Investing in Whisky Casks - Mark Littler Ltd

Investing in

an introduction to casks, buying intelligently and reducing risk

In the age of uncertainty, whisky is proving to be a solid investment and one which is rapidly growing in value. The Knight Frank Luxury Investment Index tracks the value of the top ten alternative investments such as diamonds, art, classic cars, wine and whisky. While most of these investments only see double digit growth each year, the value of bottles of rare whisky has grown by over 500% in the last decade, and in 2019, this astronomical rise culminated in a world record auction price for a single bottle of £1.5million. While many are familiar with investing in bottles of wine or whisky, buying a cask of whisky for investment is proving to be much more lucrative; some casks bought in the 1990s for as little as £3,000 are now worth £150,000 to £200,000.

An important note to make here is that the market for casks and vintage bottles is fundamentally different. However, they have both risen in value dramatically, as whisky is now seen as a status symbol and not just a drink. The same is true of Rolex watches and Hermés handbags which are not valued based on how well they function; a quartz watch or a handbag bought from a high street store will do the same job just as well. The huge step up in price for either of these items is a result of the branding behind the item, which, consciously or unconsciously, is driven by the status imparted by owning that brand.

Given how fresh the market is for cask investments, here is our ultimate guide to whisky cask investments, starting with the most fundamental question. What is single malt Scotch whisky?

Single Malt Scotch Whisky

Single malt Scotch whisky is a geographically protected product that must be made, matured and bottled in Scotland. It can only be created from malted barley with Scottish water and yeast. Furthermore, it must be matured for at least three years in an oak cask before it can be bottled and labeled as single malt Scotch whisky.

Scotland produces between 6001,000 million litres of whisky a year; averaging around 2 million litres a day. It may come as a surprise that 90% of all sales of Scotch whisky are sales are of blended whisky, not single malt. 93% of all Scotch is exported internationally, and Scotch whisky accounts for 21% of all British food and drink exports. This equates to a staggering 41 bottles being exported per second!

Investing in Whisky CaskS:

Casks of whisky

A whisky cask is a vessel for storing and maturing whisky. Casks come in various sizes and are made from oak.

Scotch whisky casks are stored in duty suspension which means no VAT or duty has been paid on them. This is only paid when the whisky is bottled and removed from bond, and as such, they must be stored in a HMRC registered warehouse.

Generally, Scotch whisky is matured in casks that have already been used to mature something else; ex-bourbon casks are the most common, ex-sherry casks are also popular and exwine, rum and other spirits are also sometimes used - although less often. Casks are an active part in maturing the whisky, adding as much of 80% of the eventual profile of a whisky. The type of wood used, the previous use of the cask, even the size of the cask and where it is located in the warehouse all influence the eventual flavour of the whisky, so every whisky is slightly different.

When buying a cask of whisky, different casks have different prices associated with them. Generally, larger casks are more expensive and you can also add a premium for more unusual cask types.

Investing in casks of whisky

There are two main components that influence the increase in value of a whisky cask: • The age of the cask • The branding strength of the distillery

Age

Age influences whisky in two simple ways. Firstly, it is broadly considered that the longer a whisky has matured, the better it is, and as such, is sold for a premium. While this carries some truth, the reality is that it is the scarcity of older casks that make the remaining whisky more expensive. 90% of all casks are used before they are 12 years old, thus scarcity increases with age and value rises much faster for casks over 12 years of age.

Brand

Unlike wine, the value of whisky is driven by scarcity and brand rather than the quality of an individual vintage. Because brand is so important, identical casks from different distilleries can go for vastly different sums. The simplest way to explain this is with some real examples: • Bruichladdich hogsheads could be purchased in the mid-2000s for around £1,500, those casks are now worth in the region of £7,500 to £15,000.

• In 2000 a new make Springbank cask would have also cost in the region of £1,500 whereas today a cask Springbank 2000 is worth in the region of £30,000 to £90,000. (The range in both examples is dependent on the cask type, remaining litres of whisky and ABV.)

