth Club pairs private investors up with wealth advisors as a guide to suitable investment opportunities in the whisky space. Much in the same way that a financial advisor guides a retail investor on suitable investments for their SIPs. They can then choose to buy, hold, bottle or sell their premium cask whisky as an investment vehicle that suits their personal circumstances and whims.

Another reason whisky cask investing is popular is it doesn’t incur VAT or Capital Gains Tax.

How Much Does a Whisky Cask Cost?

The investment club or broker strikes a deal with the distillery for a limited edition run at a discounted price. The investor then buys a cask outright via the club. This is then stored in a secure warehouse and insured. The investor patiently waits, and when it’s time to profit from the deal, the investor should expect to enjoy returns of up to 20%.

The cost of buying a cask varies. Factors affecting price include brand, variety of cask used, distillery location, and many more. The cheapest cask you may find could be around $2000, but they can go upwards of $10,000.

One unique factor affecting taste, and thus price, is the variety of casks being used. Scotch whisky likes hand-me-downs and doesn’t respond well to being put in a brand new wooden cask. So the most common and cheapest option is for it to be birthed in a bourbon cask, often shipped from America to Scotland. A first fill is when a cask, previously used to store Bourbon, is first filled up with whisky. A refill is when that same cask is filled with whisky for a second or subsequent time. Prices for these casks tend to start around the £2,500+ ($3,350) price point. Of course, that’s not the only consideration, so prices vary wildly. A cask that has previously contained sherry may well be double that and red wine, dearer still. Then there’s the option for it to be peated, or unpeated, single, double or even triple distilled.

So many options can be overwhelming and that’s why an investment broker can keep you right. The Irish Whiskey & Wealth Club and HMRC approved Whisky Investment Partners are just two of many to choose from.

There are several exit strategies available to the investor. Whether opting to sell to a whisky brand, bottle under your own label, sell at auction, directly sell to a broker network or consider alternatives provided by the broker.

A Malt or a Blend? Exclusivity Equals Profitability

Whiskies are not created equal, the cheaper ones are blends, containing only 10% to 20% of malt. True malt whiskies are a higher class and more appealing to investors. A unique brand expression, that’s not mass-produced, gives whisky its prestige and desirability. But the true value of a whisky comes from a selection of factors; age, quality, taste, brand, rarity and exclusivity all contribute to its worth.

That doesn’t mean all blends are bad, though. Jack Daniels and Johnnie Walker are blends, but retail investors can still buy exclusive bottles from these brands that hold their value.

The Whisky & Wealth Club’s unique selling point is its access to exclusive runs from top-notch distilleries in Scotland and Ireland. An example of these exclusive runs is its release of Bunnahabhain Staoisha in September. This hailed from an esteemed Islay distillery and was limited to an undeclared number of casks. An average whisky cask has a volume of 250 litres. This produces around 385 75cl bottles. The pitch was perfectly curated and highlighted the reasons Islay whiskies in particular are set to be a very valuable commodity in the future.

Whisky Investing Algorithm

In response to this newfound demand for whisky investment options, financial analysts have gone so far as to develop the very first data modelling algorithm. This is specifically designed for investors in the whisky cask market. These analysts hail from specialist whisky investment firms where they have the knowhow and experience to make clear judgements on the market. The purpose of this algorithm is to furnish prospective investors with a set of metrics that give them unique insight into the industry.

Braeburn Whisky is another Whisky Cask Investment Specialist promising investors a fun, profitable and fulfilling ride to investing in this intrinsically appreciating asset. It has teamed up with Cask 88 to create its BC20 Whisky Cask Index. So far, this index shows the whisky cask market to have a steady annual growth of around 13%. Their recent research shows that whisky investment returns have surpassed that of the S&P 500, Bitcoin (this may now be debatable) and Gold. Despite the raging pandemic, this index continued to rise during the first six-months of 2020. Its data also shows that casks from the top three whisky distilleries offer projected returns close to 20%. Islay whiskies showed a growth rate of 16.3% YOY.

According to its data, Scotland has 22 million casks of whisky maturing in storage, giving it confidence that trades will grow in quantity and cost. Gracing the top of the Distillery Cask League Table is Laphroaig approaching 20% projected annual capital growth. This is closely followed by Bunnahabhain, Staoisha and Macallan. Malt whisky must mature for a minimum of 3 years to be called whisky, but maturation periods can run upwards of 20 years. Due to the costs to store the whisky, the more mature the product, the more expensive it will be.

