Intro to the Whiskey Industry
Whiskey holds a storied place in the global market. As often as it serves as a cultural touchstone—thought of as the national spirit of various countries or regions—whiskey has historically made significant contributions to the economic well-being of the locales in which it is produced. As something of an artisanal product, whiskey is often tied to its point of production, and, as a result, it is often a contributor to international trade.
Revenues from whiskey production are spread across the value chain: employing workers in rural and urban production centers, utilizing raw materials farmed and grown across large swaths of rural territories, and sending products out to be marketed and distributed across the world. Again, whiskey’s value as an alcoholic beverage is informed by and through the social meanings that accrue, but in what follows we treat these dimensions as they are relevant in a business context, focusing our attention on the product itself where necessary to establish context.
Whiskeys are a diverse batch of aged grain spirits, with a variety of production methods determined by origin and production traditions. The scientific origins of the name and the contested ways in which its use is defined can obscure some of the more salient features and trends in today’s whiskey marketplace. Changing market trends and management decisions now seem to be moving in a slightly different direction.
Consumers are drinking less overall than in the past, and younger people are less likely than previous generations to be drinking. To provide financial returns to investors who now find themselves immersed in a more mature industry, established players are trying to sell larger quantities. In contrast, some businesses are trying to grow in different ways. Premiumization of their product portfolio and expansion into new market segments, like craft distilling operations, provide others the growth opportunity they need.
History and Evolution of Whiskey Production
Whiskey or whisky is an alcoholic beverage obtained either by fermenting a mixture of grains and water, or a distilled beer, or both, with the restriction of not having higher than 94.8% alcohol by volume. Whiskey first originated in Scotland or Ireland, but there is a dispute over which country the whiskey originated in, so there are four different versions of whiskey to suit both nations. Whiskey is a popular beverage that has endured for over a thousand years, one of the most popular spirits to enjoy.
From the very beginning, distilling alcohol has always been a way of life for many cultures of the world, and each culture devised unique methods for controlling the process to produce whiskey, including malted barley, corn, wheat, or rye. In the highly advanced whisky sector of the 21st century, it can be hard to imagine a world without the resource of stainless steel equipment, but the whisky we drink today, from distillation to fermentation, is a world away from its roots. There are more than a dozen new, commercially accessible styles or cultures of whiskey made in pretty much every country, including Sweden and Taiwan.
Around the 4th millennium BC, the first proofs of distilling come from Mesopotamia. The distillation of Armenian Moscato red grapes is believed to predate grapes 13,000 years ago, or 500 to 3,500 BC, known as brandy. In the science and technology of the Islamic era in the second half of the first millennium, the art of distilling arrived in Europe. In the Scottish and Irish population, monks began distilling whiskey as a unique art form after they had learned how to do so and brought techniques from North Africa around 1000 AD.
In County Antrim at the bottom of Dowser Hill, Ireland, the earliest distillation source found from 5,000 BC was from a copper still made at Conwell. In 1405, whiskey was recorded in Ireland’s Annals of Clonmacnoise, a drink called uisge beatha, and the “water of life.” The next 130 years saw the first proof for malt being used in whiskey production in Scotland in 1494. The favor of Scottish whiskey in the Edinburgh Exchequer Rolls would establish the absence of ardent spirits, including eight bolls of malt to pay the amount due.
Types and Varieties of Whiskey
Whiskey (or whisky, depending on geography) is an umbrella term for a wide range of spirits, each with its own unique production methods and lore. Several factors can define a whiskey, and in many cases, these factors are controlled and regulated by government organizations. Ingredients, aging process, and local fermentation practices or geographical area are all used to classify particular whiskey types. Beyond the major whiskey types discussed in this primary definition, other liquors may also take on the characteristics of a whiskey.
Scotch whisky, often simply called Scotch, is malt whiskey or grain whiskey (or a blend of both), made in Scotland. There are five primary categories of Scotch, each with different production practices and flavor profiles. Bourbon is an American whiskey made primarily from corn, around 70% of its grain, and is known for its distinctive sweet flavor profile. Irish whiskey is smoother than Scotch or bourbon, and as such, is a common ingredient in Irish coffee.
It can be made from malted and unmalted barley in a pot still and is usually triple distilled. Rye whiskey is a grain-based whiskey made in the United States and Canada, primarily during the late 1800s. It is distinct from malt whiskey due to the grain it uses and likewise from bourbon. Rye whiskey is characterized by its spiciness, which comes from the rye grain, resulting in its recent resurgence in the production of cocktails.
