Jurray Whisky Distillery
You have been engaged to advise a cooperative of grain farmers on the Scottish island of Jurray. The island is know for its local variety of barley, which is used in the manufacture of premium quality whiskies. The cooperative is composed of 10 farms, all growing local Jurray barley and devoting an average of 70 acres per year each to this crop.
The cooperative also owns and operates the small, historic distillery on Jurray, producing Jurray Scotch. Currently, the best quality 10% of the cooperative's barley production is diverted to this distillery to produce Jurray Scotch. The rest of the grain is sold on to other distilleries across Scotland to use in the production of their own whiskies.
Jurray Scotch is well-regarded by critics as a high quality product. However, the distillery has not conducted any significant marketing or branding activity in living memory, instead relying simply on word-of-mouth and repeat custom to generate a small-but-stable demand for its whisky. All sales are wholesale to retailers rather than direct to consumers. The existing Jurray brand is considered old-fashioned and not seen as appealing by younger consumers.
The whisky market is expected to grow significantly in coming years as that spirit becomes fashionable with younger drinkers in the same manner as vodka and gin have seen booms in demand recently. The cooperative are keen to exploit this coming market growth by gaining popularity with younger drinkers. Accordingly, they have asked for your advice, particularly on branding and marketting to increase their visibily and to appeal to a 20-35 year old demographic.
This case divides into three segments. First, you will better grasp whisky production by estimating the production volume of the Jurray distillery. Second, you will calculate the costs per bottle of whisky produced and compare these to the wider sector. You will discuss measures which might improve profitability. Third, you will devise a marketing and branding strategy aimed at selling a more highly priced whisky to younger customers.
Estimating Whisky Production
- One grain of barley weighs an average of 0.7 grams
- One acre of land is approximately 4000 square metres
- 1kg of barley is required to produce one 700ml bottle of whisky
From the image provided, we assume 25 grains of barley per ear
From the image provided, we assume 100 ears of barley per square metre
25 x 100 = 2500 grains per square metre
Grains weigh an average of 0.7 grams
2500 x 0.7 = 1.75kg per square metre
Total number of acres of barley = 70 x 10 = 700
One acre is approximately 4000 square metres
4000 x 1.75 = 7000kg = 7 tonnes of barley per acre
7 x 700 = 4900 ~5k tonnes of barley in total
10% of 5k tonnes = 500 tonnes of barley used for Jurray Scotch
1kg of barley is required to produce one 700ml bottle of whisky
Therefore, the Jurray distillery produces 500,000 bottles of whisky per annum
500,000 bottles per year is in line with the output of a small, local distillery. This is also a reasonable level of production for the area of land used.
The candidate can use any rationale to sense check their figure as long as their thought process is plausible
Costs and Profitability
Jurray island is a popular tourist destination. Many other Scottish distilleries run site tours and/or tastings to attract these visitors. Dedicated whisky enthusiasts will also travel for the explicit purpose of attendance. Tour visitors can be a major source of sales for smaller distilleries, as well as helping to promote the brand more generally. Direct to consumer online retail is also a major source of revenue for similar distilleries. Jurray distillery currently has no facilities for visitors to the site or for online retail, but the cooperative would like to pursue both avenues. The value chain shown in Exhibit 2 provides the basis for analysis.
The farms within the cooperative are generally operating with old and unreliable equipment which should ideally be replaced. Similarly, much of the equipment in the distillery is due for replacement and/or upgrade. There are no surplus casks at present, so any increase in production will require the purchase of additional casks for aging.
