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Scotch Trade Absorbs One-Two Punch Of COVID And U.S. Tariffs In 2020

Scotch whisky distilleries suffered a one, two punch of COVID and U.S. tariffs that made 2020 a questionable year at best and continued to affect the industry into 2021.

Normally a major commodity for the UK, because it is the largest exporter, the scotch market was trying to overcome Brexit, Great Britain’s exist from the European Common Market, and punitive tariffs imposed by the United States when the coronavirus pandemic started to wreak havoc. The perfect storm caused distilleries to halt production and their visitor centers had to shutter to prevent the spread of the virus.

When business is good, 133 Scotch whisky distilleries in Scotland commonly ship 1.3 billion bottles to 175 markets around the world.

Many Distilleries Changed Plans

To muddle through the challenge, some distilleries flipped its operations and began producing other products. Distell, a South African company that owns distilleries in three locations in the U.K., began manufacturing hand sanitizers. It continued with its Scotch whisky production, although at much lower levels than usual, and implemented a social distancing protocol to stay within UK government rules. The company also cut staff. In addition, Distell donated 10 percent of its online sales of whisky from the three sites to a Scottish drinks industry charity, The Ben, which assist employees in the trade that were affected by the COVID-19 pandemic.

Some whisky producers including Diageo, the largest Scotch whisky producer worldwide, continued production despite calls from the trade union, Unite, to stop. The union worried about safety issues as well as stress on the workers who were struggling through the pandemic.

The Scotch whisky trade worldwide depends on tourism to help build revenue. According to the Scotch Whisky Association (SWA), more than 2 million tourists visit Scotch whisky distilleries a year. As a result, the trade is the third-most-popular tourist attraction in Scotland. SWA notes that greater than 70 visitor centers at Scotch whisky distilleries has closed to comply with government policy.

The perfect storm has also affected expansion plans of many distilleries. Gordon & MacPhail delayed construction of a multi-million pound distillery in Grantown-on-Spey in the UK due to the lockdown. Moreover, Glen Moray, another distillery considering expansion, delayed opening its new visitor center in Elgin. Plans called for the attraction to open at the end of 2020. Business plans for another distillery, Glenturret, that called for a re-launch of a brand in June of 2020 were shelved. And Glenturret delayed a revamp of its facilities. which included a restoration of its guest space that consists of a shop, restaurant, café, and tasting section.

Whisky Sales Go Online

Due to social distancing policies, many whisky festivals planned for 2020 in Scotland had to be cancelled and some were moved online and presented digital events to stay relevant with their customer base. They also used the opportunity to focus on sales through the Internet.

Distell cutback on its marketing investments and shifted the money to digital and at-home events. A digital event known as Fèis Ìle, was able to attract participation from a number of distilleries including Kilchoman and Bunnahabhain.

Tourism Upheaval

The closing of the tourist trade due to the COVID pandemic in 2020 strongly affected the Scotch whisky trade. Many distillery owners feared that the lasting affects of the pandemic after it fades are changes to their visitor centers’ businesses. They feared that there would be long delays before people started to participate in visitor center events again.

Most countries worldwide, including the UK issued 14-day quarantines on international tourists. The pandemic has also negatively affected the export of Scotch whisky and distilleries feared that this would have a lasting affect on sales after the pandemic.

The U.S. Tariffs

As if the COVID pandemic wasn’t enough, Scotch whisky distilleries in the UK were hit with a $7.5 billion tariff issued by the Trump Administration at the end of 2019 as punishment for the European Union’s subsidies to airplane manufacturer Airbus.

The U.S. acted when the World Trade Organization ruled that the subsidies were illegal.

The UK and the United States were bracing for the WTO’s decision on whether the European Union could impose tariffs against the United States due to its assistance to Boeing, an American aerospace manufacturer and major producer of commercial airplanes.

The EU was already suffering from previous tariffs issued by the Trump Administration in 2018 due to steel and aluminum imports. As a result, the EU and the UK imposed tariffs on U.S. produced whisky.

The tariffs caused price increases on European made Scotch whisky in the United States. As a result, major U.S. whisky makers including Woodford Reserve, Jim Beam and Maker’s Mark have been staggering. Executives of American whisky makers complained that the tariffs contributed to their prices being raised to such an extent that they could not compete in the market.

U.S. whisky exports to Europe were increasing before the tariffs. Exports rose up to 28 percent for the first six months of 2018, reported the Distilled Spirits Council of the United States. However, after the tariffs were issued, exports from the U.S. have dropped by 37 percent to Europe and 53 percent to the UK.

Despite the tariffs, American distiller Brown-Forman, producer of Jack Daniel’s, has been willing to absorb the costs so that it didn’t lose market share. Its willingness to push one meant that it experienced declines in its profit margin.

Of course, Kentucky, where a major number of U.S. distillers are located, took the brunt of the tariffs, but other states were also affected. Thirty-seven states of the United States export whisky overseas and these states, including Virginia and New York, had suffered.

Cleveland Whisky, a distiller in Ohio, actually stopped exporting to Europe as a result of the tariffs.

New York distilleries were also doing well exporting whisky prior to the tariffs. New York Distilling Company with businesses in Williamsburg and Brooklyn, reported that 15 percent of its sales in 2018 were due to exports. The tariffs damaged it to such an extent that the company claimed that it became only 15 percent of sales in 2018. In March of 2021, it accounted for only 5 percent of the company’s sales.

Devastating Effects Of COVID, Tariffs Welcome Scotch Whisky Trade In 2021

Executives involved in the Scotch whisky trade didn’t have a very good 2021 New Year’s Eve due to expectations that the challenges of 2020 would continue into the new year.

The Scotch Whisky Association reported that exports for 2020 had dropped more than £1.1 billion due to COVID and the U.S. tariffs.

U.S. distillers feared continued price increases as they reluctantly prepared for a new year. Many were attempting to hold the line and not raise prices. Astor Wines & Spirits, located in New York City, announced that it would increase prices on a case-by-case basis as a result of price increases it had to pay to its supplier and distributor. So any price increases imposed by Astor would be due to the percentage of increase the company had to pay.

Binny’s Beverage Depot, based in Illinois, was determined to stand pat and not raise prices.

Only months into 2021, the new Biden Administration negotiated a four-month freeze of the tariffs and then three months later it suspended the tariffs that were imposed as a result of the EU subsidizing Airbus. The suspension ended the chance that tariffs would be re-imposed in July.

With a break in the tariff wars and the introduction of a vaccine that could end the pandemic whisky distillers in the U.S. EU, and the UK now have a chance to begin a recovery that will lessen the pain of a devastating period in the history of the Scotch whisky trade.