Introduction and summary:
Alcohol has for thousands of years been a vital part of human culture (whether you like it or not). Whisky though, a result of distillation, was discovered by monks as late as 1100-1300.
Whisky as an investment has attracted interest over the last decade, presumably because it has proven to be a good investment since the GFC in 2008/09. Media reports on record sales for bottled whisky, but there is another way you can invest in whisky: by crowdsourcing casks of whisky as it matures. This is of course completely different than bottled whisky which is already matured, taxed and ready for drinking. However, by looking at the process of making whisky, which takes years, it makes sense why you can get a decent return by investing in maturing whisky: it requires a lot of working capital for the distillers and it takes about ten years to reap the rewards while no “income” is received while waiting. Over the long-term you should be rewarded for taking this risk.
The aim of this article is to look at how smaller investors like myself can invest in the maturing process, not already tapped bottles, and what to expect in the form of returns and potential risks. The article is written to get a better understanding of whisky as an investment. I currently have no investment in whisky, except being a shareholder in Diageo.
In order to get a better understanding I looked at the products offered by WhiskyInvestDirect, which offers crowdsourcing of casks at the same terms as the distillers themselves. The company is a subsidiary of Bullionvault, where I’m a registered user. (Just to be clear, I have no connection to WhiskyInvestDirect at all, I’m not even a registered user, but I might get a referral from Bullionvault.)
In principle crowdsourcing works like this:
- Deposit money in your account.
- Do some research, and chose which whisky to invest in.
- Buy some barrels/casks/liters of whisky.
- Wait, while the whisky matures in the cask(s).
- Sell your whisky whenever you want 24/7.
- Hopefully profit as time goes by.
(I write whisky in this article, not whiskey. I’m not a native English speaker, but my understanding is that whiskey is the Irish and US spelling, while whisky is the Scottish and UK spelling.)
How to invest in Whisky?
Up until a few years back the opportunity to invest in whisky was solely to buy casks or simply buying tapped bottles. Perhaps needless to say, to buy casks is very unpractical unless you are a big dealer, and likewise buying bottles is kind of another game than the first one because it’s two different products: one processing, the other finished (and already taxed). Buying tapped bottles is a bit like investing in wine: wait for the whisky to mature some more, and sell it. Especially high-end whiskies are likely to be more valuable as time passes.
In 2015 the founders of Bullionvault copied their business model from gold to whisky: WhiskyInvestDirect saw the day of light. The idea is to make the market bigger by opening up possibilities for smaller investors like myself. Now you can invest in casks alongside distillers and wholesalers on the same terms using the same storage facilities and warehouses. It’s worth mentioning that they only offer Scotch whisky.
Why invest in whisky?
Whisky has a solid history of long-term appreciation. Maturing and ageing whisky is a long-term process and requires substantial cash up-front. Any profits are many years down the road. While it takes just a few days to produce spirits, Scotch takes on average 10 years to mature. Maturation works when alcohol is put inside the cask and interacting with the wood. This interaction is critical in getting the desired flavor and color of the whisky. Of all the factors which influence the flavor of the whisky, the cask in which it matures is probably the most important. Warm weather during summer and cooler weather in the winter make the cask expand and contract, thus giving additional flavor. Furthermore, the location of the casks is also critical, with for example whisky from the west of Scotland having a different flavor due to the oceanic salty environment.
Organizing and financing maturation to meet the future demand for mature whiskies is no easy task:
- Will their brand be in demand many years down the road? A lot can happen during maturation. The distiller usually market their brand while its maturing.
- Obviously the distiller don’t know many years in advance how many casks they will sell.
- The distiller can both under- and overproduce. Both are not desirable, but overproducing is the worst. This increases risk and might in the worst case lead to insolvency.
It’s of course extremely hard to make sales forecast many years into the future. Hence, the risk of over-producing outweighs the potential profit of producing more, and in aggregate the industry prefer to underproduce.
This is where individual investors like you and me come in. Just like insurance, the “outside” investors offer a solution by taking some of the risk while the whisky is maturing. Investors, put together via an online platform, simply buy some of the alcohol and store it in casks, on the same terms as the wholesalers and distillers themselves (the whisky is stored in warehouses used by the Scotch whisky industry). This way distillers can cover some of their working capital. When it matures, or even before, you can sell online to other investors, hopefully for a profit. The buyers might be other investors, but also distillers (who needs more to sell).
Another benefit is that you are protected from systematic risk in the financial system. You own the whisky outright and it’s your property. How can you be sure of that? Once a month WhiskyInvestDirect publishes on the internet the complete register of all its whisky owners (audited) – with each owner listed under a public nickname known only to themselves. WhiskyInvestDirect is your custodian and is responsible for administration and record-keeping.