Scotch Whisky
Background All Scotch whisky is whisky (spelled without the “e”). All whisky is Scotch (with the exception of the Japanese version “whisky”). While a few distilleries exist outside of Scotland and the USA, Scotland remains by far the most important whisky producer worldwide. In looking at Scotland, the range of styles produced is striking. Highland whisky is quite different from the Lowland version, which, in turn, is very different from whisky produced on the island of Islay, the home of the globally popular smoky whiskies. Finally, Speyside lies within the Highlands but is treated as a separate whisky region since its style is distinct from the rest of the Highlands.
Also, it is the most important region with over half of Scottish distilleries. Whisky types Whisky is classified as “malt” or “grain” depending on its primary ingredients. Roughly 90% of Scottish whisky is classified as “malt,” which essentially means it is produced primarily from malted barley. The remaining 10% typically is “grain whisky,” which includes wheat, rye, or corn among its ingredients. There are other subcategories in addition to the malt/grain whisky classification, which include blended malt, blended grain, blended Scotch whisky, and single grain whisky. Blended Scotch whisky is the most common by far among Scots, in the UK, and internationally.
However, among specialty premium-priced export markets, single malt Scotch whisky continues to gain ground. Most Scotch whisky is aged for longer than the legal requirement of three years in oak barrels, and each year the whisky sits in the barrels, more is allowed to evaporate. Most whisky producers package their whisky at either 80 or 86 proof. Many small distillers prefer to attract more upscale consumers and thus offer whiskies aged two to three times as long and generally sell them at 100 to 114 proof, with a corresponding increase in price.
While almost all whiskies in Scotland are made with copper pot stills, there are many variations and innovations within the basic tradition. Combinations of traditional methods are numerous, and while craft awareness is on the rise, we have not observed widespread movement away from traditional stills such as to column still production.
Bourbon Whiskey
At the heart of America’s whiskeys, made in Kentucky and accounting for more than two-thirds of the nation’s whiskey exported to other countries, is the biggest selling American whiskey, bourbon. To legally be designated bourbon, it must be made in the United States. To legally qualify as bourbon, the mixture of grains from which the whiskey is distilled must be at least 51% maize. Most bourbons must be aged in new barrels made from American white oak, charred on the inside. Bourbon whiskey has seen a huge increase over the past 10 years and has been one of the strongest segments of whiskey.
American whiskey has been traditionally and still is mostly made in Kentucky, from corn, barley, and rye, with a mandatory 51% minimum corn content. The water in Kentucky is high in limestone and iron, and it provides the basis for a unique process for whiskey distillation. The taste created by the natural limestone filters in the spring water has also contributed significantly to the city’s rise to prominence. Today, new distilleries are also emerging in many other states as the American whiskey wave spreads. Evan Williams, Jim Beam, and Wild Turkey, an array of bottled bourbons, all have had a considerable impact on the industry and contributed to the drink’s renaissance.
Not to be outdone, Maker’s Mark has its own distillery near Loretto, Kentucky. Located less than 100 miles from the Brown-Forman site, the Maker’s Mark facility welcomes nearly 100,000 visitors from all 50 states and outside of the United States every year. The collection of James E. Pepper and EH Taylor has been particularly closely watched as reaching high auctions, believed to date from 1880 to 1930. There has also been an increasing demand for bourbon in the consumption of speed and a growth in the craft bourbon movement and micro-distilleries.
Irish Whiskey
Never ones to be bested, the Irish claim that whiskey was produced and consumed on their turf prior to Scotland. However, they also note that the Irish monasteries initiated the production over 1,000 years ago. Early on in the history of whiskey, Irish producers were noted for their use of pot stills. British duty on the Irish whiskey between 1780 and the early 19th century mushroomed from 400 gallons to over two million gallons annually. Irish distillers are also credited for being the first to employ the art of triple distillation. The majority of Irish whiskeys are distilled three times to achieve their remarkable smoothness.
The subsequent maturation of the cleaned distillate was done primarily in a very light flavored spirit such as red wine or even rum casks, but never in sherry or heavily charred oak casks, as is the case with most whiskey production. There are several styles of Irish whiskey to consider. Despite this host of options, or perhaps in part because of it, an estimated 92% of all the Irish whiskey produced is blended to some extent. This preeminence for very close blending between grain and malt is one of the big differences between Irish and Scottish whiskies.