Another example is from Cavendish wines, who were a small merchant in London selling casks of whisky to the public in the 1990s. The two main distilleries they sold casks from were Macallan and Tobermory. Macallan casks were priced around £4,000 and Tobermory casks at around £1,000. Those Tobermory casks are currently worth £10,000 to £15,000 and the Macallan casks £150,000 to £250,000.

However, it is no good going out and trying to buy a cask of Macallan or Springbank now - or even Bruichladdich for that matter. Both Springbank and Bruichladdich closed following the 1980s ‘whisky loch’ and required the revenue from private cask sales to get back online. Now they do not need the additional capital, they do not have casks available to the public.

Secondly, as with any investment you always want to be looking for the next big distillery/share/ stock. Macallan, Springbank and Bruichladdich are already very dominant in their markets so you could argue they have little market share to make.

What you need to look for are brands that are planning to change their market position, and as such, you will see an additional brand-driven increase in value alongside the age-driven increase.

Importantly, the common factor necessary for both points mentioned above is time. Casks need time to age, mature and become rarer, while distilleries need time to reposition in the market. That means that a cask should only be considered as a long term investment and we suggest 10 to 20 years as a guide.

The experience to advise

The previous examples are all based on real casks that Mark Littler Ltd have sold for customers. We have a vast experience helping people exit their cask investment and this has given us the insight into the private cask market to advise people on what to look for to make a sound investment.

What you need to know

Just as importantly as what to look for, is what to avoid. Casks are an unregulated investment and there are a few basic steps to ensure you follow to make a sound investment:

1. Ensure you will be issued a delivery order A delivery order is the method of transfer of ownership where a cask of whisky is stored. Simply put, if you do not get a delivery order you have no outright ownership of your cask. Unless you are a business, there is no reason you cannot receive a delivery order and the Scotch Whisky Association also recommends ensuring you receive one.

2. Pay a fair price There is no publicly available database for the value of casks, so it can be difficult to know whether you are paying a sound price, and, as with any investment, if you overpay initially, your potential returns are reduced.

Some casks are offered for sale with a bottle count listed; unfortunately this practice is, at best, misleading. This is because the temptation is to simply divide the price of the cask by the number of bottles, but this does not take into account the duty, VAT and other costs that need to be applied to get a true per bottle cost for a cask. Therefore, a bottle count can make a cask look reasonably priced when it is not. Ideally you need to get a second opinion from a source you trust. If this is not possible, you need to check the duty, VAT and bottle cost implications for your cask in order to get a per bottle price that you can compare to open market bottle prices.

3. Check your contract for caveats Caveats in your contract can make a big difference to the eventual value of your cask. Important ones to check for include restrictions from the distillery on how bottles from the cask can eventually be labelled. Casks with a caveat saying you cannot use the distillery’s name on bottles are worth considerably less than ones where the distillery name can be mentioned.

Also keep an eye out for profit shares, where the company selling you the cask has a clause saying they are entitled to a portion of the eventual profit when you sell; there is no need for this and it should be avoided.

4. Know the details of your cask There are a few basics you need to know about any cask you are looking to buy. These include: the distillery, the cask type, the bulk litres and/or the litres of alcohol as well as the ABV of the cask. These are the industry standard measures for a cask and can be used to calculate the cask’s value. They are also necessary if you want to create a true per bottle price. It goes without saying that you need to know exactly what warehouse your cask is lying in and how to contact the warehouse too.

Conclusions

Whether you are interested in whisky simply as an investment or as something you are passionate about, a cask can be a sound place to put your money. However, in an unregulated environment it is important to be cautious when looking into your purchase.

If you are interested in learning more about cask investment Mark Littler have a free Cask Buying Guide, as well as hundreds of articles, videos and other resources on their website www.marklittler.com.