Tiki Timeout: In Which Maker’s Mark Goes New Coke
From The Pegu Blog on Feb 10, 2013
The Maker’s Mark distillery has announced a change in the classic formulation of their iconic bourbon. It’s simple really, just an increase in one premium ingredient… water. Maker’s has sent a letter to its “Ambassadors” (its most ardent, heavy-buying fans) announcing that it is essentially watering down its product. This is an interesting and important development in the spirits, and especially the whiskey industry, for a host of reasons.
The most important part of this is the why behind Maker’s decision. The global whiskey marketplace is undergoing some significant changes, and this is much more likely to be one of the first, rather than the last, impacts on existing consumers because of it. Simply, a veritable sea of Asian folk are discovering a taste for whiskey, especially bourbon. Simultaneously, they are acquiring the means to indulge that taste.
Now, the Japanese have been large consumers of Scotch for ages now, and I’ve written before about the Japanese role in preserving the American bourbon brand, Four Roses. But the middle classes that are emerging in China and other southeast Asian nations, which are simultaneously coming to appreciate good brown liquors, are already putting significant pressure on demand for bourbon like Maker’s Mark. And unlike other foreign markets for American whiskey, they are just barely getting started.
Whiskey is far from the only product that Chinese and other developing Asian national consumers have discovered a desire for in recent years. An example I know from personal experience is that a sudden Chinese demand for Georgia pecans has created occasionally serious supply problems in recent years. This tsunami of demand for middle-class accoutrements and indulgences is going to impact everything from energy and materials, to consumer goods, to food. This announcement from Maker’s Mark is just one of the first moments of a sudden, unnaturally low tide….
Bourbon, and other aged whiskeys, will give their producers special fits in dealing with what is coming. If you suddenly need 15 million more iPhones a year, you build another plant and meet production needs as soon as the doors open. But it takes more than half a decade to make a decent bourbon. And because of the way liquor production is taxed, those are expensive years. Even successful companies like Maker’s Mark, faced with what should be welcome rising demand, are on the horns of a real dilemma.
To significantly increase production, a distiller must build new rick houses to store and age the product, buy many new, very expensive barrels (cooperage is an industry which itself doesn’t have a lot of excess capacity), and pay taxes on the liquor to be aged—up front. Then, the company has to carry those costs for years before any increase in revenue can be realized on all that investment.
And that is not the whole problem. Because even if the company has the cash (or borrowing power and the cash flow to sustain it) to ramp up production, how do they not alienate their customers until they have the new production levels available to sell? The demand exists today. And its potential will only grow. If the distillers make no changes, and just hang on until whatever new production they can afford comes on line, there will be shortages, both in China and in the US. And those new Chinese consumers who want to buy bourbon and can’t will buy something else. And maybe get into the habit of buying that something else, and never go back to bourbon when it does become available. Worse, existing American and Japanese and other customers will find times when none of their preferred spirit is available, and will be forced out of their rut and expose themselves to other bourbons, even other categories of spirits. Some of them will not come back either. If the situation is bad enough, when all those new rick houses start rolling out properly aged bourbon, there won’t be that anticipated demand for it. That would be, as the accountants say, bad.
Alternatively, one could just jack up the price of the product to a level that would damp down demand. But that would just force brands like Maker’s into competition with higher-priced, dare I say higher-quality, labels who don’t have the export pressures. You are still forcing your core market into exposing itself to your competition. And your emerging market customers will be similarly displeased with the new pricing, and may get it in their head that American bourbon is by its nature over-priced. Again, the consequences for financial viability in the wake of massive, sudden expansion would be the same thing, bad.
So Maker’s Mark has decided to split the baby. Their plan is to add more water to the product, resulting in what they call a reduction of three percent in the alcohol content of the product. Actually, they are taking the ABV from 45% to 42%, which a little math with demonstrate is actually a 6.7% reduction in the amount of alcohol in the product. That means they will have an immediate 6.7% increase in supply of the product, which I am sure they hope will be enough to meet the supply challenges I outlined above, without forcing the pricing challenges.
Maker’s states that they have taste-tested the new formulation to death and customers can’t tell the difference. Maybe it will be true that your average Maker’s drinker won’t be able to tell the difference. Maybe he will. Maybe this increase in production will be enough to satisfy demand while keeping the price down. Maybe it won’t. I don’t know.
But I do know that they have chosen to mitigate the risk of doing nothing by taking on a potentially bigger risk: diddling with the perception of their product. If there is a dirtier phrase in the American drinking lexicon (other than slipping her a roofie) than, “watering down the booze”, I can’t think of what it is. In our minds, that phrase conjures images of everything from the skinflint host to the outright criminal dive bar owner. No image it conjures is one a premium spirit maker wants to have settle in the market’s mind in connection with its product. Kudos to Maker’s for being so forthright and open with their best customers about this, but I wonder if it will work.
Now, I’ll conclude with the following thought. It will not effect my own Maker’s consumption. In fact, it may slightly increase it. I mostly drink Maker’s Mark these days in Manhattans, when out on the town. Manhattans are in turn my choice for out on the town because even a pretty inexperienced bartender can deliver a decent one. If you threaten them with enough bodily harm that they don’t shake it, that is.
The only problem I am left with when choosing a Manhattan in a bar, is that they are almost always too big. If you sip them at a reasonable pace, they will be warm and nasty before you finish. If you drink them quickly enough to be nice all the way to the bottom, you are drinking too damn much booze in too short a time. Slug down one of those soup bowls that mainstream bars call a cocktail glass these days, and you are embarking on an adventure that you may not want. A slightly lighter proof Manhattan bourbon might be just the thing to make me order them more often.
To be clear, I don’t think Maker’s Mark has any perfect way out of the peril of riches they find themselves facing. I wish them well in squirreling their way out of it. And I’m very curious over what paths their competitors in similar boats will take. There will be a host of biz school papers and studies to be written out of this once it all shakes out.
(A hat tip to Twitter buddy, @TeeKeeMon, who often sends me interesting stuff, when we aren’t trolling each other over our wildly divergent politics.)