The newly established independent leaders of Ireland took great pride in their whiskey and recognized its potential as an important economic resource and an overseas ambassador for a young, modern, and educated society, as well as an indigenous industry that had little to fear from external competition. This period of exclusive sales rights to British Empire markets manufactured Ireland’s reputation in countries like New Zealand and India that continue to be vibrant markets today due to earlier recognition of the importance of the Irish heritage factor. Today, nearly two dozen distilleries are producing more than 18 million cases annually.
Teeling, who chose to purchase and renovate an old industrial building on the Liffey River, landed prominently in the heart of Newmarket. Teeling says that the blend was picked to be approachable and very much in the center of the category in the price range. The industry at large is obviously compelled by the suggestion that the Irish whiskey category can be tripled by 2030.
The myth maintains that malting with peat dates back to the time of the distilling monks. There are several trends, including ongoing movement toward single malt whiskies, the use of local barley, a dynamic cocktail scene that has gone from being underground to being really overground, consumer desire for more artisanal and craft spirits, and more.
Rye Whiskey
Rye whiskey is a style of whiskey that is defined by the Legal Identifier of Standard of Identity as whiskey that is made from a grain mix of at least 51% rye grain. The production standards do not differ significantly from those of other whiskeys. The historical significance of rye whiskey in North America is notable, and the storied roots of rye whiskey can be linked back to early settlers in the New World.
The aging period for rye whiskey is different, and it is this aging process and the lengths that the whiskey is aged that give rye its unique tastes and characteristics. Rye whiskey, in all of its defining legal and cultural forms, is known and can be marketed in the black-spirit category if the rye whiskey enters and finishes primary aging at fill proofs of 160 proof or less.
Some differences should be noted between rye whiskey and other whiskey styles. Rye whiskey is more known for its spiciness, bold flavors, and high-ester profiles in the spirits market. The bold flavor of rye whiskey has only in recent years emerged and has changed the position of rye whiskey in the flavor categories that the majority of rye whiskey currently occupies. These characteristics make rye whiskey more favorable and used in more than just sipping occasions, but favored for use in cocktails.
Recently, a number of craft rye whiskey distilleries have started operations in the United States and begun producing rye whiskey distillates for use in producing rye whiskey, and rye whiskey production is expected to grow. There is also a growing and expanding craft rye whiskey market for those aged ‘premium and super premium’ rye whiskey.
Rye whiskey, with its spicy and bold flavors and its complex ester profiles compared to other aged grain spirits, has in many aged and brown spirit and distillate consumers’ minds become the new ‘top-shelf premium whiskey’ and, in instances, preferred over aged bourbon.
A rise in the production and sales of whiskey and whiskey-related categories is projected in the next five years, and it is anticipated that there will be more broadened market niches in rye whiskey and more innovations in the flavor profiles and styles of rye and other flavored whiskey markets within the next five years. Premium and super-premium craft rye whiskey will remain the majority market in the aged ‘premium’ rye whiskey category, but that market will undergo significant changes in the next five years.
Whiskey Production Process
Whiskey is produced from grains, water, and yeast. The main grains in the production of American whiskies are corn, rye, barley, and sometimes wheat. Scotch and Irish whiskies are mostly made of malted barley. Water is a critical ingredient, and the industry will always seek out a good source of water. Malting is a process for taking a raw grain and germinating it. Once the grains are exposed to the proper conditions of moisture, heat, and time, the modification of the chemical compounds takes place.
The germination process is stopped by drying the grain in a kiln. The development of flavor takes place during this process. Depending on how high the temperature of the kilning process was, the flavors can vary. Mashing is the process by which the flavors extracted in the malting process are converted into sugars.
The base grain, or the malted grain, is ground into a form that is usable. The grain is then mixed with water and heated. The enzymes in the grain convert the starches into sugars. The liquid, now sweet liquor, is then cooled, and another set of enzymes are added to further convert the starches present into fermentable sugars. The next step in production is fermentation. Fermentation is the process by which yeast is added to a sugar solution and converts the sugars into alcohol.
The strain of yeast used can make a considerable difference in the final product. Distillation occurs once fermentation has completed. For the whiskey to be legally classified as whiskey, it must be distilled to less than 95% alcohol by volume.
Those whiskies that are not clear and colored have gone through a distillation process. There are two main types of stills utilized in the distillation of whiskey: the pot still and the continuous still. The purpose of this step is to separate the congeners and alcohols from the solution. The distillation process also allows the alcohol to gain the flavors from the previous fermenting process. The more times the liquid is passed through the still, the higher the alcohol by volume is produced.
