Why is Single Malt Scotch Whisky so Expensive?

With so many exciting expressions out there for you to try and taste, I’m sure you often find it difficult to avoid those ‘slightly more expensive than planned’ bottles that somehow find their way back with you home. I know I often give in to temptation and spend a little more than planned! As whisky prices have slowly risen over time I wanted to gain a deeper understanding as to why Scotch whisky is so expensive.

Scotch whisky is expensive due to a wide range of factors, many of which don’t affect other alcoholic drinks in the same way. Long term storage contributes a large percentage of the cost; not only due to the time it takes for maturation but the losses that occur due to evaporation. Bottling, packing and distribution weigh in heavily but the overly large percentage of excise tax added on is the real culprit in the sky-high prices we are seeing today.

Cost of whisky maturation and storage

The minimum legal age requirement to label a scotch whisky is 3 years, I’m sure you haven’t seen many 3-year-old Scotch whiskies for sale at your local outlet recently! You will, however, find many NAS (No Age Statement) whiskies and these will almost certainly contain some 3-year-old whisky mixed in with older blends; but normally 10-12 year old is the minimum most of us would consider buying for general consumption.

A standard barrel contains 200 litres of new make spirit when it’s completely filled. Spirit and barrel combined will weigh somewhere in the region of 220 to 230 Kilograms. If you picture mountains of barrels, all requiring a carefully considered environment for storage then it becomes clearer on the significant costs involved with storage over 10-20 years or possibly much longer.

Temperature control is key to avoid issues with maturation, this means barrels can’t just be stored anywhere; they need a tightly controlled environment to ensure evaporation is kept to a minimum.

Evaporation – The angels’ (expensive!) share

The Angels’ Share – it’s a common whisky term and chances are, you already know what it means. The interesting part is just how much spirit is lost through evaporation over the years. The share lost from barrels during maturation reported by the major distilleries ends averaging around 2% per year which is a significant amount.

The 2% is averaged over time as newly made spirit evaporates at a much higher rate closer to 3.5/4% over the first few years; with a slow reduction down to the 2% mark as it gets older.  The angels’ will continue to help themselves to their share over time until eventually nothing is left if the whisky is not removed at some point! Barrel size comes into play and distilleries have reported that smaller barrels tend to lose more to evaporation than larger barrels.

Airflow is important as barrels stacked up high can actually lose more to evaporation due to the ability of air to surround the barrel completely, this is in contrast to storing fewer barrels directly on gravel, or similar surfaces in order to preserve more spirit. There is constantly testing and innovation in this area as the very latest technology is used to try and reduce the evaporation rates with new styles and barrel designs; the downside is the years and years it takes to see if the experiments are successful.

If you ever get the chance to take a distillery tour then you will have almost certainly experienced this. Tours sometimes allow access to warehousing where there are usually hefty restrictions in place. You won’t be allowed to smoke, use electronics or take pictures with a phone camera; the air is so heavy with the alcoholic vapor it’s obvious it wouldn’t take much to cause an explosion!

When master distillers are planning their future yields they need to take all of this into account. As an example, they know the production of a 25-year-old single malt will require distillation of double the amount of spirit they plan to produce. To illustrate this better I have put together a simple table to demonstrate the effects of the angels’ share.

Angels’ Share Impact Table

The Devils Cut

The devil’s cut refers to the spirit absorbed by the wooden barrel during maturation.  The amount that’s lost will usually depend on the porosity of the wood used to construct the barrel. However, most of the absorbed spirit will actually move right through the wood and evaporate, becoming the angels’ share. When maturation is complete there will always be a percentage remaining in the wood long after the barrel itself has been emptied.

Although most distilleries will be unable to retrieve the devils cut and will simply write it off, Jim Beam has found a way to extract the devils cut by spinning the barrel at a high speed whilst filling it with water – I’m not quite sure exactly how it works but you can buy the Jim Beam Devils Cut whiskey on Amazon if you want to give it a try!