Additionally, whisky should provide a hedge against inflation. It’s a typical consumer product and costs can be passed on to the consumer.
Just as the stock market consists of a many different companies, the whisky market is much the same with different blends, distillers and brands. Some trade at a “premium” and others at “discount”. What the future return will be is of course unknown, and just as with the stock market it’s hard to pick the winners. You need to diversify among the whiskies offered, or else risk taking on unsystematic risk.
Whisky is no commodity with a common price or market. Due to ingredients, location and casks the taste and flavor vary. Currently at WhiskyInvestDirect you can chose among 31 different whiskies. Personally, as a person with practically no knowledge of whisky, I’m at a loss of what to invest in. If I invested, I guess I would chose a basket and diversify into all.
If you invest in stocks or real estate, it’s relatively easy to find relevant information. Prices and valuation are for both asset classes transparent. For whisky you need to spend more time finding relevant information due to the fragmentation.
The same goes for liquidity. If you are wealthy, it’s easy to invest in a diversified group of stocks or real estate. For whisky it’s not. The market is simply much smaller.
Stocks and real estate give you “income” along the way in the form of dividends and rent. If you invest in whisky you can only invest capital if you are happy with receiving nothing for many years. It’s solely based on capital gains. (I assume taxation of profits is somewhat different as well from country to country.)
What can you expect in returns?
WhiskyInvestDirect set up three different real accounts in 2015, and this link provides a summary of the performance from inception until July 2020. The chart further down on that page indicates that even whisky prices were not immune to the Covid-19 debacle: the price of whiskies witnessed a 10-20% fall in March 2020. We also see that the CAGR between the three portfolios varies a lot: the best has 10.8% while the worst has 5.8%. Just like stocks you need to pick the right whiskies, which is not an easy task.
One of the main reasons to invest in whisky is diversification in an asset that is uncorrelated to stocks and real estate. But the performance during Covid-19 shows that whisky is not immune to shock in the real economy. (Diageo, the UK distiller, has issued a warning that earnings will fall substantially as long as the Covid-19 limits bars and restaurants.)
WhiskyInvestDirect claims whisky has beaten both the FTSE-100 and the London property market since the GFC in 2008. They even make a bolder statement by looking at the stats over the last 40 years since 1979:
That’s why, according to the four decades of trade-broking data, maturing Scotch bought new and sold at 12 years old has never yet lost money after all costs. And as the industry has consolidated over the last 20 years or so, more cautious production means prices have become more stable and seen steadier appreciation.
There are three costs involved: storage, evaporation and insurance. For WhiskyInvestDirect the cost is currently £0.15 per liter (minimum £3 per month) including insurance. Buying and selling is charged a 1.75% commission, thus you need to be a truly long-term investor.
The most obvious risks are these:
- Your choice of maturing whisky might fall in price and demand. After all, this is a consumer product, and taste changes. However, the market has consolidated and this risk is decreasing.
- It can mature too old. Timing is important. If matured to long the alcohol proportion can drop below the minimum 40% requirement, and become worthless.
- You have no control of the storage, which is outsourced. It can be damaged, leaked or even stolen. However, insurance should at least cover what is presumed to be market price at the moment of accident.
- Platform risk (see below). There is a risk of WhiskyInvestDirect’s insolvency.
- Fraud: The British p2p lender Lendy went belly up in 2019 due to mismanagement (which is an understatement). There is nothing to guarantee from fraud/mismanagement.
- Evaporation: whisky evaporates at a rate of 2% annually, sometimes more. You have no control of the quality of the casks. Casks can leak.
- The whisky market for investors is still young. This might distort market prices, trends and even business models.
- WhiskyInvestDirect is about Scotch whisky. More than 90% of Scotch production is sold abroad. If the Scotch brand gets impaired, of which you have no control, this might influence the investment.
I believe the main risk is platform risk. I’m no lawyer, but it’s paramount that you read the T&C before you do any investment. You might be covered if WhiskyInvestDirect should go belly-up, but administration costs in case of bankruptcy are astronomical. UK lawyers charge £500 and more per hour and they are not modest in summarizing time spent.
However, if it all goes down the toilet, you can at least take delivery of the whisky and literally drown your sorrows, but at a cost (bottling, excise taxes etc.).
I believe whisky as an investment is mainly for whisky lovers. I will certainly stay away as this is a product and market I know too little, clearly way out of my circle of competence. While investing in bottles resembles more “speculation”, investing in casks is less so due to the maturation process. WhiskyInvestDirect offers the slow and natural price appreciation on the same terms as distillers, but keep in mind that the whisky business has had problems in the past, for example in the early 80s.
My personal opinion is that it makes more sense to invest in distillers like for example Diageo. They simply know the market much better than me.