Malting and Mashing
The first step in the production of malt whiskey is malting the grain. This process begins with the grain being soaked in water for at least 12 hours until it increases in moisture content. The grain is then spread out on a malting floor for around five to seven days during which time the grain sprouts or germinates.
The germinated grains are dried in a kiln, converting the grain’s starches into fermentable sugars. While barley is the grain of choice for most Scotch whiskies, rye is often utilized due to its intense, fiery flavor and a resultant boom of interest in rye whiskey in the United States for the past few years, a shift from the dominance of corn used in bourbon production.
Bourbon makers in the United States also tend to use a sour mash where some of the old ingredients are carried forward with a batch in order to bring forward the desired flavors in the subsequent mashing.
The common practice for the next phase in the whiskey business is mashing, advancing the process of sugar extraction by way of hot water. Increased chemical activity occurs when the addition of hot water promotes an environment for enzymes from the malted grain to break down starches into sugars. The result of mashing can develop a balance of either simple or complex sugars, which directly affects the flavor, furthering the depth of character of the final whiskey.
The equipment utilized varies between distilleries. In Scotland, for example, the sticky mass of malt called grist is deemed of lesser character than the more refined liquid extracted in the mash tun and is therefore often distilled twice, with spirits produced from the mash tun separated accordingly. The local water used in production may also be influential. The distilleries around Campbeltown, where water is particularly high in minerals that are harsh on the equipment, may therefore extend the malting process longer to mellow the harsh character of the whiskey to further mitigate the negative effects of their production, making high-quality products more available
. Innovations and expanding technologies in the malting and mashing processes include heat recovery systems, made more efficient with longer heating and cooling loops, as well as newer malting systems utilizing grain such as trimmings created in the milling stage.
Fermentation
After mashing, whiskey production moves to fermentation. At this stage, the maltose derived from the amylolytic enzymes is formed into ethanol. Yeast, the microorganism that affects this transformation, is introduced to the mash at this point. Yeast is the microorganism typically used in whiskey production. It is responsible for converting maltose (two molecules of glucose) into CO2 and ethanol through the process of anaerobic respiration.
Although the process is straightforward (resting on little to no sugar yield, plus compromising only 60% of the total carbohydrates), some variations can be initiated through yeast strain. There is therefore minimal overt influence of mash in fermentation as the end reaction is irreversible. The product of fermentation is referred to as the ‘wash.’ Fermentation is typically conducted over three days.
Unlike the preceding stages of malt whiskey production, fermentation has, in some cases, a very small warm-up time. The washbacks are traditionally left uncovered for a day while the malted barley ferments on the wort. This again brings environmental influences to bear, which can have properties of their own. Converting maltose to ethanol and CO2, yeast fermentation provides the first real flavor influence for the production of whiskey.
A standard fermentation ratio is typically 1:8; this means one part yeast is needed for eight parts warm, aerated wort. For whiskey production, this is typical for all cereal types and strains. Yeast ferments best within the temperature range of 70–80°F. The quantity of yeast needed for fermentation is approximately 0.1 g/L. Most importantly, however, is that it is this stage of production that provides a large share of the flavor and aroma compounds. Flavor, whether the whiskey will be light, fruity, and full of esters or spicy and phenolic, must all be decided in fermentation.
Distillation
Distillation is a process that purifies alcohol and, in so doing, concentrates the flavors of a faintly flavored liquid, such as beer, made from water, barley, and other cereal products. The liquid is heated to a point that allows the alcohol to boil and escape, while leaving behind the water and cereal products in a still. The alcohol is collected, and the concentrated flavors are bottled as whiskey. This can be a pot still or a continuous column still.
Column stills trap many of the flavors that would escape in a pot still and incorporate them into the whiskey made in a column. The management and shaping of the flavors produced during the distillation process create the wide variety of new make spirits produced around the world.
At 2.5 wt.% alcohol, the vapors formed will typically be richer in alcohol than the new make spirit. In both pot and column distillation, the overall efficiency of the distillation can be largely controlled by the reflux ratio. In more highly spirited distillations, temperature can impact flavor and rougher character. The original purpose of the Alcohols and Spirits Act was to ensure the quality and purity of Canadian whiskey from high waters containing wood distillates. The legal requirement for a lower-boiling fraction from malt spirits to be included in a single malt has also affected flavor. Similarly, the concentration of high-boiling esters and phenolic compounds gives Irish whiskey its typical mild flavor.
