I recently read this blog post about the secondary bourbon market and the mention of bourbon industry data got me thinking:

What does the whiskey craze look like in terms of the internet?

and

What role do sites like Bourbonr.com play in the dynamics of a primary and secondary market boom?

The article focuses on the secondary market where many people trade and sell rare bottles as though it’s some dark and mysterious underworld, and correlates that with fears of rising prices.

The mysterious bourbon flipper is the most hated figure in bourbon today. Can’t find Pappy? Blame the flipper. Store increased their prices? Blame the flipper. Distilleries increasing prices? Blame the flipper. I think of a flipper as someone that doesn’t even drink bourbon and purchases solely for resale.

There’s some truth there but, you see, there’s always been people flipping and trading bottles of whiskey or anything of value for that matter. A quick search on Google turns up many sites that have been around since the dawn of the internet, and auction houses have been around for even longer. The history of the whiskey market itself is full of tales of “legendary” black-market operators, many of which are printed on the labels of products we celebrate today, so what gives?

What I find most intriguing about the quote above is that it’s published on the same site that hosts a state-by-state Pappy release calendar. If anything, the site helps the average person track down the latest releases and arms them to the teeth with information about each one of them. I mean this with absolutely no disrespect, but sites like Bourbonr.com encourage, enable, and perpetuate the hype around coveted bottles.

Haters Gonna Hate

I fail to understand how the craze for Pappy is any different than the obsession for Beanie Babies, Furbys, or Tickle-Me-Elmos.

Most negative feelings toward the secondary market originate largely from people new to Bourbon. These are the same people who pester retail establishments for Pappy in the middle of the summer after reading a news article. They can’t get their hands on it and feel disgruntled because, as it turns out, many other people share their desire for a limited, luxury product.

They then take to the internet and gripe.

Of course there are those people who have been drinking Pappy off the shelf for years who have been priced out of the market, but many of them have other things to satisfy their thirst. Loyalists to Maker’s Mark make more noise than those in the Pappy fan club.

The truth of the matter is, if you’re not lucky enough to be on a list or have friends in the liquor business, your only option to get your hands on a bottle of Pappy is through the secondary market. You need it, but it doesn’t necessarily need you.

A lot of Pappy bottles exchange hands often behind the scenes, but in many cases they’re used as currency to acquire more exclusive bottles that most actively searching for Pappy don’t even know exist (yet).

A Taste For Charity and Nostalgia

Without the secondary market and people who bunker rare bottles, many of us would never have the opportunity to taste whiskeys that have long been off the market. We’d never know just how good (or bad) things used to be. If whiskey is meant to be immediately opened, it would be immediately lost.

I’m not claiming that the secondary market is always a pleasant place filled with unicorns and good people, but that there are many different angles from which one can view it. For example, while many are spewing hate at mysterious people, recipients of that hate are donating spare bottles of Pappy to be auctioned off for charity in private groups. I don’t hear the public discuss things like that too often.

Supply and Demand and The Big Bucks

The demand for Pappy is a great thing for “flippers” because the collections they’ve been building for years before the general public cared are suddenly worth much more. They’re relevant to a larger pool of potential buyers willing to pay the big bucks for a chance to enjoy a “hard-to-find” whiskey.

This does translate to higher retail prices on the shelf because retailers want to get their hands on a piece of the pie. Often it’s justified but sometimes it’s ridiculous. When you walk into a store and see a 15 year old Pappy priced at $1500 it just makes you laugh.

At the end of the day, retailers are in the market of selling products and if they think they can make more money due to heightened demand, well, that’s capitalism.

A Red Herring Exposed

Is Buffalo Trace leaving money on the table and giving up profits to the secondary market?

With all this talk about Pappy and the subsequent fears of price gouging making it into the retail market, I wanted to explore just how insignificant a rare, luxury product like Pappy is in the grand scheme of the industry as a whole.

Internet search data is a great place to start because it is one of the most accurate measures of the consumer’s actual interest. The chart below shows the Google search trends for queries related to “Pappy Van Winkle” from 2008 to the present in the United States. There are a few things to note:

  • The trend shows minimal interest online until mid-2010.
  • Significant and consistent interest doesn’t take off until 2012.
  • The large spikes in 2013 and 2014 are the result of media coverage of the infamous Pappy heist, which has been a great tragedy because it has brought many into the fold of the craze who otherwise would have remained in the dark in terms of product awareness.
Google Search Demand for "Pappy Van Winkle" Over Time

Google Search Demand for “Pappy Van Winkle” from Jan 2008 – Dec 2014

Even with the large spikes due to media coverage clouding the overall trend, it’s obvious the interest in Pappy has grown, but the next chart illustrates just how minuscule and recent the demand for “Pappy Van Winkle” (Blue line) actually is when examined in the context of demand for queries related to “Bourbon Whiskey” as a whole (Red line).

