Lowering the bar put Maker's Mark bourbon in a bind
February 19, 2013 6:15 AM
Maker's Mark, facing increased demand and limited supply, had planned to reduce alchohol content to allow more more bottles to be produced. Drinkers rebelled.
By Neil Irwin The Washington Post
The main message being drawn from the decision by Maker's Mark bourbon's producers to reverse track and undo plans to reduce its alcohol content is: Don't mess with bourbon drinkers.
But behind the decision is an interesting lesson in how the overarching strategic needs of big global companies can lead to bad decisions for lovers of the products under their umbrellas.
One of the tricky things about making and selling good whiskey is that it takes time; Maker's is a blend that is around 6 years old. Which means that the people at the Maker's Mark distillery in Loretto, Ky., and their corporate overlords at what is now called Beam Inc. were having to make decisions back in 2007 that determined how much Maker's Mark they have to sell now. And, it would seem, they guessed wrong.
They didn't properly foresee the booming worldwide demand for the supple, nectar-like perfection of Maker's. Sales of the bourbon rose 14 percent in 2011, and 15 percent in 2012. This is part of a broader trend: Some 16 million cases of Kentucky and Tennessee whiskey were shipped in 2011, according to the Distilled Spirits Council, up from 14.7 million cases in 2006; the revenue earned on that whiskey soared more than 25 percent in that span.
That is normally a problem -- too much demand for a product -- that a company loves to have. The simple answer to that problem would be to raise prices to whatever level will make the market clear. Maker's didn't do that, and the result was predictable: Shortages of the bourbon in some markets.
The problem is that Beam Inc., the parent company of Maker's Mark, has crafted a role for Maker's as one of its "power brands," along with the likes of Jim Beam bourbon, Sauza tequila and Courvoisier cognac. It is supposed to be one of the major drivers of the company's sales, a standard that can be found at every decent bar in the world (or, as Beam Inc. puts it in its annual report, the power brands are "our core brand equities, with global reach in premium categories and large annual sales volume").
Having those power brands ensures that Beam Inc. has relationships with distributors around the world who need its products, in turn giving Beam Inc. the leverage to ensure that its "rising star" brands also earn a place in distributors' warehouses, on liquor store shelves and behind the bars.
The "rising star" brands include both some marvelous whiskeys (Laphroaig Scotch, Knob Creek and Basil Hayden's bourbons) and some mass-market products that seem better-suited for a sorority party than a proper bar (something called Pucker Vodka, another called Skinnygirl Cocktails). What such diverse products have in common is that they are fast-growing. Basil Hayden's saw a stunning 35 percent increase in sales in 2012. And Beam Inc. can ensure that they get distributed and have a fair shot in the marketplace because liquor distributors know they need Maker's and the other power brands.
What does all that have to do with Maker's Mark's supply shortfall, and the ill-fated decision to dilute the bourbon a bit to keep up with demand?
Most companies would simply raise the price of Maker's until the market cleared. But Beam Inc. depends on Maker's Mark to be one of its mainstay products -- and if it raised the price too quickly, it could lose that status.
Many higher-end bars now use Maker's Mark as their standard go-to bourbon for mixed drinks, and at many mid-tier places, it is their standard premium option. If the price of Maker's gets too out of whack with other bourbons of similar quality, they might rethink that practice and turn to less-pricey options. And if that kind of change happened on a large enough scale, it could cost Maker's its status as that go-to powerhouse brand that helps underpin a company that sold $3.1 billion worth of liquor last year.
So it might be a little wary about raising prices further. It also doesn't work if people can't get hold of a "power brand." Hence, the decision last week, now reversed, to reduce Maker's Mark from 90 proof to 84 proof (or 45 percent alcohol to 42 percent alcohol). It would stretch the company's existing supply of bourbon further, without either increasing prices or having shortages.
The company seems not to have anticipated the degree of anger the move would prompt from loyal Maker's drinkers, and, as the statement from Rob Samuels and Bill Samuels Jr., who lead the distillery, put it Sunday: "You spoke. We listened. And we're sincerely sorry we let you down."
So what now? The underlying problem is still there. And now, it's decision time for Maker's Mark and Beam Inc. Are they really going to allow shortages of Maker's at times, meaning they would be essentially charging a below-market price? Are they going to hike price and risk Maker's status as a go-to mass market bourbon brand? Or are they going to find other, sneakier ways to get more supply of whiskey that is less blatant than diluting it and thus reducing its alcohol level, such as introducing even younger whiskey into the blend?
Ironically, for Maker's Mark drinkers, the best outcome they can hope for is that the bad press that surrounded the short-lived reduction in alcohol content will lead to a slump in demand for the product, so the answer might be none of the above.