Maturation
The majority of whiskey’s flavor compounds are derived from the yeast and the grains used during fermentation, but it is the maturation process in oak barrels that truly gives whiskey its character. As whiskey ages in oak, it interacts with the wood and draws out different flavors and phenols, leaving behind what is described as “wood notes.” These can vary from sweet flavors that are further enhanced with vanillin notes similar to baked goods, such as vanilla and honey, to more spiced, herbaceous flavors such as pepper and clove, to more earthy and leathery flavors.
Additionally, the toasted wood ages the whiskey through both the flavor it imparts and the interaction with the whiskey over time to build up esters and aromatic compounds that begin to define the whiskey as it becomes more mature. The aromatic compounds that are derived from the wood may be further categorized into phenolics, carbonyls, and alcohols, all of which interact with the whiskey to form the specific flavor profile and are essential to the aged whiskey’s character.
Multiple variables need to be taken into account when selecting which barrels to use to age whiskey, such as what the barrels have previously held and whether they were charred or toasted. The decision of whether to select new or previously used barrels also affects maturation. The flow of a good or service through an economic system can be represented in a value chain that identifies the major actors and their inputs.
Wood that is suitable to age whiskey, either as a new or previously used barrel, commands a value per unit of volume greater than lumber, heating wood, or unprocessed logs. The essence of value-added involves utilizing inputs to produce output of greater value over time. In the case of wood, a barrel comprises a greater value-added product than logs, lumber, and heating wood. The actor that controls the most value in the whiskey maturation system is the distiller. A distiller not only produces whiskey, but also values the storage service over time and controls its exchange in the market for either whiskey or money.
Global Market Trends and Consumer Preferences
Global Market: Since the economic reforms in the early 1980s, the US has seen a resurgence in start-up distilleries. These small producers differentiate themselves from their corporate cousins by focusing on hand-crafted and local products. The movement gained momentum when a growing number of white-collar workers lost faith in stocks and began to realize their dreams of owning a business via start-up distilleries. These small companies also benefit from new tax break provisions and the repeal of many regulations. The craft distillery industry continues to show large year-over-year growth, although some brewers have shut their doors.
Market Demand: There has been unprecedented growth in the aged spirits industry in the US over the past decade. While flavored vodka growth has quadrupled in five years, super-premium and aged spirits such as whiskey show double-digit growth as well. This is likely one of the major drivers of the increase in whiskies exported. With the growing volume of wealthy individuals in developing countries, personal consumption of aged spirits is on the rise and whiskey is leading export growth.
Although traditionally the largest market for US whiskey, the US has recently been surpassed by Iraq as the largest consumer of bourbon. The largest consumer of Tennessee whiskey is Japan. China remains an important market for US whiskey, but growth is slowing as the government cuts back on public expenditure and encourages personal savings.
Branding and Marketing Strategies in the Whiskey Industry
While the focus of the previous section was to discuss production and regulation within the business of whiskey, this section will focus on the marketing and business aspect of whiskey. Branding and marketing are arguably two of the most important aspects of whiskey production today. With the sheer number of products on the shelf, brand identity and consumer loyalty are essential.
The way a company tells its story and conveys its ethos is perhaps the strongest draw for a product. A good portion of what really sells a product is the story. For that exact reason, heritage marketing does particularly well in the spirits industry. Consumers are looking to grasp onto ideas of what America originally stood for: independence, craftsmanship, perseverance. Consumers are more willing to pay a premium if they can buy into an authentic story about a brand.
As important as the marketing story may be, packaging cannot be completely discounted. Labels are the name of the game in the whiskey industry because they can be a strong differentiator on the shelf. Even in bars and at fairs, whiskey drinkers who are not familiar with a brand are more likely to pick a bottle if the packaging is catching. While design and masterful storytelling are important for getting the brand identity front and center, digital marketing and social media presence have moved to the fore. In the whiskey industry particularly, marketing to an older audience can only maintain a brand for so long.
Interest will ultimately wane. That is why there has also been an enormous push, especially in the Pappy market, to leverage whiskey with lifestyle brands. This collaborative approach accomplishes many things and at an overall lower cost than traditional big media buy advertising. It can make a brand feel new again. It can attract attention for a new launch. And it can help access or bring in a new demographic to an old brand. With Pappy, this was done partly using fashion brands. As pushing an old brand was already the marketing strategy, in this case, it made sense.
For many other new small batches, though, creating experiences such as whiskey tasting events or joining up with other likeminded experiences offers a new starting point and space of originality. Branding and advertising tactics vary depending on the segment of the market a distillery is trying to break into. In particular, appealing to female whiskey drinkers of all ages has significantly gained marketing effort over the past three years.