In recent years the casks that have aged for over 20 years are achieving remarkable valuations. Casks aged over 45 years have sold for over £600,000. But it’s newly casked whisky (aka New Make Spirit) that younger investors are after because with time on their side, they can afford to reap big returns in the future.

The whisky maturing process takes place in the cask. Once it’s been bottled it stops maturing and that’s the age appearing on the label. This is why casked whisky over 20 years old is considered rare and the older it is, the more valuable it becomes. In 2019 a rare bottle of Macallan 1926 sold for an extravagant $1.5 million!

None of the distilleries followed by the BC20 Whisky Cask Index have shown negative returns. This is because it’s a booming and lucrative area of investment to be in.

Irish Whiskey vs Scotch Whisky

The Irish whiskey market is rebounding and is projected to grow for the next two to three decades. Scotch whisky is more established than the Irish whiskey market, with Scotch whisky being a major contributor to Scotland’s food and drink exports, accounting for 70% of them. This has a value of £4.7 billion annually to Scotland. In fact 41 bottles a second leave Scotland’s shores, making their way to 175 global markets.

Demand is growing and new brands are entering the space. In recent years (prior to the pandemic) gin popularity was exploding with new distilleries popping up all over the place. Many of these make gin because production is quick. But a lot of them will also branch into whisky production as a future income stream. So we can expect those brands to come online in the years to come.

An example of this is Greenwood Distillers, a boutique distillery hidden in a misty valley in the Scottish Highlands. This arm is called Ardross Distillery and it’s only begun producing its stylishly packaged ‘Theodore, Pictish Gin’ this year, but has big plans to branch into creating rare, exquisite and aged whiskies. It now owns some of the most unique single malts Scotland can offer and has further plans to expand through Japan, the US, France and Mexico.

Whisky: A Luxury Investment

Whisky investing is taking on a life of its own and very much up there with other favoured alternative investments such as art, rare coins and fine wine. There are a number of cask investment houses now making it easier for retail investors to jump on the whisky bandwagon, but it’s important to avoid pitfalls too. While the middlemen make the process easier, they can also cut into the profits. Nevertheless, these cask wholesalers offer discounts to limited batches and exclusive runs.

This prospering industry is not yet regulated, so it’s important to do your homework. There are trade associations that legitimate investment firms can join to protect the industry’s reputation. The Whiskey & Wealth Club works with a compliance officer to ensure that its compliance-ready for when the Financial Conduct Authority makes its mark.

Another risk is whisky going out of fashion, but as it’s so ingrained in Scottish and Irish heritage, which is spread throughout the world, that doesn’t look to be an imminent concern.

When it comes to launching a new whisky, an alternative route to branding is for the company to buy mature whisky from investors, which it then brands as its own. This is one reason for the increasing popularity of cask investing as it leads both parties to cash in on the rising demand for these new and exciting brands.

Haig Club is a single grain Scotch Whisky popularised by David Beckham in partnership with Diageo (LON:DGE) and British entrepreneur Simon Fuller. Several other celebrity endorsements quickly followed Beckham’s step into the whisky arena. Conor McGregor has his own Irish Whiskey named Proper No. Twelve, after the area of Dublin he comes from. Bob Dylan brought out a trio of whiskey blends, Metallica have their own American Bourbon named Blackened, and Matthew McConaughey also has a Bourbon called Longbranch.

In a 2020 report rare whisky surpassed classic cars on the Knight Frank luxury investments index, achieving its very own Knight Frank Rare Whisky 100 Index in the process. In the luxury investments index, whisky has risen by 564% in value during the past ten years.

Investing in Luxury Liquor Brands

For investors looking to diversify, it’s not just whisky that offers potential gains. The liquor market is taking on a life of its own.

LVMH Moet Hennessy Louis Vuitton SE, is a luxury goods conglomerate, headquartered in Paris and distributed to every corner of the planet. Its share price has grown phenomenally in the past decade generating spectacular shareholder returns.

Bernard Arnault, chairman and CEO of $LVMH is now one of only five centibillionaires in the world. (A centibillionaire is someone who has personal wealth of more than $100 billion.) He joins ranks with Elon Musk, Jeff Bezos, Mark Zuckerberg and Bill Gates. 