European oak is generally known to have a different base structure compared with American oak resulting in different levels of absorption and overall evaporation. 

This leads me on to thinking about the re-use of casks and how the spirit will remain trapped in the wooden staves between each use and could well affect the next fill in terms of flavour – interesting theory!

Whisky Taxes

Aside from all the costs in production and maturation, the biggest cost of your favourite dram is tax – isn’t it often the same with everything in life! You are probably familiar with the term excise tax or excise duty; the tax was originally created to discourage people from buying certain products – think about cigarettes as a good example! The tax is normally levied on the producer and not the consumer directly, although the consumer ends up paying it within the retail price.

Most countries have an excise tax on alcohol with the United States adding both Federal and State level excise duty on their whiskey.

 UK Excise Duty

The current excise duty on a standard bottle of Scotch stands at 72% in the UK which I find an incredible amount considering it’s so important to protect this vital sector in Scotland. A sector, incidentally, that currently employs 40,000 people and brings billions of pounds in revenue to the UK! Officially, in 2020, the spirit rate can be worked out as £28.74 per litre of alcohol. The calculation is based on a multiplication of the amount of whisky (in litres) and the ABV (alcohol by volume) first and then a further multiplication by the spirit duty rate. The rates are consistent with those set throughout the European Union. It’s interesting to note, the higher the alcoholic percentage the more excise duty will be levied.

US Excise Tax

The Federal Government in the US levies excise taxes when a barrel is bottled after maturation. The rate was consistent on whiskey at $13.50 per proof gallon from 1990 all the way to 2018 when Federal tax reductions were implemented by congress after years of lobbying. It has added a lifeline to spirit producers and they have lobbied to keep these reductions in place through 2019, so far they have been successful with the tax breaks extended in Dec 2019, however at this point they are still temporary and the original amount could be reinstated at any time. The tax does become more complicated and there is a tier system that offers pros and cons for smaller vs larger distilleries.

US Import Tariffs

In October 2019 the Trump administration added a 25% import tariff to all whisky exported out of the UK. This was in retaliation for the EU giving Airbus subsidies which I suppose put them at a strategic advantage over Boeing. This has been a major blow to the export market for whisky as the US currently consumes around 22% of total production from the Scottish whisky regions. The distilleries have serious concerns their market share will erode over time as Scotch becomes that much more expensive than local whiskey in the US; to gain that market share back in the future will be a massive undertaking.

Marketing

Once the whisky has been produced, bottled, packed and distributed around the world it will then have to compete against all the other brands trying to stand out. Many quality whiskies are carefully presented in attracted packaging to catch the eye of drinkers and collectors alike. Whether in tubes or boxes a lot of time and effort goes into ensuring everything is of the utmost quality. Often, the higher price point whiskies come in fancy ornate packages which could include wooden boxing or even an expensive crystal decanter.

Upper market brand Macallan has invested an enormous amount of money in worldwide marketing which has enabled them to push the price point of their whisky up and up over the past few years. As whisky in general, especially single malt whisky, has gained popularity in Asia we may find in time that marketing has been too effective. There is definitely a finite amount of 18-year-old whisky available in barrels at the top end distilleries which is evident by the amount of NAS (No Age Statement) whiskies we are seeing brought to market. If the popularity in Asia continues to grow, we may find a shortage occurs which will be hard to solve considering it’s going to take many more years to produce the sprirt required to satisfy demand.

Adding it all together

Adding up all the factors covered above reveals how easily costs start to add up and why a quality whisky is so expensive. We haven’t touched upon the many other input elements such as bottling, labelling, packaging and distribution as well as all the staff that work in various parts of the process. Running a distillery is an expensive business which explains why the majority are owned by large global corporates – there are some that are still family-run like The Glenfiddich! A quick search reveals that even a micro-distillery would require an upfront investment of at least $1 million and that’s before even one drop has been distilled.

I hope you’ve found this brief overview insightful, if you can think of anything that should be added then please drop a comment below.