Google Search Demand for "Bourbon Whiskey" and "Pappy Van Winkle"

Google Search Demand for “Bourbon Whiskey” and “Pappy Van Winkle” from Jan 2004 – Dec 2014

Pappy barely makes a dent, but it’s getting there.

Just how big is Bourbon these days? In the United States it’s taking over Scotch with a significant margin of interest.

Google Search Demand for “Bourbon Whiskey” and “Scotch Whiskey” from Jan 2004 – Dec 2014

Google Search Demand for “Bourbon Whiskey” and “Scotch Whiskey” from Jan 2004 – Dec 2014

Bourbon is catching up worldwide, too.

Google Search Demand for “Bourbon Whiskey” and “Scotch Whisky” from Jan 2004 – Dec 2014 (Worldwide)

Google Search Demand for “Bourbon Whiskey” and “Scotch Whisky” from Jan 2004 – Dec 2014 (Worldwide)

Now translate these trends into terms of actual product supply and demand and Pappy becomes an insignificant player.

If we consider the product portfolio of a distillery like Buffalo Trace, or a large company like Sazerac, products like Pappy, even with their high price tag, are not a significant portion of revenue due to their lack of volume. Raising prices on these products to combat the potential profit loss to the secondary market would not only be a blip on the radar, for big business it would be a blunder.

Van Winkle Market Value

I did some digging to find actual release figures, but settled on the numbers mentioned in the article linked in the stats below because they yielded the highest numbers. I wanted to inflate the significance as much as possible. Keep in mind this is an elementary analysis and isn’t an exact science. I’ve rounded many numbers for ease.

According to one source there are 7,000 Cases / 84,000 Bottles of Van Winkle products released each year.

If the average value of each bottle is ~$100, that’s $8.4M in total revenue.

This doesn’t take into account the expenses to produce and market these products, or the price at which they are sold to distributors, but that’s not relevant here.

If we multiply $8.4M by 10x to match the ~$1000 per bottle generated on the secondary market we get a total potential revenue of $84M.

Both $8.4M and $84M are substantial amounts of money but, compared to the $13.6B Suntory paid to acquire Beam Inc. this year for example, even Pappy’s high end secondary market value of $84M is only 0.6% of the value of a single company.

At that rate, if Beam Inc. relied solely on secondary market revenue generated from the Van Winkle products, it would take 162 years to recoup the company’s purchase price.

How much of the market does this one company own, you ask? About 18%.

Top Spirits Producers

Source: IMPACT Spirits Databank and IRI 52 Weeks Ending December 2, 2012.

This puts the value of the total market at roughly $70 billion in terms of purchase price and market ownership (it’s actually over $400 billion).

Since Pappy is a Sazerac product, and Sazerac occupies approximately 7% of the market according to this data, we can translate that into about $5 billion, meaning the retail value of Pappy is about 0.2% of their overall value.

That’s not even a drop in the bucket.

Will Secondary Market Values Lead To Higher Retail Prices Overall?

Absolutely not. Well, not really.

It’s easy to get caught up in the hype of a single elusive product but for the large companies that run this industry, the revenue potential is relatively insignificant. Where this does come into play is with small operations that have a high secondary market demand, such as Willett, but that’s a topic for another day.

Instead of expanding a luxury product, it’s much easier to manipulate a flagship, and we have seen this happen through minimal and gradual price increases of core products. If Beam Inc. increases the retail price of Jim Beam by just 1% (less than $0.25 per bottle in many cases) that is a massive amount of new revenue when considering the volume at which the product is sold. The impact on the consumer is almost negligible. If you can get away with putting younger whiskey into those bottles, the margin gets even bigger.

Increasing the prices of core premium brands that remain readily available is another strategy we’ve seen evolve recently. Think Eagle Rare or Blanton’s. If you have stockpiles of old whiskey, why sell that for $10 a bottle when you can remove an age statement, put cheaper whiskey in that $10 bottle, and move the aged product into a premium product that sells for $50? That’s a huge amount of new revenue by manipulating supply of your core product range.

Of course, a company must do this without significantly diluting the product’s quality, but as new taste buds move into the market at the exponential pace they currently are, the consumer’s definition of quality evolves as well.

So What Does $8.4-$84M Buy In The Spirits Industry?

A lot of nice fancy things and investments in future business. For example:

  • A new Wild Turkey visitor center for $4M
  • A 125,000 sq. ft. bottling operation at Wild Turkey for $40M
  • Jim Beam’s new American Stillhouse for $30M
  • The Evan Williams Bourbon Experience in Louisville for $10M

As it turns out, Van Winkle products generate enough cash flow to fund new event spaces and additional production lines that will bottle more bulk product. That’s about it.

Pure Luxury.

Happy hunting!