Investments required to continue to run the distillery and to enact the cooperative's ideas:
- Replacement/upgrade of farming equipment
- Replacement/upgrade of distilling equipment
- Additional casks will be required for aging to accommodate any increased production
Other items to be included in the cost per bottle include:
- Depreciation of any acquired equipment or other assets
- Cash expenditure and the cost of any loans
Fixed and variable costs of production will include:
Fixed
- Maintenance of buildings and equipment
- Property tax
- Insurance (including public liability insurance for any visitors)
Variable
- Additional casks
- Bottles and other packaging
- Tax on revenues
- Labour
- Marketing
Values for these costs can be seen in Exhibit 3
Establish costs per bottle:
The cost of investment is spread over 10 years. Thus, investment costs £600k per year for the distillery as a whole. 600k/500k = £1.20 per bottle.
Fixed costs per year = 5.25m. Thus, fixed cost per bottle = 5.25m/500k = 5.25/0.5 = £10.50 per bottle
Variable costs per bottle = £14.30
Total costs per bottle = 1.20 + 10.50 + 14.30 = £26
Discussion of costs/price
A production cost of £26 per bottle is going to make for an expensive whisky for consumers once mark-ups are added. Many whiskies are available to the consumer well under Jurray's cost of production. This, combined with the brand's lack of profile and undesirable image will make it difficult to generate high levels of demand, even if the product itself is of a very high quality. Most importantly, high costs reduce profits.
There are a few steps which we might take to increase profits:
Increase the Number of Bottles Produced
Increasing production will inherently mean inputting more grain. We can segment different ways in which this might be accomplished:
Using more than 10% of the cooperative's existing grain - This will mean using some of the lower quality grain from the 90% currently sold on - thus slightly compromising whisky quality.
Increasing total grain supply within the cooperative - Improved farming equipment or techniques might increase crop yields slightly. However, significant increases in grain supply would require the cooperative to either buy more land or expand to include more farms. The former option will be expensive and time consuming, whilst the latter will mean splitting profits between more farmers.
Buy grain from other farmers on Jurray Island - This will require strict quality control, as farmers outside the cooperative will not be incentivised to supply only top quality grain.
Reduce Costs
There are a few ways to do this:
Reduce Investment - This is the least significant factor contributing to cost per bottle, making up only a small fraction of the end price.
Reduce Fixed costs - these will be difficult to reduce, especially in the short term, though the distillery could explore leasing equipment or outsourcing elements of production. We can assume they have already found the best deal available on their insurance.
Reduce Variable costs - These make up more than half of the total costs. However, they are also not easy to reduce in this case. Taking a look at some main elements of variable costs:
Wages - labour supply on a small island will be limited, so cheaper workers will be difficult to find.
Bottles/packaging - Using cheaper packaging or bottles is very likely to negatively effect the brand image of the whisky, possibly reducing revenues.
Marketing - This will be essential to develop the brand in line with the cooperative's ambitions.
Tax - This is at a rate fixed by the government.
Increase Sale Price
The price will already be high even with only a modest mark-up. However, the whisky is a premium product and can potentially command a higher price with appropriate marketing. The younger customer base expected to drive growth in the whisky market are prepared to pay a higher price for more desirable products.
Brand and marketing
Develop a branding and marketing strategy to support a higher price per bottle and to specifically target younger demographics. This will have a number of possible components:
Narrative - Marketing should explain that the whisky is unique in being made solely with high quality Jurray barley - thus it is a unique, premium product. The historic nature of the distillery and the cooperative nature of its operation can also be leveraged.
Physical Appearance - Bottles/packaging should be improved to give a more premium and up-to-date appearance which picks up on the themes of the broader marketing strategy.
Reviews - Since the product compares favourably to others in the market, effort should be made to enter Jurray Scotch into competitions and to have it reviewed in well-read publications, websites or apps.
Online - Social media can be used as a cost effective way to drive brand recognition and improve image. As well as the more professional reviewers mentioned, the brand can also gain promotion via more casual reviewers or lifestyle influencers. Online promotion can link to the distillery's new online shop.
Site visits - Site tours will generate sales to visitors and somewhat improve the brand's profile. They will also serve to generate content and activity on social media and will likely result in some free promotion by local tourism bodies.