LVMH whisky brands include Glenmorangie and Ardbeg, while some of the other luxury goods under its label include Tag Heuer, Moët & Chandon, Sephora, Louis Vuitton, Hennessy (cognac) and more recently it acquired Tiffany.

If you’d prefer to spread your investment in luxury goods, across a selection of them, you could opt for a luxury goods ETF. One such ETF is The GLUX – Amundi S&P Global Luxury UCITS ETF – this tracks the S&P Global Luxury Index’s performance. Along with LVMH, this includes Pernod Ricard SA (EPA: RI) a French drinks giant with whisky brands that include Chivas Regal, The Glenlivet, Jameson and luxury Scotch Whisky Royal Salute, it also owns many other alcoholic beverages.

Hollywood actor Ryan Reynolds recently sold his premium gin brand to Diageo plc (LON: DGE) for $610m (£460m). In striking the deal he agrees to be the face of Aviation American gin for the next decade. Diageo is a fan of the celebrity endorsement, having previously collaborated with George Clooney and David Beckham.

Diageo is another stock that has rocketed over the past ten years. Its share price faltered in 2019 but has been gaining ground during November. Whisky is such an important part of Diageo’s portfolio, it’s committed to investing £185 million to revamp its Scotch whisky visitor offerings at distilleries around Scotland.The highlight of this is an immersive visitor experience at its Johnnie Walker, Princess Street in Edinburgh, which tells the story of the brand.

Remy Cointreau SA (EPA: RCO) creates premium spirits such as its opulent champagne cognacs. Its whisky portfolio includes Bruichladdich single malts, Port Charlotte and Octomore, as well as Westland American whiskey and Domaine des Hautes Glaces French whisky. Remy’s share price rise has been more volatile over the past decade than LVMH and Diageo, but long-term holders will still be sitting on a significant profit.

Hidden Costs

The “hidden” or extra costs – and what catch so many people out – are the costs involved once the whisky is matured and deemed ready for bottling. Nine times out of ten, the purchase price you pay at the start covers only the cask and spirit up until it’s deemed ready to bottle. For whatever happens after that, the ball is in your court, as are the expenses. In the case of Scotch, the whisky must be bottled in Scotland, and so not only do you have to pay for bottling costs (in Great British Pounds, mind you, which is unlikely to favour your particular exchange rate), you also have to ship those bottles and all that extra weight of glass. Freight costs are determined by weight, and so in the case of a cask that yields, say, 250 x 700ml bottles, you’re paying to ship roughly 330kg of goods – of which 45% is just the weight of the glass! Printing and labelling costs also have to be paid for at the Scottish end (again, in pounds), and we haven’t even come to transport costs yet.

Then, there’s the biggie of them all – the cost of the duties, excise, taxes, and import costs to bring your whisky home to your own country. Take the case of Australia. Those that forked out, say, £2,500 to buy the cask at the start (roughly $4,600AUD) will be up for an additional $11,600 in local taxes (approx), depending on the bottling ABV! (The rough indication given here was based on 250 x 700ml bottles at a strength of 58% ABV). If you don’t have access to a genuine exporter who’s registered for UK VAT and Duty and can’t export under bond, then it’s likely you’ll also be up for the costs of all the UK excise and taxes (about an extra $6,400 based on the same assumptions as above), as well as those at your local end. And the costs of engaging a Customs broker to handle your Customs clearance still haven’t added in; the cost of freight itself (varies, but can be anywhere between $3 to $7 per bottle for sea-freight, depending on your carrier and what rate you can negotiate as a small, one-off player). Next, the additional costs of having to obtain a liquor licence (for importing a commercial quantity of alcohol) and – once it arrives here – space to hoard 250 bottles! And so, as many people have found to their surprise and dismay, what started out as a fun, sentimental venture ends up being an exercise that has become unaffordable. As a single player, doing a one-off exercise with a single bottling, the economies of scale simply do not exist.

Of course, many of these issues can be ameliorated by forming a syndicate and going in as a group. One person may struggle to deal with and pay for everything, but splitting a cask and its costs between, say, 20 or 30 people is a far more manageable affair.

Conclusion

Investing in whisky and luxury liquor appears to be an interesting and potentially lucrative space to be diversifying your financial investments. Just don’t be tempted to drink away your profits!

Part 2 of this article follows.

A major portion of this post is a reprint of an article by Kirsteen Mackay on Value The Markets
https://www.valuethemarkets.com/2020/11/20/whisky-investing-in-liquid-gold